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Are higher taxes inevitable?

Obama is in a bind, given his no-tax campaign pledge. But the recession, stimulus spending, and higher interest on national debt are ballooning federal deficits, perhaps to risky levels.

By Staff writer / August 26, 2009

A vehicle traded in by customers August 24, the last day of the "Cash For Clunkers" auto rebate program at Courtesy Chevrolet dealership in Phoenix, Arizona bears a message for President Obama.

Joshua Lott/Reuters

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Higher taxes, anyone?

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After an era of falling taxes, the federal government may be getting close to a change in the other direction.

This isn't something that politicians have proposed or that the American public wants. And this threshold won't necessarily be crossed during President Obama's term in office. After all, he campaigned on a pledge to reduce taxes for 95 percent of Americans.

But fiscal-policy experts generally say the question is not whether US taxes will go higher, but when. Some say it's likely that Mr. Obama will at least begin the process of reversing America's tax cut trend. The reason: Federal deficits are on an unsustainable path, which could put the whole economy's vibrancy and stability at risk.

Warning signs have been clear for years

This "fiscal train wreck" scenario isn't new, of course. Just remember Ross Perot and the 1992 presidential campaign.

But the question of possible tax hikes has gained currency this summer for several reasons. Budget deficits are running at a record pace – $1.6 trillion for this fiscal year, up from $455 billion last year, the White House Office of Management and Budget said Tuesday – thanks to stimulus spending and a recession-related dive in tax revenues. Debate over proposed healthcare reforms has raised public concern about whether Obama is committed to getting the deficits under control. Meanwhile China, a key buyer of Treasury bonds, has been voicing louder concerns about the safety of the US government debt it holds.

"My guess is that at some point this administration and this Congress will have to take on tax reform," says Isabel Sawhill, a Brookings Institution specialist on fiscal policy. In the process, "some revenue raising ... will need to occur."

It's a difficult situation for Obama. He campaigned as a tax cutter and has started off as such – one-fourth of his $787 billion stimulus package comes in the form of tax breaks. His main pledge: no tax hikes for households earning less than $250,000 a year. "You will not see your taxes increased by a single dime," he told voters. "Not your income tax. Not your payroll tax. Not your capital gains tax."

Some of Obama's top economic officials recently said it's important to keep fiscal options open, and that "hard choices" will be required to bring down federal deficits. But then White House spokesman Robert Gibbs reaffirmed the president's no-tax pledge.

A crisis could be catalyst to higher taxes

In this climate, some policy analysts say it will be a crisis – such as a sharp drop in the dollar or a spike in interest rates – that prompts Washington to confront the fiscal challenge.

"I'm fairly confident that will happen. I just can't say when," says Eric Toder of the Tax Policy Center, a nonpartisan research group.

In the past, voters and politicians alike have proved adept at supporting unbalanced budgets. It's possible that the next few years will provide a final opportunity to delay the fiscal reckoning, before the tide of baby-boom retirements gathers force.