With Bush in charge, taxes may still rise

A soaring federal deficit, some economists say, will put fiscal pressure on the next president - Bush or Kerry.

Taxes are headed up.

That provocative prediction is likely to pan out, some economists argue, whether American voters reelect George W. Bush or choose John Kerry in this fall's presidential contest.

You certainly won't hear it from Mr. Bush on the campaign trail. And it's possible that Republican tax-cutting fervor could hold sway for some time, given enough electoral support.

But there's a new budget reality that even some conservative economists can't ignore. A massive and growing federal budget deficit now looks increasingly hard to tame without raising more government revenue. That's another word for tax hike.

"It's inevitable," says Bruce Bartlett, a senior fellow at the conservative National Center for Policy Analysis in Washington.

Norman Behravesh agrees. The chief economist of Global Insight, a consulting firm in Waltham, Mass., holds that, notwithstanding election-year rhetoric, the next president will have to raise taxes to deal with the deficit.

Higher taxes, of course, go against the political soul of Bush and many other Republicans. But their hand may be forced, some experts say, if rising deficits fuel worries about inflation. That could scare the bond market and foreign investors into demanding higher interest rates. (Foreign investors now buy a large percentage of federal debt.)

So far, rising deficits haven't pushed long-term interest rates up.

But already, there are signs that Congress is taking a harder look at ways to scale back deficits. In the Senate, Democrats joined moderate Republicans last week in creating some hurdles for making Bush's tax cuts permanent, and pared back 2005 spending from Bush requests.

The House, now considering Bush's budget, is more closely aligned with the president for making tax cuts permanent.

The president has "not done a good job" in restraining spending, says Beryl Sprinkel, chairman of the Council of Economic Advisers under former President Reagan. "I'm disappointed."

Mr. Sprinkel says spending restraint, not tax hikes, would be better for the economy than tax hikes. "I don't want to stall the economy, or make it more difficult to grow," he says. But he admits he doesn't know whether Congress will actually overcome the objections of special interest groups to restrain spending.

Indeed, even as Congress has been struggling in recent days to hold back spending, some of its action has added to deficits. That hints at one reason why some analysts figure a tax hike lies ahead - perhaps as much as $200 billion to $300 billion, reckons Mr.Bartlett.

Though such a hike would be politically difficult, it may be easier than real budget cuts that could bite into spending on Medicare or other entitlement programs, education, veterans benefits, etc. That would be especially the case if the bond market displays alarm at the deficit.

If bond investors demand higher interest rates, it would burden millions of families with higher costs on their mortgages, car loans, and credit-card debts. Businesses would pay more for bank loans as the need for financing of government debt tended to "crowd out" their investments.

"The biggest surprise to me is how sanguine the bond market is in relation to the those huge deficit numbers," says Mr. Behravesh. President Bush talks about cutting nondefense discretionary spending, but Behravesh says "there's not enough there to make a dent."

Mr. Kerry, the Democrats' probable nominee, advocates raising taxes on those making $200,000 or more. But his plan will also not reduce the deficit much.

In a political year, neither candidate is likely to call for a broad tax hike. But Federal receipts as a percent of gross domestic product, the nation's output of goods and services, have fallen from 21 percent in 2000 to below 16 percent this year. That is out of line with their historical average of between 17 and 19 percent.

Federal spending now amounts to about 20 percent of GDP. Behravesh assumes that spending restraint bring that down to 19 percent over the next 10 years. Tax hikes, he reckons, can boost revenues to 18 percent. Such moves would shrink but not eliminate the deficit.

Behravesh maintains that the electorate will not punish a victorious president for raising taxes, just as it didn't penalize President Reagan for doing so after his 1981 tax cuts. A hike could still leave Bush's record as an overall tax cutter intact.

Some see corporations, which have seen decades of tax cuts, as a probable target of any tax hikes. Another possibility would be to leave the Alternative Minimum Tax in place on the well-to-do. This would be seen as a "stealth tax hike" on many individuals. Congress also may not make all the Bush tax cuts permanent.

Some conservatives say tax hikes won't be needed, pointing to low current interest rates.

And Federal Reserve Chairman Alan Greenspan doesn't show as much concern about the twin deficits as in the past, arguing that the financial system has become "far more ... efficient, and hence resilient."

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