Political posturing shouldn't guide corporate tax reform

Published in Standard Examiner, March 19, 2015, Ogden, Utah

By VIJAY K. MATHUR

It might be in the political interest of the GOP majority in Congress to implement federal corporate tax reform based upon facts and serious analysis. Some members of Congress from both sides of the aisle and lobbyists may want to gum-up the discussion with political rhetoric that feels good to the public at large. But political posturing may not be in the best interest of businesses, taxpayers and the country. Before discussing issues for tax reform let me present a brief history and other features of federal corporate tax.

According to Data Release (www.irs.gov), even though the Revenue Act of 1894 established the principle of taxing corporations separately from their owners, definitions of income and tax rates did not distinguish between them. The Supreme Court found the tax unconstitutional when it was challenged in 1895. President William Taft imposed corporate income tax in 1909 and also got ratification of 16th Amendment to the Constitution in 1913, thus establishing the principle of taxing income. Since then the basic structure of corporate tax remains the same.

A Congressional Research Service (CRS) paper, Dec. 1, 2014, states that a corporation pays taxes on income net of business expenses, such as labor compensation, capital depreciation, material cost, interest and advertising to produce that income. It also allows other deductions, credits and tax preferences. Corporate income tax is a progressive tax, imposing higher tax liability on corporations with higher incomes, since for most income brackets it varies from 15 percent to 35 percent.

Many who are critical of corporate tax rates in US only focus on all businesses and the maximum marginal tax rate of 35 percent. However, CRS reports that only 6 percent of businesses are subject to corporate tax. In 2013, corporate tax revenue was only 9.9 percent of federal tax revenue, as compared to 47.4 percent share of personal and payroll taxes. In addition, if one counts tax loopholes and tax breaks (tax expenditures, resulting in federal tax revenue losses of $154.4 billion in 2014), the average effective tax rate (actually paid) is 27.7 percent, same as other advanced countries. The Wall Street Journal, Jan. 6, 2015, reports that last year average profit margins at private companies with revenues of $1 million and higher were 6.6 percent, highest since 2003. These facts do not undermine competitive edge of corporations, as many claim.

My arguments are not against the reform and lowering of rates. My intention here is to emphasize that political discourse on reform should be based on facts, economic reasons and benefits to businesses and public at large.

Aside from a convoluted and patchy tax and rate structure, the following are some of the issues that must be considered in any corporate tax reform. First, corporate tax suffers from double taxation. Same income is taxed at the corporate level and also as dividends. It provides incentive to evade taxes by forming non-profit entities and S-corporations (that do not pay corporate tax since all income is distributed to shareholders). Second, interest rate deduction, favoring debt finance over equity finance, thus causing debt overload, should be eliminated. Professor John R. Graham (www.nber.org) finds that this bias creates net benefits of 3.5 percent of firm value, at the moderate end of estimates.

Third, even though most of the burden of the tax on many competitive businesses falls on capital, part of the burden also falls in the form of reduced real wages and higher consumer prices. The tax may also reduce capital expenditures, thereby decreasing productivity of labor. Real wages could decrease not only directly due to tax shifting, but also indirectly due to decline in productivity, since labor would have less capital to work with. Therefore, a case could be made for lowering tax rates within a narrow range, competitive with other advanced nations, and at the same time for closing tax loopholes and at least minimizing tax expenditures.

Fourth, reform should deal with tax deferrals where tax is deferred on incomes held abroad. Many proposals in Congress have been made over the years to fix this tax leakage. Lower rates would partly remedy this situation. In addition, as Thomas Hungerford of Economic Policy Institute suggests, tax should be on worldwide income of US companies with foreign profit tax credit. Fifth, as Professors Joel Slemrod and Jon Bakija argue, any corporate tax reform should be integrated with personal income tax, dividend tax and capital gains tax. With these changes no distinction should be made between different types of businesses, because one reform affects other tax sources of revenue. Finally, tax codes of all taxes mentioned above should be simplified, because complicated codes make it easier to devise loopholes.

