Obama's real deficit problem: His tax cuts

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney) -- President Obama takes a lot of heat from Republicans for supposedly being a big spender. But when it comes to future deficits, the president's problem isn't spending. It's the tax cuts.

The president's budget request for next year would add $9.5 trillion to deficits over the next decade, which is $2.7 trillion more than would otherwise be the case, according to a preliminary analysis released Friday from the independent Congressional Budget Office.

The main reason? Obama's budget would reduce revenue by a net $2.3 trillion over the next 10 years.

As a result, the amount of interest owed on the national debt would go up by another $519 billion. And that interest is the reason spending as a whole would rise under the president's budget.

"Outlays would be greater ... in each of the next 10 years, primarily because the proposed reduction in revenues would boost deficits and thus the costs of paying interest on the additional debt that would accumulate," CBO wrote.

Deficit hawks point to interest payments as one of the reasons the U.S. debt situation is unsustainable. With or without the president's proposals, interest payments will start to grow rapidly.

For instance, in 2021, the CBO estimates that under the president's budget, the government will have to pay $931 billion in interest alone. Currently interest is projected to be $807 billion, hardly a small amount.

On the tax side, Obama's 2012 budget proposes extending or expanding a bevy of tax breaks -- mostly for individuals -- and calls for killing or limiting several business tax breaks.

The main hit to revenue results from two of his proposals: to make permanent the 2001 and 2003 tax cuts for the majority of Americans; and to protect middle- and upper-income earners from having to pay the Alternative Minimum Tax.

Even though his proposals would reduce tax receipts substantially relative to current law -- which assumes the Bush tax cuts expire and that the AMT hits tens of millions -- total revenue would rise to 19.3% of GDP by 2021, which is above the 18.3% historical average.

When it comes to spending, the president's request called for a mix of proposals aimed at boosting U.S. competitiveness and belt-tightening intended as a "down payment" on serious deficit reduction. For example, he proposed a 5-year freeze on non-security discretionary spending.

Overall, his budget would increase spending by $402 billion over the next decade. But most of that is because of interest.

In fact, CBO said that non-interest spending under Obama's budget would fall $117 billion relative to the policies in place under current law.

But that doesn't really improve the country's debt trajectory. The CBO estimates that debt held by the public -- which does not include money owed to government trust funds like Social Security -- would rise to 87% of the economy by 2021 under the president's budget. Under current law, debt held by the public is estimated to reach 76%.

Neither scenario is palatable. And neither can be realistically improved without reducing spending and raising more tax revenue. Deficit hawks have been calling for lawmakers to bring debt down to 60% of GDP by the end of the decade and to 40% thereafter. To top of page

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