Read their lips: Mixed signals from Obama team on taxes

In a televised interview on ABC on Sunday, Secretary Geithner talked about the need to make "hard choices" to rein in federal budget deficits. And the president's top economic policy adviser, Larry Summers, said on CBS that healthcare reform will cost money, and "it is never a good idea to absolutely rule things out."

Is this code language for reconsidering a middle-class tax hike?

On Monday, White House spokesman Robert Gibbs insisted that's not the case. "The president's clear commitment is not to raise taxes on those making less than $250,000 a year," he said.

The 8 percent solution?

Whereas conservatives talk about solving the budget problem by cutting spending, and liberals (including Obama) call for making the highest-earning Americans pay more, the scale of the challenge may end up defying those prescriptions. The federal deficit "is projected to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years," economists William Gale of the Brookings Institution and Alan Auerbach of the University of California, Berkeley, concluded in a study earlier this year.

They say the US must close a gap equal to about 8 percent of gross domestic product. That means if the nation acts now, taxes must either go up that much or federal spending must go down that much, permanently, to put government finances on a sustainable course.

For comparison, federal revenues totaled about 18 percent of GDP in 2008.
To close the whole gap with tax increases might crimp economic growth, as the government grabbed a larger share of national income. Spending cuts of that magnitude might displease legions of voters who – whatever they may say about bureaucracy – rely on government services. It's hard for policymakers to agree to a shift that big all on the spending side, or all on the tax side. In the past, Mr. Horney says, progress on budget deficits has generally come with compromises on both sides of the ledger.

Not everyone agrees on the size of the so-called "fiscal gap." But budget experts agree that the gap grows progressively larger, as a percentage of GDP, with each year of delay. The nonpartisan Congressional Budget Office offers one scenario outlining the gap being 8 percent of GDP if action is taken today, and 12 percent of GDP if action is taken in 2030.

----

Follow us on Twitter.

Previous

1 | 2