WASHINGTON — With every passing day, it is becoming clearer that next year the issue of paying for the government will be back at the center of political debate.
There will be a head start on the discussion this summer or fall, because some of the expiring Bush tax cuts must be extended. But the hangover from the Great Recession and the lagging unemployment numbers will make it impossible to focus on improving the Internal Revenue Code.
Come 2011, however, the demand to start dealing seriously with the overhang of deficits and debt threatening the nation’s future will become irresistible. Whether we like it or not, we have been warned.
On Tuesday, Paul Volcker, the former chairman of the Federal Reserve Board, told a New York audience that the time is coming when new taxes will have to be considered. “If at the end of the day, we need to raise taxes, we should raise taxes,” he said.
On Wednesday in Dallas, Ben Bernanke, who now holds the same job, said: “Inevitably, addressing the fiscal challenges posed by an aging population will require a willingness to make difficult choices. The arithmetic is, unfortunately, quite clear. To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”
The next day, at a breakfast with reporters in Washington, Douglas Elmendorf, the head of the Congressional Budget Office, confirmed that his economists have begun studying how to write a value-added tax, a form of national sales tax, because of growing congressional interest in drafting such a measure.
Elmendorf reminded the journalists of the grim news contained in his agency’s analysis of President Obama’s budget proposals. Agreeing with Bernanke that the current course is “unsustainable,” he said that unless something changes, the U.S. will emerge from the Obama years spending one-quarter more than it collects in revenue — 25 percent compared to 19 percent of the gross domestic product.
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Closing the gap “can’t be solved through minor changes,” he said. Revenues projected under current laws would barely be sufficient to pay for Medicare, Medicaid, Social Security, defense and interest on the national debt. Everything else would depend on finding new revenues — or borrowing.
This is the reality that will face the new fiscal responsibility commission, created by Obama’s executive order after Senate Republicans led the fight against legislation that would have established a similar panel. That bipartisan commission may struggle this year for sufficient agreement to send its recommendations on to Congress for a vote, but it will certainly narrow and focus the debate for next year.
Some Senate Republicans greeted last week’s hints of coming tax hikes with predictable grumbling, as if they had nothing to do with creating the deficits in the years when they were authorizing wars and cutting tax rates.
But the good news is that retiring Sen. Judd Gregg of New Hampshire, the senior Republican member of the Budget Committee, is setting a good example for his party by teaming up with Sen. Ron Wyden of Oregon, always the most bipartisan of Democrats, on a bill that could become a model for next year.
Rather than raising taxes, it reforms them in the interest of simplification and fairness, lowering the overall rates in most cases while eliminating loopholes. That kind of approach has not been taken since the tax bill of 1986, a collaboration of Republicans Ronald Reagan, James Baker, Dick Darman and Bob Packwood with Democrats led by Bill Bradley.
The forces converging to make taxes a top agenda item in 2011 can also make it a year of opportunity — if legislators and the president step up.