Both parties’ tax plans would add to the deficit

The “fiscal cliff” debate in Washington has been cast as a choice between runaway Democratic spending and draconian Republican cuts, but no matter who wins the argument, both parties’ tax plans add to the deficit — by a minimum of $4.3 trillion through 2022, according to the nonpartisan Congressional Budget Office.

Republicans, who want to extend almost all of the George W. Bush-era tax cuts beyond their Jan. 1 expiration date and want to continue to delay the full alternative minimum tax, would deepen the deficit by $250 billion next year and $5.3 trillion over a decade, according to the CBO.

Democrats support delaying the full alternative minimum tax and want to extend all but the highest-income tax rates, which the CBO says would deepen deficits by $205 billion next year and $4.3 trillion over the same period.

“Everybody has forgotten that it is not just the tax cuts for the upper-income people; it is the entire package of Bush tax cuts that were unaffordable,” said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan deficit watchdog.

Mr. Bixby said the tax cuts should be extended only if Congress comes up with a broad deficit-reduction plan with the kinds of savings and new revenues that would make a real dent in the deficit.

Others were more blunt.

“It is time to take the plunge — let all the Bush tax cuts expire,” said David Stockman, who was a budget director for President Reagan. “They were unaffordable in 2001 and 2003, and now with $16 trillion of national debt and counting, they are a fiscal abomination.”

Lawmakers are trying to strike a deal by Jan. 1, when the 2001 income tax rate cuts expire and the 2003 cuts to dividends and capital-gains taxes also expire. On Jan. 2, $110 billion in automatic spending cuts, known as “sequesters,” take effect under the terms of last year’s bipartisan debt deal.

Both Republicans and Democrats have called for eliminating some tax loopholes and deductions, which could reduce CBO’s deficit projections. But so far, neither side has put forth a specific concrete plan to do so.

When the tax cuts were passed, Republicans controlled the Senate and House and did not offset the tax reductions with spending cuts. Because the tax cuts were passed without a supermajority in the Senate, they were scheduled to expire in 2010.

But with the economy slumping, President Obama and congressional Republicans struck a deal in late 2010 to extend most of the cuts for another two years.

The deal was part of a broader package that also extended unemployment benefits for 13 months, set the tax rate at 35 percent for estates valued at more than $5 million and included a one-year payroll tax reduction, with the employee contribution to financing Social Security dropping from 6.2 percent to 4.2 percent.

It also included a two-year “patch” on the alternative minimum tax and a number of other tax-reducing measures, known in Beltway-speak as “tax extenders.” Once again, the revenue reductions were not offset by spending cuts or tax increases, instead lumping billions of more dollars onto the nation’s credit card.

Each of those items meant new spending or lost revenue as a result of lower taxes — and none of it was offset with spending cuts.

Mr. Obama and Republican leaders also did not fully pay for a deal they hashed out late last year that kept the 2 percentage point payroll tax cut on the books, extended unemployment benefits again, and prevented doctors’ Medicare reimbursement rates from being cut. Earlier this year, Congress once again extended the reduction in the payroll tax — adding another $90 billion to the deficit.

Since Election Day, Mr. Obama and Senate Majority Leader Harry Reid, Nevada Democrat, have claimed a mandate to raise taxes on families making at least $250,000 a year and individuals making $200,000 or more.

Speaking on the floor of the Senate last week, Mr. Reid said it is “within our power to forge an agreement that will take a balanced approach to reduce spending.”

“In fact, we could avert the fiscal cliff for 98 percent of American families and 97 percent of small businesses today. The House must only consider the Senate-passed bill freezing tax rates for those making less than $250,000 a year,” Mr. Reid said. “This Congress is but one vote away from avoiding the fiscal cliff for middle-class families and small businesses.”

House Speaker John A. Boehner, Ohio Republican, and Senate Minority Leader Mitch McConnell, Kentucky Republican, have insisted that they have a mandate from voters not to raise taxes.

“Instead of raising tax rates on the American people and accepting the damage it will do to our economy,” Mr. Boehner said in the weekly Republican address after the election, “let’s start to actually solve the problem” and make 2013 the “year to begin to solve our debt through tax reform and entitlement reform.”

Aside from the Bush tax cuts, lawmakers also must decide how much they want to add to the deficit when they consider the $10 billion Medicare “Doc Fix,” $84 billion in business tax extenders, about $95 billion for another extension of the payroll tax break and $103 billion for the patch to the alternative minimum tax.

The saga continued to unfold Friday when Republican and Democratic leaders emerged from the White House expressing confidence that the two sides will be able to make a deal before the end of the year.

Despite the optimism, it is clear that the fiscal cliff has put congressional leaders in a postelection pickle as they struggle to find the balance between tackling the deficit and not hurting an already fragile economic recovery.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said lawmakers are in a tight spot.

“The goal here is to put together as big a deficit package as you can that would stabilize the debt without derailing the economy recovery,” she said.

“There is a risk that if you do too much, too fast, you actually put us back into recession and that makes things harder. It is a delicate balancing act that is going to be difficult to get right,” she said.

“But the key is, are they going to be able to put together a package that is big enough and hits the right structural parts of the budget that the debt is not growing faster than the economy?”