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Fratto: Phantom Fiscal Savings from Obama Tax Increases


Congressional Democrats and Obama Administration officials have trotted out the argument that failure to raise taxes on households earning more than $250,000 a year would explode the deficit.

The Washington Post reported today a breathless analysisby the Joint Committee on Taxation concluding that the Obama Administration's proposed tax increase would result in $36 billion of fiscal 'savings' next year over Republican proposals.

And Treasury Secretary Tim Geithner, in recent remarks to the liberal think tank, Center for American Progress, provocatively, and repeatedly, asserted that failure to hike the top tax rate "would be a $700 billion fiscal mistake" citing JCT's estimate of the fiscal price tag over a ten-year budget horizon.

Reporters latched on to Geithner's salacious $700 billion morsel and raced off to file stories highlighting the Democrats latest argument in the coming tax battle.

Anyone reading these stories would be excused for believing that federal deficits will be $700 smaller with the tax hike in place. But they would be wrong.

"Another target for watering down is the amount of money the reform bill would require firms to pay upfront as part of a bailout fund for too-big-to-fail firms that might need financial help." -Credit, Writer

What reporters neglected in Secretary Geithner's remarks was that those expected revenues wouldn't be "saved", but would instead be spent in additional stimulus measures ­ including aid to states. As Secretary Geithner said, "there are lots of good alternatives to use those resources."

And, in fact, Democrats wasted no time in finding one of those "good alternatives" when this week they passed legislation to spend nearly every dime of expected revenues from the proposed tax increase by sending more than $26 billion to state governments, while Administration committed an additional $3 billion to subsidize homeowners in default.

In other words, instead of filling the existing gaping fiscal hole, the Obama Administration intends to dig deeper with increased spending. Even with the Obama tax increases, fiscal deficits will average over a trillion dollars a year through the next decade.

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Tony Fratto, a CNBC contributor, is Managing Director of Hamilton Place Strategies – a strategic economic policy and communications firm based in Washington, DC. He is a former White House Deputy Press Secretary for the George W. Bush Administration and Assistant Secretary of the Treasury. You can follow him on Twitter at http://twitter.com/TonyFratto.