Voters weighing Obama, McCain tax plans

That’s a wide “fiscal gap” between promises (like Medicare) and current tax payments.
Economists generally say this gap is too big to simply “grow our way out,” although figuring out ways to boost economic growth would certainly help.

Bond rating a factor

One danger: If lenders someday stop viewing US Treasury bonds as “Triple-A” quality, the government would have to pay higher interest when it borrows in the future.
Solutions are within reach, but they may involve both more taxes and new spending controls. Delay makes the economy’s fiscal burden larger, and it would spread the cost less evenly.

“It’s an issue of distributing the burdens and benefits fairly among generations,” says Mr. Auerbach at the University of California. “Something pretty significant has to be done with respect to these entitlement programs. Some combination of taxes and spending changes.”

Part of the fix might be tax reform that balances or blends public goals: simplicity, economic efficiency, and fairness.

Another is to devise creative new ways to curb spending.

The alternative looks grim: Rising deficits could erode the pool of capital the economy needs for investing in things such as research, education, and new businesses.

“The general public understands the basic math problem,” says Diane Lim Rogers, an economist at the Concord Coalition in Washington, which promotes fiscal sustainability.
Without action, she says, “our children and grandchildren are going to face higher taxes or lower services.”

Reality check

The candidates have their proposals, but what will actually get done? Probably some of their tax cuts but not all.

Both major candidates want to maintain Bush-era income-tax rates on most Americans. With those rates set to expire at the end of 2010, a failure to do this could tar the next president and Congress as imposers of a mammoth tax increase.

But worry about federal deficits may impose some limits on tax cuts.

For one thing, remember the way an economic slump in 2001 caused the budget deficit to widen to unexpected proportions as dotcom-era tax revenue evaporated.

Moreover, campaign pledges to curb government spending alongside tax cuts have a way of going awry.

“I’m not sure anybody is going to make substantial reductions in spending. It looks to me like all the pressure is going in the other direction,” says one veteran watcher of budget matters, Stan Collender, a managing director at Qovis Communications in Washington.

“For anyone earning over about $150,000 a year, taxes are almost certainly going up regardless of who gets elected,” Mr. Collender predicts.

He says the top income-tax rate won’t go higher than where it stood when Bush took office – 39.6 percent.

Pollsters anticipate a more Democratic Congress, but many of them “are relatively fiscally conservative,” Collender says. And Senate Republicans may retain enough seats to use filibuster leverage against measures they oppose.

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