CBO: Taxmageddon would bring tax pain but debt relief

While the year-end burst of tax hikes and spending cuts known as Taxmageddon promises to be messy, it would set the nation on a course to smaller budget deficits and lower debt, the nonpartisan Congressional Budget Office said Tuesday.

So, policymakers looking to preserve the current low tax rates should be prepared to cover the cost, the CBO said, or pay a steep price in the form of a rapidly soaring debt that could ignite a European-style crisis on this side of the Atlantic.

“The aging of the U.S. population and the rising costs for health care mean that the combination of budget policies that worked in the past cannot be maintained in the future,” the CBO said with uncharacteristic bluntness in a long-term budget outlook released Tuesday.

“To keep deficits and debt from climbing to unsustainable levels . . . policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches,” ideally maintaining deficits at least as low as those projected if Taxmageddon were to strike on schedule.

Taxmageddon is the popular nickname given to a series of policies set to lapse or take effect in January, immediately slicing more than $500 billion out of next year’s federal budget deficit. While spending would be cut by about $100 billion, the bulk of the changes would raise taxes, primarily through the expiration of President Obama’s payroll tax holiday and the broad tax cuts enacted under President George W. Bush in 2001 and 2003.

The payroll tax cut is unlikely to be renewed, but neither party wants to see all of the Bush tax cuts expire. Republicans want to extend the lower rates for every American, which would add about $4 trillion to the debt over the next decade. Obama wants to keep rates low for everyone earning less than $250,000 a year, which would add more than $3 trillion to the debt over the next decade.

With compromise looking unlikely, there is already talk of postponing a decision, perhaps by temporarily extending current tax policies. That would avoid a short-term fiscal shock that the CBO has said is likely to throw the economy back into recession during the first part of next year.

But delay could prove costly down the road, the CBO said, and “would substantially increase the size of the policy adjustments needed to put the budget on a sustainable course.” For example, the CBO said, if lawmakers acted this year to stabilize the debt for the next 25 years, they would have to cut spending or raise taxes immediately and permanently by about 4.8 percent of gross domestic product — or about $700 billion this year — similar to the size of Taxmageddon. If lawmakers postponed action until 2015, however, they would have to find immediate and permanent annual savings equal to 5.2 percent of GDP.

And the choices would not be easy. So far, lawmakers have focused their deficit-reduction efforts on a relatively abstract portion of the budget known as discretionary spending. But future spending growth is driven almost entirely by popular entitlement programs for the elderly, the CBO said, whose numbers are soaring as the baby-boom generation ages.

The graying of America will push federal spending on programs such as Medicare and Social Security to more than 16 percent of the economy over the next 25 years, the CBO said. By comparison, total federal spending has averaged 18.5 percent of GDP over the past 40 years. Without significant changes to federal health and retirement programs, taxes will have to rise to historically high levels or the nation will sink inevitably into the red.

Under the policies in effect today, the portion of the debt held by outside investors would exceed 90 percent of the economy by 2022, the CBO said, and approach 200 percent of GDP by 2037. A few years later, the debt would be approaching 250 percent of GDP, the CBO said, a level so far outside the nation’s experience that the agency “cannot reliably estimate” the potential effects on the economy.

With the higher taxes and spending cuts of Taxmageddon, however, the debt would decline gradually over the next 25 years, the CBO said, falling to 53 percent of GDP by 2037. That would be an improvement over the current course, but still significantly higher than during the four decades before the Great Recession, when the national debt averaged about 35 percent of GDP.

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
SECTION: {section=business, subsection=economy}!!!
INITIAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, display_more=true, moderationrequired=false, includefeaturenotification=true, canvas_allcomments_id=washpost.com/km4ey0dajm, comments_period=14, defaultsort=reverseChronological, includevoteofftopic=false, allow_videos=false, includesorts=true, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, childrenitemsperpage=3, includeheader=true, includeverifiedcommenters=true, defaulttab=all, includerecommend=true, includereport=true, maxitemstop=3, source=washpost.com, allow_photos=false, maxitems=15, display_ugc_photos=false, includepause=true, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!!

UGC FROM ARTICLE: {allow_comments=true, allow_photos=false, allow_videos=false, comments_period=14, comments_source=washpost.com, default_sort=, default_tab=, display_comments=true, is_ugc_gallery=false, max_items_to_display=15, max_items_to_display_top=3, moderation_required=false, stream_id=}!!!

FINAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, display_more=true, moderationrequired=false, includefeaturenotification=true, canvas_allcomments_id=washpost.com/km4ey0dajm, comments_period=14, defaultsort=reverseChronological, includevoteofftopic=false, allow_videos=false, includesorts=true, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, childrenitemsperpage=3, includeheader=true, includeverifiedcommenters=true, defaulttab=all, includerecommend=true, includereport=true, maxitemstop=3, source=washpost.com, allow_photos=false, maxitems=15, display_ugc_photos=false, includepause=true, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!
Comments
SECTION: {section=business, subsection=economy}!!!
INITIAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, display_more=true, moderationrequired=false, includefeaturenotification=true, canvas_allcomments_id=washpost.com/km4ey0dajm, comments_period=14, defaultsort=reverseChronological, includevoteofftopic=false, allow_videos=false, includesorts=true, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, childrenitemsperpage=3, includeheader=true, includeverifiedcommenters=true, defaulttab=all, includerecommend=true, includereport=true, maxitemstop=3, source=washpost.com, allow_photos=false, maxitems=15, display_ugc_photos=false, includepause=true, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!!

UGC FROM ARTICLE: {allow_comments=true, allow_photos=false, allow_videos=false, comments_period=14, comments_source=washpost.com, default_sort=, default_tab=, display_comments=true, is_ugc_gallery=false, max_items_to_display=15, max_items_to_display_top=3, moderation_required=false, stream_id=}!!!

FINAL commentConfig: {includereply=true, canvas_permalink_id=washpost.com/8bvh5zpd9k, allow_comments=true, commentmaxlength=2000, includeshare=true, display_comments=true, canvas_permalink_app_instance=m6yzjj840m, display_more=true, moderationrequired=false, includefeaturenotification=true, canvas_allcomments_id=washpost.com/km4ey0dajm, comments_period=14, defaultsort=reverseChronological, includevoteofftopic=false, allow_videos=false, includesorts=true, markerdisplay=post_commenter:Post Commenter|staff:Post Writer|top_commenter:Post Forum|top_local:Washingtologist|top_sports:SuperFan|fact_checker:Fact Checker|post_recommended:Post Recommended|world_watcher:World Watcher|cultuer_connoisseur:Culture Connoisseur|weather_watcher:Capital Weather Watcher|post_contributor:Post Contributor, childrenitemsperpage=3, includeheader=true, includeverifiedcommenters=true, defaulttab=all, includerecommend=true, includereport=true, maxitemstop=3, source=washpost.com, allow_photos=false, maxitems=15, display_ugc_photos=false, includepause=true, canvas_allcomments_app_instance=6634zxcgfd, includepermalink=false}!!
Show Comments
Most Read Business