Presto! -- It’s Deficit Magic

Federal Reserve Chairman Alan Greenspan is increasingly testy about the perils of the federal budget deficit, warning Congress and the Bush administration last week that it poses “a significant obstacle to long-term stability.” The higher the debt goes, the more the threat of inflation increases. That forces the Federal Reserve to raise interest rates, slowing economic growth. Friday’s sunny job creation figures, though good news, also intensify pressure to raise rates.

The Congressional Budget Office projects a deficit of $477 billion for 2004 -- and by 2013, a recent average college graduate will shoulder $51,520 of the total national debt. The new $25-billion request by the White House to underwrite the Iraq occupation will be on top of those projections. But Congress continues living in a fiscal house of mirrors, using gimmickry to disguise the cost of current and proposed tax cuts.

The mischief begins with the one-year curb on the so-called alternative minimum tax that the House approved Wednesday. If enacted, it will shield about 9 million individuals and families at a cost of $17.8 billion to the Treasury. The AMT is a parallel tax system originally designed to prevent the wealthy from avoiding all income taxes. But because it was not indexed for inflation, middle-class taxpayers are falling within its limits. Indexing the tax makes sense, but not on top of the more reckless cuts already passed.

Now Congress seeks to have it both ways by relying on one-year extensions. It pretends at budget time that hundreds of billions of AMT dollars will be available over the next decade. Then it can turn around and extend AMT relief for another year.

The “marriage penalty” produces another sleight of hand. A tax code quirk often penalizes married couples when both spouses work. Once again, relief is good in theory but lawmakers aren’t honest about lost revenue. By pretending the AMT will be in effect, they assume for budgeting purposes that about half of the tax cuts the AMT is intended to provide for married couples will be canceled out. Dizzying as well as deceptive.

The congressional Joint Committee on Taxation estimates that if, as is likely, the AMT is curbed each year, the bill the House passed April 28 for marriage relief would cost $204 billion over 10 years, not $105 billion.

If Congress rolled back the parts of the tax cuts that benefit the most wealthy, changes to the AMT and marriage penalty could be considered, but cuts already enacted reduce federal taxes of households with incomes above $1 million an average of $123,600 in 2004. Over the next decade, interest payments on tax-cut debt will amount to all that the government spends on the departments of Education, Homeland Security, Interior, Justice and State.

The longer that lawmakers budget by fakery, the more they will inundate future generations with trillions in debt. Whom will those generations blame?