Tax pledge hinders Obama's plans to overhaul tax code, reduce deficit

Jan. 11 (Bloomberg) -- David Semmens, U.S. economist at Standard Chartered Bank, talks about the outlook for the U.S. labor market. Semmens also discusses the U.S. economy, Federal Reserve monetary policy and the U.K.'s austerity measures. He talks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)
Washington Post Staff Writer
Thursday, January 13, 2011; 11:14 PM

President Obama's refusal to raise taxes for the vast majority of Americans will prevent him from pursuing a broad overhaul of the tax code and is making it difficult for him to achieve his goals for reducing the budget deficit, according to administration and congressional sources.

Barely a month after Obama's fiscal commission laid out a road map for reining in the soaring national debt, the president's resistance to tax increases for families making less than $250,000 a year has ruled out a key prescription: a plan to reduce cherished but expensive tax breaks for individuals.

Obama is planning to propose deeper cuts in agency spending in the budget request he will submit to Congress next month, including a sharp reduction at the Pentagon. But the president is unlikely to trim nearly as much from future spending as the commission has proposed and nowhere near as much as House Republicans are demanding, the sources said.

Without deeper cuts or fresh revenue, White House budget officials will have a tough time meeting the president's own targets for short-term deficit reduction, including a promise to narrow the budget gap from nearly 9 percent of the gross domestic product last year to 3 percent of GDP by 2015.

The sources spoke on the condition of anonymity because the budget is still being drafted.

Administration officials said no one should be surprised to learn that Obama is unwilling to backtrack on one of the central tenets of his administration - protecting middle-class Americans from higher taxes - particularly after last month's tax battle with Congress.

"The president remains committed to returning to a path of long-term fiscal discipline without imposing additional burdens on middle-class families," White House spokesman Amy Brundage said. "His budget will reflect these values."

But independent budget analysts were nonetheless disappointed, saying Obama is missing an opportunity to build on the momentum established by his fiscal commission, whose leaders persuaded key members of both political parties to embrace an array of politically painful policies to rein in the soaring national debt.

"It's a tremendous letdown," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. "The purpose of the fiscal commission is to give politicians cover to do hard things, to pull back from the promises they can't stick to and to be a game-changer that promotes the real policies we need to fix the situation. If the White House returns to the stale debate over untenable promises about what they won't do, then they're not even letting the fiscal commission help them."

The urgent need for policymakers to reduce the deficit was underscored Thursday, when two major rating agencies expressed discomfort with the country's financial condition.

In a report on triple-A-rated governments, Moody's Investors Service said the United States must reverse the rising trajectory of its debt to maintain its favored rating status. The report noted that Obama's fiscal commission had offered a plan to "move the budget to primary surplus by 2015" but that its recommendations had not been sent to Congress and that "only piecemeal adoption of some measures now appears possible."

In view of the recent extension of tax cuts enacted during the George W. Bush administration, the report said, "the outlook for near-term stabilization of U.S. government debt ratios is not promising."

Meanwhile, at a conference in Paris, Carol Sirou, head of Standard & Poor's France, told reporters that "the view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar" to fund its deficits. "But that may change," Sirou said, adding, "No triple-A rating is forever."

Sirou's comments and the new Moody's report echo statements previously made by both ratings agencies about the viability of the country's financial condition, and the markets took Thursday's statements in stride.

But Steven Hess, Moody's lead analyst for the United States, said in an interview that the day of reckoning may be inching closer - and could arrive very quickly if Congress fails to raise the legal limit on government borrowing later this year. Republicans are threatening to block an increase in the debt ceiling without sharp cuts in federal spending.

As things now stand, Hess said, "we're saying that within the next couple of years, we would consider a negative outlook on the AAA rating - not that we would downgrade, but consider a negative outlook - if there are no offsetting measures put in place during that time."

Because of the size and resilience of its economy, the United States "maybe has more time" than other countries to "move to a more restrictive fiscal policy," Hess said. "But what we're saying is, still, it needs to be done at some point, roughly over the next couple of years."

The White House is pursuing some elements of the fiscal commission's plan. Both Obama and Treasury Secretary Timothy F. Geithner say they are interested in overhauling the corporate tax code to close loopholes and lower a 35 percent tax rate that is one of the highest in the industrialized world.

On Friday, Geithner is to begin a series of meetings with groups interested in corporate tax reform, starting with the chief financial officers of more than a dozen major companies, including Wal-Mart, Caterpillar and Microsoft.

But House Republicans say they are not interested in pursuing corporate tax reform without also overhauling the individual tax code, arguing that millions of companies now pay taxes through the individual code.

The administration, moreover, has pledged that corporate tax reform would be "revenue neutral" - meaning it would shift the tax burden on corporations without increasing federal tax collections - making it virtually useless as a method of deficit reduction.

Instead, Geithner said during a speech Wednesday in Washington, the administration is looking to "spend less and spend more wisely."

"You'll see the president - in the State of the Union and in the budget - lay out a set of proposals for how we bring our fiscal position back into balance," he said.

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