I hope that Congress diligently and deliberately deals with reform for the long run to minimize uncertainties in the tax system. Uncertainty in tax policies imposes heavy cost on the nation’s economic activity.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economic, Cleveland State University, Cleveland, Ohio. His articles also appear in Mathur’s Blogonomics. He now resides in Ogden.

Tax phobia in Utah hinders quality of life

Published in Standard Examiner, February 23, 2015, Ogden. Utah

By VIJAY K. MATHUR

The dictionary definition of phobia is “a persistent, irrational fear of a specific object, activity or situation that leads to a compelling desire to avoid it.” Tax phobia in Utah and elsewhere is squandering our country’s quality of life. We are falling behind other advanced nations in education, R&D, modern and advanced infrastructure and general well being.

Let us look at some of the facts about taxes in Utah. The data from the Institute on Taxation & Economic Policy, January 2013 (www.itep.org), shows a regressive tax structure in Utah. Overall tax burden in Utah falls as income rises if we count sales and excise taxes, property taxes and income taxes, with federal deduction offsets. For example, tax share of average family income, after federal deduction offsets, varies from 9.4 percent for $0 to $20,000 to 8.3 percent for $53,000 to $84,000. However, top 1 percent in the income distribution pays only 5 percent of their income in taxes. Rationality would dictate that Utahns should be willing to support higher taxes on rich.

The most regressive taxes are sales and excise taxes. However, Utah legislators have no hesitation increasing such taxes. For example, Sen. Kevin Tassell has proposed  SB160 that will increase the current state gasoline tax from 24.5 cents to 34.5 cents per gallon (40 percent increase) and diesel tax from 24.55 cents to 25.73 cents per gallon (5 percent increase). Since prices have decreased and Utahns are buying fuel-efficient cars, state legislators are concerned about falling tax revenue. Hence, a proposal is floating around to change per gallon flat tax to a percent tax, like a sales tax. It would be a highly regressive tax when there is inflation in gas prices, a double whammy to low income tax payers.

If gas prices increases to say $4 per gallon, a 13 percent gas tax, as it is now on the average price of $1.90 per gallon, would amount to a tax increase of 112 percent from the current flat tax of 24.5 cents per gallon. There are progressive ways to finance transportation infrastructure, such as state corporate tax increase above the flat rate of 5%, and/or an increase in severance tax on fracking and mining companies. Recently awakened concern among Republicans in Utah and Congressional Republicans about the economic plight of lower income people is heartening, but so far it has not resulted in any concrete actions beneficial to those groups.

Rep. Paul Ryan of Wisconsin has called President Obama’s tax proposal, that reduces income tax on lower income people and increases it on the rich, “envy economics”. Tax phobia and supply side economics took hold during President Reagan’s Administration. Taxes were decreased more for the rich than for lower income people. It was claimed that it would stimulate economic growth, benefit lower income Americans and reduce budget deficits. However, research has shown that none of the claims met expectations. The same argument is now being advanced by Congressional Republicans to counter President Obama’s tax proposal.

Politicians are not paying attention to the facts and wishes of Americans. Research by Levy Economics Institute, April 20, 2014,shows that relative disposable income (after taxes) of the top 10 percent to bottom 90 percent increased from close to 65 percent in 1986 to 90 percent in 2012. In addition, the wealthiest 10 percent gained 90 percent of the total wealth created during 1983-2010. Pew Research Center reports, May 22, 2013 (www.pewresearch.org), that 57 percent of Americans in a survey are very much bothered that the wealthy are not paying their fair share of taxes; however less Republicans than Democrats and independents are bothered.

The Irony is Republican politicians, who now claim to be concerned about middle class and poor, are not paying attention to facts and Americans’ views on tax system. Assisted by ideologically driven media, they are too busy in fanning tax phobia and distrust of government in which they serve. Armed with misinformation and American exceptionalism, voters seek refuge in their ideology when voting for those politicians.

