Are higher taxes inevitable?

Treasury Secretary Timothy Geithner has defined fiscal sustainability as holding the national debt constant as a share of gross domestic product. He says that can be done by bringing annual budget deficits down to about 3 percent of GDP. That may not prove easy to do in the near term, however, let alone the longer run.

As the accompanying chart shows, federal deficits are on track to balloon because of an aging population, medical costs that are rising faster than GDP, and a related surge in the cost of interest payments on the national debt.

Key measure: Federal spending as a share of GDP

Economists measure America's fiscal health by comparing government spending with the overall GDP that supports it. They also look at the so-called "fiscal gap," now estimated at about 8 or 9 percent of GDP. This refers to the magnitude of spending cuts or tax hikes that would have to be enacted today and permanently, to avoid piling larger debts on future generations. Delay will tend to make the fiscal gap larger as a share of GDP.

Obama and his team have talked about confronting this long-term challenge but so far haven't offered concrete plans.

For reference, 9 percent of GDP roughly equals what today's income tax provides to the Treasury. No one's suggesting that the fiscal gap will be plugged in one step or that doubling income taxes is the right way to do it.

But that's the scale of the problem. Many experts say it requires serious restraint of medical spending and more tax revenue.

"There is no way that we can solve the problem just on the spending side alone," Ms. Sawhill says. "Nor can we solve it just by raising taxes on the top 5 percent [of earning households]."

Need for a deficit-reduction plan by 2011

Few economists advocate higher taxes right away, with the economy still struggling to get out of recession. But Secretary Geithner says the nation needs to have a credible deficit-reduction package in place by 2011, when he expects the economy to be on a growth path again.

Already, the Obama administration has been finding some revenue-side wiggle room. The president has moved to raise $33 billion in revenue from higher cigarette taxes. He's supportive of a cap-and-trade plan to reduce greenhouse-gas emissions, which in some versions could amount to an energy tax. And tax code tweaks might be used to pay for some of his proposed healthcare reforms.

Sawhill says the government could secure about $1 trillion a year in new revenue while leaving tax brackets the same – just by removing layers of credits, deductions, and loopholes. Many deductions are popular, though, and it would be politically risky to get too clever about the definition of a tax hike.

Would healthcare reform make deficits worse?

Healthcare reform has provided a wake-up call for Obama. One of his core goals is "bending the cost curve," or slowing the rate of medical inflation far into the future. But last month, one proposal that emerged as his team conferred with Congress would have extended insurance to more Americans without curbing costs.

The director of the Congressional Budget Office put it bluntly: Lawmakers so far are failing to bend the curve. Perhaps as a result, recent polls show the public growing more focused on the problem of federal deficits and taxes.

At the same time, it's becoming economically risky for Washington to ignore the coming fiscal crunch. A dollar or interest-rate crisis may not be on the immediate horizon, but economic stress in those areas could easily emerge.

Michael Cosgrove, a University of Dallas economist, expects interest rates to rise next year as the economy recovers and governments around the world compete for investors to fund their rising debt. This could prod Congress to make some revenue-boosting tax changes in 2011, he says, once lawmakers have navigated next year's elections. "What they do will probably be incremental in nature," Mr. Cosgrove predicts. But taxes would then be going up, not down.

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