At the request of House Speaker Pelosi and Budget Chair Spratt, the CBO completed a study on the budgetary impact of three policy scenarios--a baseline (all temporary provisions expire and there's no AMT patch); a first alternative (the stimulus bill is taken into account, all temporary tax cut provisions are extended, and the AMT gets patched); second alternative (same as the baseline, except troops at war gradually pull down from 190,000 in 2009 to 75,000 in 2013), and third alternative (same as second, except provisions of the 2001 tax cut affecting upper-income taxpayers would expire and the estate tax would remain in the diminished 2009 form).
As noted, the CBO baseline projection assumes that current laws remain in place and that the major tax cut bills passed during the Bush administration (the ironically named "Economic Growth and Tax Relief Reconciliation Act of 2001" (EGTRRA) and "Jobs and Growth Tax Relief Reconciliation Act of 2003" (JGTRRA)) will expire at the end of 2010. The scenario is inherently rosy--those temporary provisions reducing taxes expire, and the AMT patch that has been added annually to reduce taxes that would otherwise be collected is not assumed to be enacted. Funding for the wars holds steady at just what has already been approved for 2009, growing each year at specified inflation rates. Funding under Medicare for physicians goes down as it is supposed to rather than having the provisions waived so doctors can continue to receive high fees. The baseline result? A 2009 deficit of $1.2 trillion and a deficit of $3.1 trillion through the decade.
Under the first alternative, CBO estimates the impact of leaving all the Bush cuts in place, and continuing to patch the AMT to leave those cuts in place. The war costs for 2008 are projected to repeat through the decade (adjusted for inflation), and nondiscretionary spending stays the same (adjusted for inflation) Instead of the full decline in doctors payments under Medicare, it is assumed that physicians' fees will increase by 1% annually. The result would be another $218 billion added to the 2009 deficit, and another $8.4 trillion for the ten year period (on top of the amount under the baseline).
Under the second alternative, the cost of keeping troops in Iraq and Afghanistan, even at slightly reduced levels projected by gradually reducing from 190,000 to 75,000 in 1913 is about the same as keeping the Bush tax cuts in place--$218 billion additional 2009 deficit and $7 trillion more deficit over the ten year period. That fits with the analysis many have given of the source of the deficits before the crisis in the Bush tax cuts and the Bush wars of choice.
The third alternative reduces the deficit for the 10 year period to $5.6 trillion. Better, but not where it ought to be.
Congress needs to look closely at these projections. They suggest that more far-reaching changes to undo the Bush mess will be necessary. Reversing the preferential rates for capital gains would be a good step that could be accomplished within the AMT, along with a permanent "fix" to the exemption amount to protect ordinary taxpayers--those couples making $150,000 or less. Letting the estate tax go back to its 2001 levels should be considered--or at least limiting the exemption to $2 million and retaining the 55% rate and perhaps inaugurating a progressive rate structure for the estate tax. Removing some of the many "entitlement" expenditures favoring the oil and gas industry and other corporate recipients should also be on the docket.