Extending the 2001 and 2003 Bush tax cuts will increase the federal deficit by nearly $3 trillion over the next decade, according to projections released by the Congressional Budget Office this week.

The CBO’s Budget and Economic Outlook for Fiscal Years 2012 – 2022 projected the deficit will shrink from $1.1 trillion to $196 billion – an 82% reduction – over the next six years if the Bush-era tax cuts are allowed to expire at the end of the year. The resulting increase in tax revenues combined with spending cuts will nearly halve the deficit in 2013, lowering it to $585 billion. 

“Much of the projected decline in the deficit occurs because under current law revenues will rise considerably,” said Doug Elmendorf, Director of the Congressional Budget Office.

The tax benefits scheduled to expire this year include the 2001 and 2003 Bush tax cuts, the temporary Alternative Minimum Tax (AMT) exemptions, the payroll tax cuts for employees, and the accelerated depreciation deductions for businesses.

Read more: How the 2001 & 2003 Bush tax cuts benefit the wealthy

Allowing the 2001 and 2003 Bush tax cuts to expire and eliminating the AMT exemptions (thereby expanding the tax base by more than 26 million payers) would generate more than $3.8 trillion between 2013 – 2022. Ending the Payroll Tax Credit, which reduced the employees’ share of Social Security payroll taxes by 2%, would add another $1.6 trillion in revenues between 2012 – 2022. The expiration of the accelerated depreciation deduction, which allowed businesses to write off more of the costs of equipments and machineries purchased, would result in $340 billion in additional revenue between 2013 – 2022.

If these tax policies go into effect as scheduled, tax revenues are expected to grow by more than 30% between 2012 and 2014. And accordingly, the deficit would be reduced by 68% during that period, from $1.1 trillion this year to $345 billion in 2014.

But if Congress votes to extend all expiring tax provisions (except for the Payroll Tax Reduction), uphold the Medicare reimbursement rates for physicians (which are scheduled to decrease by 27% in March), and block the $1 trillion sequestration cuts (approved under the Budget Control Act of 2011), the federal deficit will shoot up by $7.9 trillion, totaling $11 trillion instead of $3 trillion by 2022. Consequently, the public debt will reach nearly 94% of GDP in 10 years, according to Elmendorf.

“Changing current law to…allow people to pay less in taxes and benefit more from government programs in the next few years…would put the nation on a quickly unsustainable fiscal course,” said Elmendorf. “Under that scenario, the economy will be noticeably stronger in the next few years than under current law but noticeably weaker later in the decade.”

“How much and how quickly the budget deficit declines over the coming decade will depend in part on how well the economy does. Probably more critical, though, will be the choices [Congress] make as you face the substantial changes to tax and spending policies that are slated to take effect within the year,” he added.

Pending policies that will add to the federal deficit:

• Extension the 2001 and 2003 Bush tax cuts scheduled to expire in December 2012: $2.84 trillion plus another $505 billion in debt service fees, totaling $3.35 trillion added to the deficit between 2013 – 2022
• Extension of 80 other tax provisions, many of which expired in December 2011, including research and experimentation tax credit: $839 billion plus another $173 billion in debt service fees, totaling $1 trillion added to the deficit between 2013 – 2022
• Extension of the Alternative Minimum Tax exemptions: $804 billion plus another $133 billion in debt service fees, totaling $937 billion added to the deficit between 2013 – 2022
• Continuation of existing Medicare reimbursement rates to physicians: $316 billion plus another $56 billion in debt service fees, totaling $372 billion added to the deficit between 2013 – 2022
• Cancellation of sequester cuts mandated by the Budget Control Act: $984 billion plus another $187 billion in debt service fees, totaling $1.2 trillion added to the deficit between 2013 – 2022

SOURCE: CBO Budget & Economic Outlook for Fiscal Years 2012 – 2013 (pages 18 – 22)
 

Learn More:

• WhatTheFolly.com: CBO projects U.S. deficit to reach $1 trillion, unemployment to remain above 8% in 2012
• WhatTheFolly.com: Transcript: Testimony of Doug Elmendorf on CBO’s budget and economic outlook for 2012-2022
• WhatTheFolly.com: Transcript: Opening statement by Rep. Paul Ryan on CBO’s budget and economic outlook for 2012-2022
• WhatTheFolly.com: Transcript: Opening statement by Rep. Chris Van Hollen on CBO’s budget and economic outlook for 2012-2022
• WhatTheFolly.com: How the 2001 and 2003 Bush tax cuts benefit the wealthy
• Congressional Budget Office: Testimony on the Budget and Economic Outlook: Fiscal Years 2012 – 2022 (PDF)
• Congressional Budget Office:  Budget and Economic Outlook: Fiscal Years 2012 – 2022 (PDF)
• House Budget Committee: Hearing on the Congressional Budget Office’s budget and economic outlook
• C-Span.org: Video of the House Budget Committee hearing on CBO’s Economic and Budget Outlook for 2012