The Ticking Tax Time Bomb

All the hundreds of billions of dollars in new spending are going to catch up with taxpayers sooner or later. Politicians always hope it's later - when they're no longer around to take the blame. They always try to push it off on someone else.

President Obama is more than willing to blame President Bush for the fiscal mess he inherited, all while doubling down on the national debt with massive new spending that is unprecedented in American history.

So, who will pay for the mess?

Everyone will.

The CBO baseline cumulative deficit for the Obama 2010-2019 budget is $9.3 trillion. How much additional deficit and debt does Mr. Obama add relative to a do-nothing budget with none of his programs? Mr. Obama's "debt difference" is $4.829 trillion -- i.e., his tax and spending proposals add $4.829 trillion to the CBO do-nothing baseline deficit. The Obama budget also adds $177 billion to the fiscal year 2009 budget. To this must be added the $195 billion of 2009 legislated add-ons (e.g., the stimulus bill) since Mr. Obama's election that were already incorporated in the CBO baseline and the corresponding $1.267 trillion in add-ons for 2010-2019. This brings Mr. Obama's total additional debt to $6.5 trillion, not his claimed $2 trillion reduction. That was mostly a phantom cut from an imagined 10-year continuation of peak Iraq war spending.

The claim to reduce the deficit by half compares this year's immense (mostly inherited) deficit to the projected fiscal year 2013 deficit, the last of his current term. While it is technically correct that the deficit would be less than half this year's engorged level, a do-nothing budget would reduce it by 84%. Compared to do-nothing, Mr. Obama's deficit is more than two and a half times larger in fiscal year 2013. Just his addition to the budget deficit, $459 billion, is bigger than any deficit in the nation's history. And the 2013 deficit is supposed to be after several years of economic recovery, funds are being returned from the financial bailouts, and we are out of Iraq.

Finally, what of the claim not to raise taxes on anyone earning less than $250,000 a year? Even ignoring his large energy taxes, Mr. Obama must reconcile his arithmetic. Every dollar of debt he runs up means that future taxes must be $1 higher in present-value terms. Mr. Obama is going to leave a discounted present-value legacy of $6.5 trillion of additional future taxes, unless he dramatically cuts spending. (With interest the future tax hikes would be much larger later on.) Call it a stealth tax increase or ticking tax time-bomb.

What does $6.5 trillion of additional debt imply for the typical family? If spread evenly over all those paying income taxes (which under Mr. Obama's plan would shrink to a little over 50% of the population), every income-tax paying family would get a tax bill for $163,000. (In 10 years, interest would bring the total to well over a quarter million dollars, if paid all at once. If paid annually over the succeeding 10 years, the tax hike every year would average almost $34,000.) That's in addition to his explicit tax hikes. While the future tax time-bomb is pushed beyond Mr. Obama's budget horizon, and future presidents and Congresses will decide how it will be paid, it is likely to be paid by future income tax hikes as these are general fund deficits.

There is one policy that Congress should act on that will spare millions of taxpayers an added burden. It's something that President Obama called for; it is the indexing of the AMT (alternative minimum tax) to inflation. Every year Congress does a dance to index the AMT to inflation so as to spare hundreds of thousands of middle class taxpayers the indignity of getting hammered by the AMT.

Congress has repeatedly used the AMT to help get other legislation passed, and politicians are smooth operators when it comes to this ploy since they can paint those who oppose the legislation as seeking tax hikes on the middle class. Leadership will attach the AMT indexing provisions to legislation they want passed, regardless of opposition precisely because they know that the AMT needs to be passed. It's cynical, but it works.

Eliminating the annual AMT indexing dance will prevent Congress from holding the AMT hostage and passing still more bad legislation and porkbarrel spending. That can only be a good thing.