Backgrounder: Analysts Predicting Plunging Revenues May Be Proven Wrong Multiple Ways

Pundits are saying that President-elect Barack Obama will have a tough time righting the economy, handling two simultaneous wars, and fulfilling myriad campaign promises, because the weakening economy means federal revenues are slumping, so money will be scarce in Washington.

Predictions would have Obama slashing funds for ballistic missile defense programs. He also was predicted to be poised to ravage budgets for the U.S. space program, until he promised Florida voters he would increase support for some NASA programs.

But Obama, rather than facing ever-dwindling revenues to pay for both defense and domestic programs, actually may reap an enormous increase in federal revenues during his administration.

It works this way:

First, Obama has pledged to withdraw U.S. troops from Iraq, a war that costs $120 billion a year. To be sure, $2 billion or more would be needed to repair and replace items worn out or destroyed in the war, and some of that saving would be offset by force increases in the war in Afghanistan. But clearly, Obama could realize savings of more than $300 billion in his four years in office, even if increasing troop strength in Afghanistan costs $50 billion in that period.

One unknown here, however, lies in other military personnel spending: Obama has pledged to increase total troop strength, and each additional 10,000 troops on the payroll costs about $1.2 billion a year, according to former Gen. Pete Schoomaker, who was the Army chief of staff. And Obama has pledged good care for veterans, in a nation where health care costs are steep.

But clearly, Obama easily stands to pick up $50 billion or more each year by removing U.S. troops from Iraq, a substantial amount compared to the roughly $20 billion yearly for NASA, or the $10 billion-$11 billion for ballistic missile defense programs.

But he has made innumerable other promises to voters during his nearly two-year quest for election to the White House: Obama spoke of health care covering uninsured Americans, higher education for students, energy and the environment, saving Social Security and much more. And for each promise kept, a price tag would be attached.

But again, Obama will see the federal government gather in more, not fewer, dollars.

The second way this will eventuate will be if he wins approval for his plan to raise taxes on those whose incomes are $250,000 or more yearly. Given that the Democratic senator from Illinois will be greeted by substantial increases in the seats held by Democrats in Congress, it’s likely that will be enacted.

While Obama promised a tax cut for the middle class, that could well be watered down as it makes its way through Congress. He could even sit back and let the bill die in congressional infighting, without his involvement, and say Congress killed it. But even if it becomes law, it wouldn’t change the fact that Obama may have huge amounts of new revenues at his disposal.

Then we come to the third and most lucrative means of increasing federal revenues: doing nothing.

In 2001 and 2003, when President Bush and Republicans in Congress cut taxes by $2 trillion in this decade, they placed automatic expiration dates on the tax cuts, and those sunset dates will come due in 2010 and 2011.

At those points, the tax cuts expire and taxes return to the same level as in the 1990s.

While Republicans wish to see those tax cuts extended, and accuse any Democrat who opposes an extension of increasing taxes on Americans, all Obama and Democratic legislators need do is to point out that the expiration dates were written by Republicans, and only Republicans.

Permitting those tax cuts on various types of taxes to expire would yield about $2.6 trillion in extra revenues in the next decade, according to Obama’s opponent, Sen. John McCain of Arizona, who was the Republican presidential candidate and still is a senior member of the Senate.

McCain, according to The Wall Street Journal, proposed tax cuts including an extension of the Bush tax policies (far more than $200 billion a year in lost revenue) and additional tax cuts that would have cost, in total, more than $600 billion yearly in lost income for the government, or north of $6 trillion over the next decade.

Just permitting the Bush tax cuts to expire on schedule in 2010 and 2011 would average out to a whopping $260 billion a year in extra revenues.

Just what could that buy?

That is equivalent to about half of the annual U.S. defense budget.

It is about 13 times the entire NASA budget.

And it is more than 20 times the yearly Missile Defense Agency budget.

With this much money, Obama could provide Americans with both guns and butter.

Now, to be sure, Bush has pressed forward with a $700 billion financial industry bailout bill. And Democrats may advance a fiscal stimulus bill of $100 billion, or perhaps more — $150 billion up to $300 billion. But still, that would leave $1.6 trillion in new revenues over the next decade, solely from permitting the Bush tax cuts of 2001 and 2003 to expire.

Finally, there would be yet another option for new revenues: special purpose taxes and fees.

Many lawmakers on Capitol Hill have proposed infrastructure spending as a way to stimulate the economy. They also point to a critical need for infrastructure repair, citing examples such as the interstate highway bridge collapse in Minnesota.

But that needn’t take money from general revenues such as those supporting space and missile defense programs.

Rather, highway construction and repair programs long have been funded with the 18.4-cents-a-gallon federal gasoline tax that yields about $40 billion yearly. With the price of gasoline plunging in recent months by $1 a gallon in some areas, a 20-cents-a-gallon fuel tax increase would barely be noticed.

So, in multiple ways, Obama’s four years in the White House, rather than being threadbare times of want, could turn out to be flush with cash for an array of programs, including defense, space and missile defense, and improved domestic programs as well.

True, he clearly expressed a preference, during 21 months of campaigning for election to the White House, to focus on domestic issues, rather than for addressing overseas matters.

However, that, too, was true of Bush, who in the 2000 campaign sounded at times almost isolationist, with little appetite for foreign adventures.

But the realities of the presidency, of the U.S. role as the sole superpower, and events such as the Sept. 11, 2001, attacks and rise of Islamic terrorism forced Bush to become an internationalist.