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Keeping tax cuts beneficial in short term, harmful over long term, CBO says

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Bar chart shows the Congressional Budget Office warned that the nation faces
By Brady Dennis
Washington Post Staff Writer
Friday, August 20, 2010

The director of the nonpartisan Congressional Budget Office said on Thursday that permanently extending tax cuts put in place under President George W. Bush would provide a "considerable" economic boost over the next several years but would result in substantial increases in the federal deficit, placing the country in a precarious fiscal situation by 2020.

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In offering this assessment, Douglas Elmendorf underscored the difficult choice facing lawmakers as they debate whether to extend any or all of the tax breaks, which are scheduled to expire at the end of the year.

The CBO's analysis was part of a broader report released Thursday in which the agency projected that the federal government's budget deficit for this year would be $1.34 trillion. The figure is slightly below last year's total, but the CBO warned that policymakers face "daunting" challenges in the years ahead in trying to return the country to fiscal sustainability.

Concerns about the federal deficit have been figuring prominently in congressional debates over whether to spend more money on programs to stimulate the economy and to help the unemployed, as well as over the Bush-era tax cuts.

The CBO examined the impact if most of those cuts are extended. This scenario assumed that the breaks for higher-income taxpayers would expire.

"Under that . . . scenario, economic growth would be stronger next year; unemployment would be lower next year," Elmendorf said. But he added that "over time, that extra borrowing -- and it's a good deal of extra borrowing -- would have negative consequences on the economy."

Republicans and many representatives of business have pushed for a permanent extension of all the tax cuts, arguing this would jump-start economic growth. They warn that allowing taxes to rise could stifle the recovery.

The Obama administration and Democratic leaders in Congress are seeking to extend tax cuts for Americans earning less than $250,000 a year, while letting expire some of those for wealthier individuals. Democrats say this would help stimulate the economy and cost the government less than if all cuts were extended.

The CBO's baseline scenario assumes that the Bush-era tax breaks will expire, as current law provides. In that case, next year's deficit would fall to $1.07 trillion, or 7 percent of the country's total economic output, or gross domestic product, according to agency estimates. By 2012, the deficit would shrink to $665 billion, or 4.2 percent of GDP.

Agency analysts also projected that public debt would rise from 53 percent of GDP last year to almost 70 percent of GDP by 2020, a figure unmatched since the 1950s.

"It is an extraordinarily high level of debt by the experience of this country over the past 65 years," Elmendorf said. "Of course, it is also an extraordinarily difficult economic situation in which we find ourselves."

President Obama created a bipartisan commission this year to address the nation's soaring debt. Members are considering a wide range of measures, from cuts in Medicare and Social Security to reform of the tax system. Obama has asked the group to make recommendations by Dec. 1.

On a positive note, the CBO lowered by $50 billion the estimated cost of the government's bank bailout program, known as the Troubled Assets Relief Program. The CBO said the change was in part due to improved market conditions and a provision in the recently approved financial overhaul bill that reduced the program's spending authority.


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