Candidates face obstacles to halving deficit

Author: Peronet Despeignes

Published: October 27, 2004

Asked in his second debate with President Bush if he would promise not to increase the tax burden on families earning less than $200,000 a year, Sen. John Kerry was unequivocal.

"Absolutely. Yes. Right into the camera. Yes," Kerry said. "I am not going to raise taxes."

That puts Kerry firmly in Bush's camp when it comes to new taxes on middle-class Americans: They're both against it. They also say they'll halve the record budget deficit in four years. But experts on all sides, with decades of experience in the federal budget process, say those words come cheap.

"Both candidates' proposals would make our deficit worse," says Leonard Burman, a tax expert at the non-partisan Urban Institute.

Kerry and Bush are "touting expensive initiatives that would make deficit reduction more difficult," says Robert Bixby, executive director of the Concord Coalition, a deficit watchdog group. "Their plans are very different. The bottom lines are not. They take alternative routes to a similar destination."

'The numbers don't add up'

Kerry's biggest spending and tax-cut proposals would cost $1.8 trillion to $2.7 trillion over 10 years, according to estimates from liberal, independent and conservative groups. Most of that comes from his plans to spend more on health care and make Bush's middle-class tax cuts permanent. Kerry would expand eligibility in government health plans to more middle- and low-income adults and children, and have Washington assume some of Corporate America's biggest health care costs.

Bush's proposals would cost about the same, but with more tax cuts and less new spending. His plans would cost $1 trillion to $3 trillion over 10 years, mostly by making his income tax cuts permanent and modifying Social Security, according to the Concord Coalition and the White House. Bush wants to let younger workers invest a small portion of their Social Security payroll taxes, but the revenue diverted would need to be made up to pay current beneficiaries.

Kerry's no-income-tax-increase pledge exempts more than 97% of all U.S. taxpayers, who together made more than $8 trillion in income last year. Bush would exempt all taxpayers from tax increases.

Yet, Kerry and Bush say they would cut the $413 billion federal budget deficit in half during the next four years. Based on a Congressional Budget Office forecast that the deficit will be $312 billion in 2009, halving the deficit from this year's $413 billion would cost at least another $100 billion.

The cornerstone of Kerry's plan to pay for his proposals and still halve the deficit is a rollback of Bush's tax cuts for upper-income Americans. He proposes lifting the top two marginal income tax rates from 35% and 33% back to 39.6% and 36%. That raises $282 billion more over the next 10 years than what's projected under current law, which assumes Bush's tax cuts will expire by 2011, according to the Tax Policy Center, a group jointly run by the Urban Institute and the Brookings Institution.

Kerry's other big money-raising plans, such as reversing Bush's elimination of the estate tax and cutting "corporate welfare," would raise at least $580 billion over 10 years, according to the Tax Policy Center and Kerry campaign figures.

Bush says he would hold the line on spending, and he says his tax cuts will boost the economy, leading to a growth in tax revenue.

On paper, both sets of proposals are at least $1 trillion short. In addition, neither candidate fully accounts for the alternative minimum tax. The AMT, a measure created in 1969 to ensure that the rich pay taxes, threatens to hit a growing number of middle-income taxpayers with tax increases because it does not adjust for inflation.

By 2010, more than half of all tax returns reporting income between $75,000 and $100,000 could be affected, including nearly all married couples in that bracket with two or more children, the Tax Policy Center says. A permanent AMT fix would cost $425 billion in lost tax revenue over 10 years, according to the Congressional Budget Office.

"The numbers don't add up," says Bill Dudley, chief economist at Goldman Sachs.

What the president could do

Kerry and Bush have several options to close the gap:

?Raise taxes on high-income Americans. The Urban Institute says the government could raise an additional $200 billion by pushing top rates to 50% and 40%. But Bush has ruled that out, and Kerry has said he'd return only to Clinton-era rates. Burman says lifting tax rates much higher would risk damage to the economy, greater tax evasion and subsequent revenue losses.

The roughly 2% of households reporting at least $200,000 make about 20% of all U.S. personal income, or more than $1.9 trillion, and pay more than a third of all income taxes, according to Commerce Department and Internal Revenue Service figures. "It's already a very top-heavy system," says Steve Moore of the anti-tax Club for Growth.

?Cut other spending. Kerry says he'd scale back his proposals if needed to get the deficit under control. He also says he would revive budget rules to offset most new spending or tax cuts legislated by Congress with spending cuts and tax hikes.

Bush says he wants Congress to restrain spending outside of defense and homeland security and would support new budget rules to help do that. But he opposes similar rules that would require tax cuts to be offset with tax increases.

Kerry says he would keep many existing programs from growing faster than the inflation rate, but would exempt Defense, Homeland Security, health and education and programs such as Medicare and Social Security that make automatic payouts based on eligibility. Interest on the $7.4 trillion national debt ($160 billion a year and rising) would also be excluded; it must be paid to avoid default.

That leaves 14% of the federal budget, including widely supported programs that most lawmakers don't want to cut. Eliminating them all wouldn't balance the budget.

?Hope for a revival in economic growth and tax revenue. A future boom in the economy and tax revenue could be the solution. But tax revenues would have to come in $1 trillion to $3 trillion higher than already projected over the next 10 years to pay for both candidates' budget proposals.

"It's possible, but highly unlikely," Burman says. "We'd have to be very lucky in terms of both peace and prosperity."