Why You Should Care About the CBO Report – Really This Time

The non-partisan Congressional Budget Office (CBO) produced the most-recent version of it’s periodic report on the state of the nation’s economy.  The report was as dreadful as expected: debt rising and tax receipts going down, but you knew that already.  What’s different is how they are either lying to candy coat how bad things are going to get, or they are simply telling us that our personal situations .. are about to get much, much worse.

As a numbers geek, I read these things.. the whole thing to find those things that really mean something.  The report starts out sounding kind of rosy.

The Congressional Budget Office (CBO) estimates that the federal budget deficit for 2010 will exceed $1.3 trillion—$71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010, when it issued its previous estimate.

Great, so the deficit isn’t as bad as the CBO thought it might be a few months ago, but still terrible.  We hear this stuff on the evening news, in the car, in the paper .. to the point that we’ve become numb to it.  That’s why they bury this little nugget “below the fold” or in other words, late in the article after you’ve already tuned out (emphasis mine).

In CBO’s baseline, total revenues climb sharply in the next few years, from 14.6 percent of GDP in 2010 to 17.5 percent in 2011 and 18.7 percent in 2012. That increase is attributable in part to the scheduled expiration of tax provisions originally enacted in 2001, 2003, and 2009 (including temporary relief from the AMT, which expired at the end of December 2009) and in part to the anticipated economic recovery.

The parenthetical mention of the expiration of AMT relief is almost a confused negative , kind of like “jobs created or saved”.  It took me several reads and some prodding from a CDN staff member to focus on the intent of this paragraph: this economic outlook is based on the assumption that ALL of the Bush Tax Cuts will expire (not just the ones for the top 1%) and that tens of millions of Americans will no longer be given “relief” from the AMT provision of tax law – that could mean YOU!

In the past, most of us have not made enough to have been affected by AMT, or, the alternative minimum tax.

The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax. The AMT has increased its reach, however, and now applies to some people who don’t have very high income or who don’t claim lots of special tax benefits. Proposals to repeal or reform the AMT have languished in Congress for years, but effective action does not appear to be on the horizon. Until Congress acts, almost anyone is a potential target for this tax.

The reason that most of us have not paid attention to this tax on the wealthy is that it does not impact middle-class America (thanks to interventions from our beloved Congress) as this Tax Policy Center Post makes clear.

It has become a regular stop on Washington’s fiscal merry-go-round: Congress patches the Alternative Minimum Tax for a year or two, but leaves future fixes for mañana. For instance, the Senate Budget Committee’s new fiscal blueprint makes room to fix the AMT for one year only and assumes money will be found from somewhere to pay for future patches.

The good news – even folks like you and me are now considered wealthy.  AMT was never indexed for inflation or anything else so over time, more median-income families will be pulled into what is quickly becoming the middle-class tax.  This graph illustrates how, with the CBO’s proposed expiration of the AMT relief, an alarming number of Americans will find themselves subject to the supposed wealth tax.

The good news is we’re wealthy – the bad news.. Obama is promising to raise taxes on, that’s right,  the wealthy.  You and I, and everyone that works and struggles to make ends meet .. is going to meet head-on with an ugly tax bill in years to come.  Here’s a situation illustrated by MSN.com that you or I could easily find ourselves in the middle of.

Marile Robinson, 52, had just bought her dream home a few years ago when her accountant gave her a nasty shock: She owed an unexpected $290,000 in taxes.

Robinson, who earns $75,000 a year as a human resources director at Intel, had no choice but to sell the house and take out a loan to pay off the tax bill. Im starting from scratch, and Im in my 50s, Robinson said. Her monthly take-home pay is equivalent to the monthly interest on her loan.

It turns out that Robinson, like more and more middle-income folks each year, got slapped with the alternative minimum tax, a tax system thats separate from the regular income tax and comes with its own rates and rules. By 2010, the Internal Revenue Service estimates, more than 35 million taxpayers will be subject to the tax.

That’s a single person making $75,000 .. the same applies to a family.

The news gets no better if you continue to read between the lines of the CBO report.

Revenues will also be boosted by provisions of the recently enacted health care legislation (the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010), which are estimated to increase receipts by growing amounts over the next few years

Ah, so Health Care reform was more about collecting taxes than doing much else – not much of an aha moment actually.  Unfortunately, those revenues.. come from medical equipment manufacturers and pharmaceutical companies.. you know.. employers.  At best, this adds to the causes of stagflation where prices need to go up to pass on the costs of government greed, but can’t because of deflationary pressures (no one can afford more expensive drugs, or insurance companies force lower price compensation due to government regulation).

Stagflation.. scary.. that’s what we had during Carter’s catastrophe of a Presidency.  Oddly enough .. Paul Volcker was leading the economic direction then too..

The CBO report does discuss inflation, or the lack thereof.

Inflation in the prices of consumer goods and services (calculated using the price index for personal consumption expenditures, or PCE) is projected to be about 1 percent in 2010 and 2011, when measured on a fourth-quarter-to-fourth-quarter basis. Core inflation, which excludes the prices of food and energy, is also projected to be about 1 percent this year and next. CBO projects that inflation will pick up moderately thereafter but remain below 2.0 percent from 2012 through 2014.

While the report somehow makes the possible 1% price growth a positive thing, we all know that with the aforementioned fallacies in-mind that’s not even a reasonable assumption.  Deflation is going to be the order of the day for the foreseeable future.  The CBO is able to ignore the possibility by simply pretending that Congress will act a certain way (kill 100% of Bush tax cuts and expose 30 Million middle-class Americans to AMT AND assume economic recovery.. yeah that’s happened).  Perhaps Congress will do those things, but if they do .. consumers, who make up 70% of GDP will be left with much less to spend- deflation is all that can result.

If Congress acts in the way that the CBO presumes, middle-class families will have to cough up an additional $500 Billion over ten years.  The only way the CBO sees to balance the budget is to raise taxes, odd how a non-partisan Government agency is no more frugal than the partisan ones.The flip side is what if they don’t?

If Congress does what they’ve done for years, the budget deficit and the national debt will increase to alarming levels (ok ok , even more alarming levels).  This report demonstrates that they are counting on the expiration of all of the Bush tax cuts, no fix for AMT, light inflation, and a perceivable recovery.  It is very realistic to assume that the Bush tax cuts will be extended for all but the top 1 or 2% of earners, that the AMT fix will be put back in, the we might see severe deflation and that the recovery won’t be this year.  The debt picture gets downright dark if the fairy-tales in the economic report don’t come true.

I will be as financially distressed as many of you by the actions Congress will take to match this outlook.  It’s coming, it’s nasty and it’s real.  This CBO report is about you, to you, and affects .. you.

I pray November comes fast enough: “Silence has gotten us nowhere so it’s once again time for our collective voice to make a simple yet powerful demand .. Don’t Tread on Me” –_{Glenn Beck}