Just about everybody remembers Captain Louis Renault, in “Casablanca,” declaring, “I’m shocked, shocked to find that gambling is going on here.”
And just about everybody expects a newly elected politician to declare, upon taking office, that he is “shocked, shocked” to find that his predecessor has left the government’s finances in worse shape than expected.
Don’t be shocked if that happens early in 2009.
But the excuse will be harder to accept when the next president and Congress take over. For years now, budget and tax experts of all political stripes have been warning that President Bush and the Republicans who controlled Congress at the time have created what I think of as a kind of “doomsday machine,” one that will blow itself up by 2010 when nearly all of the tax cuts they approved in 2001 and 2003 are set to expire at once.
Sure, most voters haven’t been paying much attention. It’s a complicated situation and it’s hard to believe that lawmakers would agree to deliberately push up income tax collections by hundreds of billions of dollars on a fixed date nearly a decade into the future, risking a sudden shock that could push the economy into a recession.
Still, for a number of political and budgetary reasons that seemed to make sense at the time — at least to those involved — that’s what they decided. And it hasn’t exactly been a secret in Washington. No doubt the presidential candidates, some of whom are already making promises about extending tax cuts or enacting expensive new health care initiatives, have been briefed at least in a general sense about the fiscal situation the winner will inherit.
For Republicans, the solution is obvious : extend Mr. Bush’s tax cuts indefinitely into the future and worry about the consequences for the budget deficit later.
For most Democrats, the answer is a bit more convoluted but equally clear. They want to let the tax cuts expire for the rich — those earning over $200,000 a year, they say — but keep taxes from rising for the middle class.
If only it were that simple. No candidate, it turns out, has been willing to talk publicly yet about the sheer magnitude of the fiscal challenge that awaits the next president and just how politically painful it will be to try to overcome the problem.
“All the alarm bells will be going off at once,” said Kevin Hassett , director of economic policy studies at the American Enterprise Institute, the conservative research organization in Washington. “Whoever wins in 2008 will have to deal with everything at the same time,” Said Mr. Hassett, who served as an adviser to Senator John McCain during the 2000 Republican presidential primary campaign and to President Bush during his 2004 reelection campaign.
“Everything” includes even more than the estimated $2 trillion decade-long revenue loss from extending the tax cuts intact — a move that would benefit the wealthy by far the most. Beyond that is another $1 trillion cost to the Treasury to avoid a substantial increase in tax burdens for millions of middle- and upper-middle-class families from the so-called alternative minimum tax.
That add-on tax to the normal income tax was originally intended to prevent a handful of rich people from escaping income taxes altogether. But now, absent another temporary “patch,” the alternative minimum tax is scheduled to grow exponentially , affecting not just the 3 million taxpayers today who have already been ensnared by the A.M.T. but more than 30 million families by 2010.
“You’re talking about 10 percent of everything the federal government takes in,” Peter Orszag, director of the Congressional Budget Office , said in the cautiously understated manner that his non-partisan position demands. “Given the scale of these changes, you would think that policymakers would want to resolve them before 2010,” said Mr. Orszag, a former Clinton administration official.
Maybe yes, maybe no. When congressional Republicans adopted the temporary tax cuts in the early years of the decade, they assumed that future lawmakers would have no choice but to extend them.
But now that Democrats control Capitol Hill and have a good shot at capturing the White House, says Robert Reich, a former Labor Secretary under President Bill Clinton, that is not so obvious.
“The tax cuts will automatically expire,” Mr. Reich, who is now at professor at the University of California at Berkeley, said, “so the next president won’t have to do anything except sit tight.”
Looming over all this is the monumental built-in rise in government spending over the next few decades to pay tens of millions of aging baby boomers — who also happen to be highly motivated voters — for their promised Social Security and health care benefits as they move into retirement.
Unlike the expiring tax cuts, however, that situation does not create any immediate crisis.
“With the tax system, there is a cliff,” says William Gale, co-director of the Urban-Brookings Tax Policy Center in Washington. “There’s not with entitlements.”
The impending storm from the expiring tax cuts and the rising burden of the alternative minimum tax, experts like Mr. Gale say, could actually have an unintended benefit if it opens the door to a debate over creating a fairer, broader tax system better designed to handle the inevitability of higher taxes for increased entitlement spending with fewer adverse economic consequences. But that’s not Topic A, or even D, E, or F, on the campaign trail.
“It certainly concentrates the mind,” Mr. Gale said. “For once, there’s a real chance to reform the whole system rather than just tinkering around the edges. Whether Washington will have the discipline to do so, well, that’s another question.”
Nobody expects the president to be the nation’s accountant-in-chief. And there’s no political advantage in talking about higher costs when it’s so much more fulfilling to promise new benefits. But shouldn’t the candidates be asked insistently how they propose to deal with this coming mess?
One of them, after all, will be occupying the White House in 2010.
Tom Redburn, a deputy business editor at The Times, oversees coverage of economic issues.
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