NCPA - National Center for Policy Analysis


January 8, 2008

Our next president will encounter three ticking tax bombs in the weeks following the inauguration, as he or she prepares the budget for fiscal year 2010, say Bill Archer, a member of Congress from 1971 to 2001 and chairman of the tax-writing House Ways and Means Committee from 1995 to 2001 and James Carter, deputy assistant secretary of the Treasury from 2002 to 2006.

The first ticking bomb is the fate of the Bush tax cuts:

  • The Congressional Budget Office's (CBO) federal budget surplus projection is based on the assumption that Congress will allow the president's tax cuts to expire as scheduled at the end of 2010.
  • That would trigger the largest tax increase in history; the enduring effect would be to reduce the growth path of the economy, permanently reducing potential gross domestic product (GDP) by 5 percent to 6 percent compared to the levels projected under current tax rates.

The second is the Alternative Minimum Tax (AMT) which the budget surplus projection assumes will detonate:

  • If Congress had not extended the latest patch in December, the number of taxpayers affected by the AMT would have risen to 25 million in 2007 from four million in 2006.
  • If no further changes are made to the AMT, reports the Treasury, the number of taxpayers affected by the AMT is expected to grow to over 56 million by 2017.

The third tax time bomb is America's looming entitlement crisis:

  • CBO estimates that spending on Medicare and Medicaid will grow to 5.9 percent of GDP by 2017, up from 4.6 percent in 2007.
  • Social Security will increase to 4.8 percent of GDP, up from 4.2 percent.
  • Beginning in 2011, Medicare costs are projected to exceed income including interest, and assets must be redeemed each year until the trust fund is exhausted in 2019.

Source: Bill Archer and James Carter, "Tax Challenges for the Next President," Wall Street Journal, January 8, 2008.

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