Published in Standard-Examiner, March 21, 2014, Ogden, Utah
Vijay K. Mathur
Bloomberg,
on March 5, reports online that President Barack Obama's budget of $3.9
trillion for fiscal year 2015 benefits low-income families, college students,
researchers and infrastructure. It raises taxes on airline passengers, wealthy
and multinationals. As a percentage of the Gross Domestic Product (GDP), the
projected deficit will be 3.7 percent in 2014 and 3.1 percent in 2015, a
decrease of more than 6 percent from 2009, when President Obama took office.
Congressional Republicans disapprove of the president's budget.
For Republicans, major fiscal problems are deficits, debt, taxes, and entitlements.
They claim that if we reduce income and corporate tax rates, entitlements, and
regulations, growth rate and jobs will increase, budget deficits will decrease
and debt rate will slow down. Rep. John Boehner, Speaker of the House, R-Ohio,
criticized the president's budget and wants a balanced budget.
Rep. Paul Ryan, R-Wisc., has proposed reducing growth of
entitlements and considered that overlapping poverty programs create
disincentives for work. Rep. Dave Camp, R-Mich., has proposed a tax code overhaul.
His proposal reduces the corporate tax rate from 35 percent to 25 percent and
exempts from taxes 95 percent of repatriated foreign profits. It also reduces
individual income tax rates and tax brackets from seven to three. Mr. Camp
wants to replace the Earned Income Tax Credit (EITC) with payroll tax
reduction. He claims, just like Rep. Ryan, that his tax reform will induce
substantial economic growth.
It appears that a compromise could be negotiated on fiscal
matters, while noting that Rep. Boehner's balanced budget idea is wishful
thinking, given the economy's economic condition. However, the CBO reports,
March 2013, (www.CBO.gov) that budget deficit in 2014 will be 4.4 percent of the
GDP -- less than half of the deficit in 2009.
The long-run goal should be to fix long-term fiscal problems in
mandatory programs, claiming 71 percent of the revenues in 2013. Social
Security, including disability payments, Medicare and Medicaid alone constitute
82 percent of mandatory outlays. Therefore, budget trimming over the long run
should start with reforming these programs.
Here are some areas of probable compromises for the near term:
1. Expand the Earned Income Tax Credit (EITC) to individuals
with no children, for job creation and reducing poverty.
2. Consolidate poverty programs with built-in work incentives.
Even with thin empirical evidence on reduced work effort due to entitlements,
it would be worth negotiating and implementing to improve efficiency.
3. Minimize use of "tax extenders" -- routinely
extended tax subsidies, mostly to corporations. Tax Policy Center (www.epi.org) reports that tax extenders, expired on Jan. 1, if extended
through 2024, it would cost $46.6 billion per year.
4. Reduce the corporate income tax rate. Reduction of tax on
foreign profits should be temporarily granted on the portion of profits
invested in non-financial investment activities in the US.
5. Treat "carried interest" of private equity firms'
partners and capital gains as earned income for tax purposes. Many Republicans
and Democrats in Congress are inclined to make these changes in the tax code.
6. Most agree that one of the effective ways to fight poverty is
through education and training for high end and skilled jobs in the
technology-driven economy. Expenditures on R&D are necessary to maintain
competitive edge in global markets and foster growth. The president's budget
boosts spending on these programs and on preschool education for all children. Most
evidence shows that early childhood education pays a very significant economic
dividend to children and the society at large. Data from the Office of
Management and Budget (www.whitehouse.gov/omb) show that the estimated outlay on "Education,
Training, Employment and Social Service" was 6 percent of the total outlay
in 2013 and 2014 budgets. This meager sum should be increased. Reducing
tax extenders, tax revenue from treating "carried interest" and
capital gains as regular earned income would be sufficient to pay for
education, training and R&D.
7. Carbon tax and tax on Internet sales (with credits for local
sales taxes), could be implemented in place for reductions in income tax rates
and tax brackets. Carbon tax is an efficient way to reduce pollution and
dependency on fossil fuels, while offsetting any revenue loss from reductions
in income tax rates and brackets. Internet sales tax on all suppliers, with the
proposed credit, will enhance competition among all sales outlets.
Favorable tax treatment of out of state Internet sales, serving as substitutes
to local outlets' sales, undermines competition. Internet sales already have
price advantage due to lower display costs of products.
Former Rep. Lee Hamilton of Indiana, Standard-Examiner, March 8,
opines on the current dysfunctional Congress and Congressmen that, "Their
aim seems to be partisan and ideological, rather than a constructive effort to
solve nation's problems." Hopefully all parties heed this criticism
by an experienced and respected Congressman.
Congress and the administration have a stake in working out the
compromises in fiscal matters to make this democracy function and serve as a
model to the rest of the world. For democracy and a democratic government to
survive and sustain itself, it must work on consensus, not dissension,
positivism not negativism, and welfare for haves and have-nots.
Mathur is former
chair and professor of economics, and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He also writes blogs at
http://blogs.standard.net/economics,etc.
