When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion freshly authorized by Congress Tuesday.
Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.
It doesn’t sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That’s one-half of one percent. And it qualifies as a “cut” only in the fanciful world of government accounting.
The Budget Control Act of 2011 will save $917 billion over 10 years relative to the Congressional Budget Office’s baseline. It leaves the tough work to a bipartisan congressional committee of 12, to be appointed by the leadership in each house. If this supercommittee fails to agree on a minimum of $1.2 trillion of additional savings over 10 years, automatic spending cuts -- evenly divided between defense and nondefense -- will kick in.
Is there any reason to think the same folks who couldn’t agree on a grand bargain this past month will join hands and find commonality in the next three, with one month off for vacation?
Rosy Scenario
Even if the committee agrees on the prescribed savings by Nov. 23 and Congress enacts them by Dec. 23, as required, laws passed today aren’t binding on future congresses.
Throw in the fact that revenue and budget forecasts tend to be overly optimistic, and there’s even less reason to think Congress has put the U.S. on a sound fiscal path.
In a July 2011 working paper for the National Bureau of Economic Research, Harvard economist Jeffrey Frankel identified a pattern of over-optimism in official forecasts, a bias that gets bigger in outer years. (Who can forget the CBO’s 2001 estimate of a 10-year, $5.7 trillion budget surplus?) A fixed budget rule, such as the euro area’s Stability and Growth Pact with its mandated deficit-to-GDP ratios, only exacerbates the tendency.
“Political leaders meet their target by adjusting their forecasts rather than by adjusting their policies,” Frankel writes.
First Installment
The deal hashed out in Washington at the eleventh hour this week does nothing to curb the unsustainable growth of entitlement spending -- on programs such as Medicare, Medicaid and Social Security. Medicare outlays have risen 9 percent a year for the last 30 years in a period of stable demographics, according to Steven Wieting, U.S. economist at Citigroup Inc. The automatic spending cuts outlined in the budget act would limit reductions in Medicare expenditures to no more than 2 percent a year.
By the end of 2012 or start of 2013, the federal government will be back at the trough with a request for additional borrowing authority. The debt will keep rising, and the ratio of publicly held debt to GDP will increase from 62 percent last year to as much as 90 percent in 2021, according to some private estimates, depending on what Congress does about the expiring tax cuts, the Medicare “doc fix” and the alternative minimum tax.
The CBO’s estimate of $2.1 trillion in savings over 10 years is well short of the $4 trillion Standard & Poor’s says is necessary to stabilize the debt and avoid a rating downgrade.
‘Architectural Change’
No matter. Some prominent Keynesians are advocating more spending now for an economy that is sputtering. Alas, there is little appetite in this country, and less in Congress, for more spending in light of the questionable results. A lost decade doesn’t seem like a good return on an $8.35 trillion investment. (For purists, only $6 trillion of the increase was in marketable debt, the kind of good old deficit spending Keynesians love.)
Maybe it’s time to try something new and different. In 2002 I wrote a column titled, “How About Some Tax Reform Along With Tax Relief?”
How about it? Get rid of the loopholes. Better yet, scrap the entire tax code, which would decimate the lobbying industry. Implement a flat tax or a national sales tax. The time has come for what former Treasury Secretary Paul O’Neill calls “architectural change.”
Can the Code
The current tax code is burdensome, inefficient and costly to administer. O’Neill says it costs the Treasury an estimated $800 billion annually, divided equally between administrative costs and uncollected revenue.
Eliminate the corporate and individual income tax, he says, and replace them with a value-added or consumption tax, with tax refundability for lower-income households.
“We should focus the tax system on raising revenue for the things we as a society need,” O’Neill says.
Of course, what society needs is a matter of opinion. Without strong economic growth, the options are more limited, the choices more difficult. Fiscal stimulus can have only a short-term impact. The government taxes or borrows from Peter to pay Paul, reflecting a temporary transfer of resources, nothing more.
What does the nation have to show for chronic short-term thinking and policies like these? Long-term problems and a mountain of debt.
USuncutMN says: Tax the corporations! Tax the rich! Stop the cuts, fight for social justice for all. Standing in solidarity with http://www.usuncut.org/ and other Uncutters worldwide. FIGHT for a Foreclosure Moratorium! Foreclosure = homelessness. Resist the American Legislative Exchange Council, Grover Norquist and Citizen's United. #Austerity for the wheeler dealers, NOT the people.
