Compromise can be done on fiscal isues

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.