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Spending plans may have to be trimmed
Conservative economists and budget analysts predict President-elect Barack Obama can turn a seemingly insurmountable budget
deficit into a potential cash windfall for the country in as little as three years.
John F. Cogan, a budget and economic adviser in previous Republican administrations, said preferred bank stock the government is acquiring in the bailout is a tool that may help trim the escalating budget.
“So Obama could inherit a trillion-dollar deficit, but three years from now, when the stock is sold, the budget deficit will look extremely good,” he said.
Initially, however, Mr. Obama will be forced to scale back his tax and spending plans next year because of huge budget deficits arising from the recession and the economic bailout, Mr. Cogan and other experts at the Hoover Institution say.
“He needs to scale back what he’s proposed. It would cost vastly more than he said, and his supposed [tax] revenue would raise a lot less than he claims. So you would have this big increase in the budget deficits,” said Hoover economist Michael J. Boskin, who chaired the Council of Economic Advisers under President George H.W. Bush.
Budget analysts here project that Mr. Obama will be facing a federal budget deficit of about $600 billion when he takes office in two months and that it easily could grow to nearly $1 trillion by the end of the 2009 fiscal year.
“We’ve seen just how hard it is to maintain these pay-as-you-go rules where every additional expenditure needs to be financed with higher taxes. And Senator Obama is going to face exactly that problem, so it will be very hard to finance the kind of change he talked about in his campaign,” said Mr. Cogan, a Hoover scholar and professor on public policy at Stanford University.
These same budget constraints, as well as the weakening economy, also will affect Mr. Obama’s plans to raise taxes on upper-income Americans as well as his promised tax cuts for low-to-middle-income workers, the core of his economic recovery program.
Like Mr. Cogan and other conservative economists at Hoover, Mr. Boskin says he thinks higher tax rates - especially Mr. Obama’s plans to raise taxes on capital gains and dividends - will hurt economic growth.
“It’s hard to conceive of the circumstances where it’s a good thing to raise tax rates, but it’s especially stupid to do it in a recession,” he said.
Asked if he knew of an example in which raising taxes in a recession had worked and led to an economic recovery, Mr. Boskin said, “I don’t know of one.
“He’s got to deal first with the problems of the economy. It would be wise to put off the rejiggering of the tax code until later. To do anything now that might harm the economy would be economically dangerous and politically foolish,” he said.
Mr. Obama has acknowledged that he will have to re-evaluate his tax and spending proposals to see if any changes may be necessary as a result of the deepening recession and its impact on the deficit and economy. However, he maintained during his campaign that all of his proposals to give tax cuts to 95 percent of all taxpayers, as well as his domestic spending plans, “are paid for,” meaning their cost would be offset by increased tax revenues from higher taxes on the top 5 percent of income earners.
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