Obama's 'no tax hike' pledge on the line

My fellow members of the President's National Commission on Fiscal Responsibility and Reform and I met for the first time on April 27. Like many Americans, I wonder if the commission is an attempt by the Obama administration to sweep the spending and debt crisis under the rug until after the November election or provide political cover for a massive tax increase, perhaps through a European-style value-added tax (VAT). Then again, it might represent a sincere effort and unique opportunity to save America from a fiscal crisis of historic proportions. Only time will tell.

However, I was encouraged to hear the president reiterate during our meeting with him that "everything" must be on the table. Let us hope that "everything" includes more than token spending reductions and reforms. If not, in order to solve the debt crisis, the president will likely be forced to again break his "no tax increase" pledge to families making less than $250,000 a year.

According to the Office of Management and Budget, federal revenues have averaged 18 percent of gross domestic product (GDP) and federal spending has averaged 20 percent of GDP since World War II. Over the last few years as tax revenue has fallen, federal spending exploded to 24.7 percent of GDP in 2009 to create the largest debt and deficit since World War II. CBO data shows that the president's fiscal year 2011 budget will result in a debt of 90 percent of GDP at the end of the decade, more than double its historic norm of 43 percent. Greece could prove to be a preview of coming attractions to Main Street, USA.

Despite the president's claim to the contrary, the chief actuary of the Centers for Medicare & Medicaid Services recently certified the president's new health care plan actually increases national health care costs, adding another unsustainable entitlement program to the existing "Big 3" unsustainable entitlement programs - Medicare, Medicaid and Social Security. These programs will help drive federal spending to approximately 40 percent of GDP over the course of the next generation, according to CBO's 2009 Long-Term Budget Outlook.

To tackle this crisis mainly or, in a worst-case scenario, solely on the tax side, would be a huge mistake, or simply impossible.

First, it is important to note that, unless Congress and the president intervene, under current law, taxes will increase, including taxes for families who earn under $250,000. The 2001 and 2003 tax relief is scheduled to expire at the end of this year. For many Americans, the dividend tax will increase 164 percent and the capital-gains tax will increase from 15 percent to 20 percent. The alternative minimum tax is due to hit millions. The death tax will revert from nothing to confiscatory levels, and at least 18 new taxes in the new health care law, including a new 3.8 percent investment tax, will soon follow.

What if Congress intervened and tried to limit tax increases to just those households earning $250,000 or more annually? A study by the Urban Institute-Brookings Institution Tax Policy Center estimated that to reduce the deficit to 2 percent of GDP under the administration's baseline, in 2019 those households making over $250,000 would see the top two marginal tax rates rise to 85.7 percent and 90.9 percent.

The more likely scenario is that, according to the CBO, to finance current projected spending only on the tax side, assuming current policies continue, all taxpayers would be punished by requiring the 10 percent bracket to increase to 25 percent, the 25 percent bracket to jump to 63 percent, and the 35 percent rate to rise to 88 percent. The CBO noted "such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion," which understates the point.

Former CBO Director Robert Reischauer testified before the commission that the fiscal crisis is so serious that, "raising taxes on the rich or corporations ... simply won't be enough." Another former CBO head, Rudolph Penner, told the commission that if we maintain current federal spending patterns and stabilize the debt at 60 percent of GDP, the U.S. total tax burden would be higher than today's Organization for Economic Co-operation and Development average by midcentury and that a few years after that we would be "the highest-taxed nation on Earth."

Without intervention from Congress and the president, taxes on all Americans, including families making less than $250,000, are due to increase. If the president is serious about fiscal responsibility, he needs to either roll up his sleeves on the spending side or be prepared to acknowledge that his "no tax increase" promise to those households making under $250,000 has already been broken.