Obama �Agnostic� on Deficit Cuts, Won�t Prejudge Tax Increases

Business Week (Link) - Rich Miller (February 11, 2010)

President Barack Obama said he is �agnostic� about raising taxes on households making less than $250,000 as part of a broad effort to rein in the budget deficit.

Obama, in a Feb. 9 Oval Office interview, said that a presidential commission on the budget needs to consider all options for reducing the deficit, including tax increases and cuts in spending on entitlement programs such as Social Security and Medicare.

�The whole point of it is to make sure that all ideas are on the table,� the president said in the interview with Bloomberg BusinessWeek, which will appear on newsstands Friday. �So what I want to do is to be completely agnostic, in terms of solutions.�

Obama repeatedly vowed during the 2008 presidential election campaign that he would not raise taxes on individuals making less than $200,000 and households earning less than $250,000 a year. When senior White House economic adviser Lawrence H. Summers and Treasury Secretary Timothy F. Geithner suggested in August that the administration might be open to going back on that pledge, White House press secretary Robert Gibbs quickly reiterated the president�s promise.

In the interview, Obama said that putting preconditions on the agenda of a bipartisan advisory commission, which he said he would soon establish, would just undermine its purpose.

�What I can�t do is to set the thing up where a whole bunch of things are off the table,� Obama said. �Some would say we can�t look at entitlements. There are going to be some that say we can�t look at taxes, and pretty soon, you just can�t solve the problem.�

Politically Risky

Many economists, including conservatives such as former Federal Reserve Chairman Alan Greenspan, argue that tax increases will be necessary as part of a broad package to control the deficit, which the White House projects will hit a record $1.6 trillion in the fiscal year ending on Sept. 30.

Obama said the U.S. was faced with a �structural deficit� that was in place before the recession began and that was only made worse by the deepest drop in the economy since the 1930s.

Revenue �Mismatch�

�Our real problem is not the spike in spending last year, or the lost, even the lost revenues last year, as significant as those are,� he said. �The real problem has to do with the fact that there is a just a mismatch between the amount of money coming in and the amount of money going out. And that is going to require some big, tough choices that, so far, the political system has been unable to deal with.�

The administration hopes the bipartisan commission will make it easier to produce a comprehensive plan to reduce the budget gap to a sustainable level, often described as 3 percent of the overall economy, by 2015.

The White House decided to set up the group on its own after the Senate blocked a measure to establish a congressional panel whose recommendations would have been guaranteed a vote by lawmakers. Opponents, including a majority of Senate Republicans, complained that the plan would result in tax increases and that Congress wouldn�t have a chance to amend the panel�s recommendations. Under a presidentially appointed commission, Congress could ignore any panel recommendations.

Republican Skepticism

House Republican leader John Boehner has expressed skepticism about the Obama commission and has sought assurances from the White House that its makeup would be bipartisan and not predisposed to tax increases. The Ohio Republican said he is still considering whether to appoint members from his party to the panel after a Feb. 9 meeting with the president.

The Obama administration�s budget already takes that route with its proposed $970 billion tax increase over the next decade on Americans earning more than $200,000 a year, largely by not extending former President George W. Bush�s tax cuts for the wealthy beyond 2010.

Even with those revenues -- and a proposed three-year freeze on some discretionary spending by the government -- the administration still projects a deficit of $752 billion in 2015, equivalent to 3.9 percent of gross domestic product.

That�s above the 3 percent mark that White House budget director Peter Orszag has said is necessary to stop the rise in government debt as a proportion of the economy.

Budget Gap

Analysts say that middle-class taxes will need to be increased because the government can�t raise enough money from the wealthy alone to close the budget gap. �It�s just not possible to get the revenue you need only from this group,� said Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan.

Going back on his campaign pledge would be fraught with risks for Obama. Former President George H.W. Bush paid a steep political price when he abandoned his 1988 campaign promise not to raise taxes, losing out in his bid for a second term to Bill Clinton.