USuncutMN supports #occupyWallStreet, #occupyDC, the XL Pipeline resistance Yes, We, the People, are going to put democracy in all its forms up front and center. Open mic, diversity, nonviolent tactics .. Social media, economic democracy, repeal Citizen's United, single-payer healthcare, State Bank, Operation Feed the Homeless, anti-racism, homophobia, sexISM, war budgetting, lack of transparency, et al. Once we identify who we are and what we've lost, We can move forward.
Showing posts with label US tax code. Show all posts
Showing posts with label US tax code. Show all posts
Sunday, August 7, 2011
Decade of Stimulus Yields Nothing but Debt: Caroline Baum
Decade of Stimulus Yields Nothing but Debt: Caroline Baum
Wednesday, June 8, 2011
Blemishes in the Fair Tax: Business Week
Boosters say a single national sales tax is elegantly simple, but it's actually more complicated than it seems
Illustration by Carlos Monteiro
Illustration by Carlos Monteiro Editor's Note: There are a lot of ideas on how to "fix" taxes, though many conflict with each other and most fail. From around the world, here is one of several current prescriptions.
It's a great idea—on paper: Scrap the individual income tax, the estate tax, the payroll tax, and the corporate income tax, and replace them all with a single, 23 percent national sales tax. This would boost the economy by eliminating red tape and removing loopholes that clutter the tax code. At least, that's the case made by proponents of the so-called FairTax, a group that includes about one-fourth of House Republicans.
A legislative proposal to eliminate most existing tax law and put the FairTax in its place was introduced in the House in 1999 but never moved out of committee. Now supporters, energized by Republican gains in the midterm elections, are taking another stab at making it law. "The FairTax makes it so no individual ever has to deal with the tax man again," says Representative Rob Woodall, a freshman Georgia Republican who is the lead House sponsor of a 2011 bill.
Boosters say the FairTax is elegant in its simplicity. Yet part of the reason the idea hasn't caught on beyond a core group of conservative advocates is that it's more complex than it seems. It isn't the same as a flat tax, which is based on income. It also isn't akin to the value-added taxes used around the industrialized world, which are collected at the producer and wholesale levels, as well as at the point-of-sale. The FairTax is like the sales taxes that many U.S. states charge, though critics contend that the way it is calulated makes it actually a 30 percent levy, not 23 percent.
The 23 percent rate is set at a level designed to raise the same amount of revenue as the taxes it would replace. Yet it assumes full compliance. If experience is any guide, that's too optimistic: The current tax code, even with safeguards such as W-2 forms and automatic withholding by employers, leaks roughly $300 billion a year due to avoidance and evasion.
To generate sufficient revenue, the FairTax would have to be applied to goods and services that Americans are not accustomed to paying taxes on, such as rent, new-home sales, legal fees, and health care. If a political decision were made to exempt some categories, those that remain would require a higher rate. "The notion that we'd be able to get a clean tax that taxed everything at the same rate seems fanciful," says William G. Gale, a senior fellow at the Brookings Institution in Washington. "No country in the history of the world has done that."
The higher the tax rate, the greater the incentives for consumers and retailers not to report cash transactions. That would mean the economic jolt that FairTax supporters envision wouldn't materialize, Gale says. "We stall on the question of: Is it enforceable?" he says. "I just don't think it passes the laugh test at that level."
The FairTax would weigh heavier on lower-income households, because they spend a larger proportion of what they earn. That's why Woodall's proposal calls for a "prebate," a monthly advance rebate that covers the cost of the tax up to the federal poverty level. Compared with the current system, the FairTax would be a boon to the highest earners, who spend a relatively low share of their income each year and would no longer have to pay taxes on capital gains. FactCheck.org, a nonpartisan group at the University of Pennsylvania, estimated in 2007 that the proposal would translate into a tax increase for people making between $15,000 and $200,000, compared with the current system.
Woodall has heard all these complaints before, yet he thinks the FairTax is an idea whose time has come. To fulfill his dream, he sees an opportunity to harness the energy of his fellow freshmen legislators, who aren't yet attached to particular tax breaks that would disappear if the plan were enacted. "Call me a freshman optimist," he says, "but I see those opportunities for people to say: 'You know what, there are some big ideas out there, and let's team up to make them happen.' "
Representative Patrick J. Tiberi, an Ohio Republican who chairs a crucial tax-writing subcommittee, believes the FairTax is not politically viable. Yet the U.S. tax code, he says, is too broken to delay repair. "We would be not very smart if we wait until the perfect time," says Tiberi. "We have to do something today to make our tax code fairer, simpler, and pro-growth."
The bottom line: A proposal to replace all levies with a 23 percent sales tax is unlikely to advance in Congress.
Rubin is a reporter for Bloomberg News.
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