CBO figures that the legislation is likely to slightly raise the GDP through 2012, have no impact for a couple years, and then reduce economic output starting in 2015. The most optimistic case envisions small increases through 2014 instead of 2012. But the reduction in GDP will be permanent, and will mostly manifest itself in lower salaries — for workers who will be taxed much more to pay off the government’s increased debt. The agency’s conclusion has special credibility since CBO is subject to retaliation by the Democratic congressional majority for criticizing the party’s economic centerpiece.
Runaway spending ensures that this year’s TFD will be dwarfed by future TFDs. Some day someone will have to pay off the debts being run up today. The Obama administration’s budget figures are bad enough, but they almost certainly rest upon unrealistic economic expectations. The CBO again offers a sobering analysis: “CBO’s estimates of deficits under the President’s budget exceed those anticipated by the administration by $2.3 trillion over the 2010–2019 period.”
The agency’s bottom line is even more astonishing. CBO reports that “the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period,” leading to a deficit of $1.8 trillion in 2009 (compared to the Tax Foundation’s $1.5 trillion assumption) and $1.4 trillion next year. Moreover, “The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current‐law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019.” Congress trimmed a bit from the president’s proposals when it approved the budget in early April, but actual federal spending almost always ends up far higher than initially projected.
Indeed, none of these numbers include fiscal disasters yet to come. The Federal Housing Administration is talking about needing a bailout. State and local pension funds are in crisis, prompting Phillip Silitschanu, an analyst at the Aite Group, to predict a bailout: Washington “could provide federal loans, or demand cutbacks as a condition of stimulus money, or there could be a federalization of some of these pensions.” The G-20 has proposed an extra $1.1 trillion for the International Monetary Fund, World Bank, and other development and trade institutions, the largest share of which would come from America. And the Congressional Oversight Panel for the Troubled Asset Relief Program approved last fall warns that the financial crisis “is far from over” and “appears to be taking root in the larger economy,” which could prompt even more attempts to bail out failing firms and stimulate the economy.
Then there is the more than $100 trillion in unfunded Medicare and Social Security outlays. If these programs are not changed, the red ink flood will grow exponentially. Add up all these numbers and imagine the taxes that will be due in the years to come.
Even at today’s “low” tax burden, observes the Tax Foundation, “Americans will pay more in taxes than they will spend on food, clothing and housing combined.” When the rest of the government’s bills come due and taxes rise accordingly most Americans won’t have any money left for necessities let alone discretionary outlays after they pay their taxes.
In the midst of economic crisis, it is tempting to celebrate the Tax Foundation’s report on TFD as a little bit of good news — sort of the tax quiet before the spending storm. Alas, the bad news is really bad. The best case is a big increase in spending, smaller GDP, and much higher tax burden. The worst case is financial crisis and collapse.