Tax Pledge Is a Target As Deficits, Debt Grow

During last year's campaign, President Obama vowed to enact a bold agenda without raising taxes for the middle class, a pledge budget experts viewed with skepticism. Since then, a severe recession, massive deficits and a national debt that is swelling toward a 50-year high have only made his promise harder to keep.

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Tax Pledge Is a Target As Deficits, Debt Grow
Stabilizing a Staggering Deficit
The Obama administration has insisted that the pledge will stand. But the president's top economic advisers have refused to rule out broad-based tax increases to close the yawning gap between federal revenue and government spending and are warning of tough choices ahead.

Republicans are already on the attack, accusing Obama of plotting to break his no-tax vow, the same political transgression that cost Democrats control of Congress under former president Bill Clinton and may have cost president George H.W. Bush his job. Democrats say Obama is highly unlikely to break the pledge before next year's congressional election and observe that it would be safer to wait until his second term if a tax increase becomes unavoidable.

Some lawmakers are focused instead on setting up an independent commission to solve the deficit problem. Senate Budget Committee chairman Kent Conrad (D-N.D.) plans to hold hearings on the topic when Congress returns to Washington this fall.

Obama, meanwhile, has vowed to pay for any new initiatives and to draft an overhaul of the health-care system that eventually would save the government money, driving deficits down. But effective health reforms would take decades to produce savings. In the meantime, White House budget director Peter R. Orszag acknowledged, "there are additional steps that will be necessary."

"The administration is very concerned about these [future] deficits, and getting those deficits under control is a top priority of the administration," Orszag told reporters this week as he rolled out a new economic forecast that added $2 trillion to deficit projections from 2010 to 2019.

Treasury Secretary Timothy F. Geithner and White House economic adviser Lawrence H. Summers have both delicately sidestepped the tax question on Sunday talk shows. Orszag has also refused to discuss what steps Obama might take to reduce the deficit in the budget blueprint he will present to Congress in February. But budget analysts say he has few real options.

"If you rule out inflating our way out of the problem and defaulting on the debt, there are two ways: Cut spending or raise taxes," said William G. Gale, an expert on fiscal policy at the Brookings Institution. With more than 80 percent of federal spending devoted to politically untouchable programs such as Social Security, Medicare and Medicaid, he said, "it's going to be really hard to make significant headway on the spending side. So that means you've got to think about taxes."

Spending cuts were a big part of the solution the last time the nation faced such a towering debt. In the aftermath of World War II, with the debt exceeding the country's entire economic output, the government slashed military expenditures. Within two years, Washington was spending less than it took in. Fifteen percent inflation also helped by reducing the real value of the debt. When the country went to war again in Korea and then Vietnam, tax increases helped keep the budget largely in balance and the debt continued to fall.

Today's problem is more complex. Obama not only faces the fallout from the worst economic downturn in 30 years, but also inherited the debt piled up by his predecessor, Republican George W. Bush. Bush invaded Iraq and approved an expensive new prescription drug benefit for the elderly while pushing through one of the biggest tax cuts of the post-war era -- worth an estimated $1.6 trillion in foregone revenue by the time the provisions expire next year. This was the first time the United States had not adjusted its fiscal policy to meet its wartime needs, according to "The Price of Liberty," a book on war financing by Goldman Sachs vice chairman Robert D. Hormats.

After running surpluses in the late 1990s, the government began spending far more than it took in, forcing the Treasury to increase borrowing from China and other creditors. During the Bush administration, the portion of the debt held by the public jumped from just over $3 trillion to nearly $6 trillion. Federal rescue efforts in the face of last fall's financial meltdown have rapidly driven the debt higher. Today it stands at nearly $7.4 trillion, or about 52 percent of the overall U.S. economy.

"There's no question in my view that Bush was the most fiscally irresponsible president in the history of the republic," said David M. Walker, the comptroller general under Bush who now advocates for deficit reduction. Obama "was handed a bad deck," he said. "But the question is, are you making it better or not? And so far the answer is no."