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Watchdogs Sound Alarm On Bush's Deficit Policies By GREG IP Staff Reporter of THE WALL STREET JOURNAL April 14, 2004 3:08 p.m. WASHINGTON -- Two international economic watchdogs warned that President Bush's deficit plans will make the U.S. and other countries poorer in the long run, and one of them suggested higher taxes to balance the U.S. budget. The International Monetary Fund estimated that even if the U.S. budget deficit is cut in half in five years, as the Bush administration projects, U.S. gross domestic product would be 1.4% lower by 2020 than under normal economic scenarios. For the world, GDP would be as much as 2% lower. The estimates were included in portions of the IMF's semiannual World Economic Outlook, released Wednesday. The IMF also said the Bush plan, which would cut the U.S. budget deficit from about $500 billion now to half that by 2009, rests on "somewhat optimistic assumptions," including a rebound in tax revenue, no change in the alternative minimum tax, which each year wipes out the benefit for more families of the Bush tax cuts, no costs beyond this year for the Iraq occupation and unprecedented restraint in discretionary spending. If those assumptions prove wrong and the budget deficit continues at current levels, the loss in output would be far larger: 2.7% for the U.S. and as much as 3.4% for the rest of the world, the IMF said. The IMF suggested that if the budget were more rapidly returned to balance, the long-term losses of output would be much smaller. It didn't specify whether the budget should be balanced though spending cuts or tax increases, but it did say attention should be paid to "incentives to work and invest," suggesting it prefers the tax cuts be largely left in place. Separately, the Paris-based Organization for Economic Cooperation and Development, in its annual report on the U.S. economy, while praising the tax cuts and echoing the administration's emphasis on the need for spending restraint, also said taxes might have to rise to balance the budget. The OECD, an association of the world's rich countries, suggested broadening the U.S. personal income-tax base by dumping tax breaks for mortgage interest, charitable donations and employer health-insurance premiums and closing down corporate tax shelters. It also suggested the U.S. encourage saving by implementing a national sales tax, or "value-added tax." It argued that the Bush administration's proposed "Lifetime Savings Accounts" and "Retirement Savings Accounts" wouldn't boost savings, because only a handful of wealthy households have already reached the limits of existing tax-sheltered savings plans. But the plans would "lead to further substantial revenue losses." If the deficit isn't cut, the beneficial impacts of the Bush tax cuts are likely to be more than wiped out by the negative impact of large deficits on interest rates and investment in the long run, the OECD said.
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