Do the right thing Obama; though I doubt you will...

NYT

[S]ooner than he may prefer, Mr. Obama will have to face up to what he has so far avoided: the need to raise taxes broadly to rein in deficits.

The deficits are not of his making. Some two-thirds of the $9 trillion shortfall resulted from policies that predate his administration; most of the rest is the cost of policies that both parties consider necessary, like continued relief from the alternative minimum tax.

But when he inherited the burden of the budget mess, Mr. Obama also inherited the responsibility to clean it up. Neither economic growth nor spending cuts will be enough to fix the projected shortfalls. Nor is there enough to be gained by confining tax increases only to families making more than $250,000 a year, a campaign promise that Mr. Obama still says he will keep.

Assuming the economy has begun to recover by 2010, next year would be the natural time to start raising taxes. That’s because the Bush-era tax cuts are set to expire at the end of 2010. If Congress does nothing, taxes will revert to higher levels for everyone; if it extends all of the cuts, taxes will stay low for everyone; if it extends some and lets others expire, taxes will stay low for some taxpayers and go up for others.

Since 2010 is also a Congressional election year, lawmakers will be reluctant to raise taxes at all, and certainly not without considerable support from the White House, which is already worried about the 2010 elections.

Under these political pressures, Congress might be tempted to extend all of the Bush cuts at least through 2011 — and that would be a dangerous move because time is not necessarily on Mr. Obama’s side.

No one is angling to raise taxes during the recession, but the longer it takes to show real progress on deficit reduction, the greater the possibility that the nation’s creditors will demand higher interest rates on loans to the Treasury. That would worsen the deficit by raising the nation’s borrowing costs. And with the recovery of both the financial system and the housing market dependent on low interest rates, an unanticipated or uncontrolled rate increase would be a crisis in its own right.

The question then is not whether taxes must go up, but when, how and how much. The White House budget director, Peter Orszag, has said the administration is working to bring the deficit down in the 2011 budget, due early next year. But when asked recently by The Wall Street Journal for details, including the possibility of higher taxes on families making less than $250,000, Mr. Orszag said that the administration was not yet giving any specifics on the next budget.

In the meantime, the tax code remains inadequate to the task of raising sufficient revenue — and high-income taxpayers are about to benefit once again. Next year, a misguided law enacted in 2006 will take effect, giving high-income taxpayers the chance to shelter much of their money from future tax increases.

The law will let high-income taxpayers transfer traditional individual retirement accounts into so-called Roth I.R.A.’s. Unlike regular I.R.A.’s., no tax is due when money is withdrawn from a Roth. That often makes Roths a better deal, especially if you believe that tax rates will be higher in the years to come — and they are bound to be higher. Taxpayers who switch to Roths will have to pay tax upfront on the amounts they transfer, so the government will get a jolt of revenue. But later, the transfers will be a money loser for the government as high-income Americans and their heirs make tax-free withdrawals that would have been taxable at tomorrow’s higher rates.

The Obama administration may not want to talk about the need for broad tax increases while other issues dominate the agenda. But if the administration and Congress do not act rationally and in a timely way, they risk being forced to act by circumstances beyond their control. In that event, the economic harm to Americans would be far greater than simply acknowledging the obvious and acting accordingly.

Posted via email from Jim Nichols