Research findings by Henrik Jacobsen Kleven, The Journal of Economic Perspective, Fall 2014, on attitudes on taxes, other social and cultural factors in Scandinavian countries relative to US, are instructive. He found that despite high tax to GDP ratio, Scandinavian countries, as opposed to US, have least tax avoidance and higher male and female employment rates, notwithstanding subsidies, for example, for child care, pre-school, elderly care etc. In addition, relative to US, they also have much higher trust among people, more charitable donations, voter turnout and more willingness to pay taxes to help poor since they don’t consider them lazy.

Factual information about tax burdens of various income groups, promotion of collective responsibility and trust, and crucial role of government for the wellbeing of all Americans, especially low income, would be a good start to conquer this phobia. Vince Lombardi once said, “ The challenge for every organization is to build a feeling of oneness…”

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, OH. This version was published on line at www.standard.net. The print version excluded 8^th paragraph.

Time right for Utah wood burning ban

Published in Standard Examiner, January 12, 2015, Ogden, Utah

By VIJAY K. MATHUR

Governor Herbert recognizes the inversion problem in Utah, especially along the Wasatch Front, and is pushing for a ban on wood burning to heat homes (www.airquality.utah.edu). Recently Salt Lake County decided to ban such fireplaces. There is no excuse for homeowners to continue to burn wood to heat homes, given that natural gas prices are so low. Wood burners and other such polluters must realize that clean air is a public good and its pollution causes health hazards to all.

Public goods such as clean air and water are distinct from private goods. A private good provides benefits only to the person who pays the price. If a person uses clean air to emit pollutants, he/she uses that resource without paying the price, hence free market leads to its overuse. In the case of Wasatch Front, we have an inversion problem because too much pollution overwhelms the capacity of the air shed (so called sink) to clean itself. Thus it imposes health cost and property damage. Therefore, the market fails in the absence of regulation and/or price for the resource air.

As opposed to direct regulation, it would be more economical to impose tax price on polluters to promote cleaner air. But political courage is lacking to impose such a price. Hence we have to tolerate regulations, a less efficient strategy to curb pollutants in the air.

EPA standards for small particulate matter (PM 2.5) require that annual average concentration should not exceed 12 micrograms per cubic meter, and daily average should not exceed 35 micrograms per cubic meter. The Atmospheric Department, University of Utah (http://home.chpc.utah.edu), reported that during 1999-2005 in some mid-winter weeks, more than half of the days had PM 2.5 concentrations above 17.5. Actual 24 hr average concentration has worsened (though below EPA standard) when I compared data from UDEQ for December 2004 to December 2013 and January 2005 to January 2014.

The enforcement of pollution standards has taken a backseat to politics in Utah. It appears that political ideology has assigned higher priority to job growth at the cost of clean air, developed a shortsighted view on health benefits to Utahns, and has not recognized that job growth in the service based economy is greatly influenced by environmental amenities. It is ironic that defenders of free market do not recognize that environmental degradation is the result of market failure, because air, water and open spaces are common property resources. The solution is for government to intervene and impose a tax price on polluters to incentivize them to efficiently use natural resources to reduce harmful effects.

A recent academic paper in the journal Economic Inquiry, January 2015, by Robert Innes and Arnab Mitra (IM), sheds some light on the issue of political influence on enforcement of regulations under the Clean Air Act (CAA). Their findings are relevant for Utah.

EPA proposes a budget and the inspection rate of facilities in each Congressman’s district. Inspection rate and enforcement of regulations have a deterrent effect on emissions of pollutants. However, even though Congressmen do not directly convey their preferences over the EPA budget, they do let EPA know about their preferences for inspection intensity. IM used data for a sample of Congressional elections, “close” with a margin of victory of less than 2.5% and “open” where no incumbent was running, from1989 to 2005. Controlling for other variables affecting inspection rates such as income, population density and regional differences, IM found that as opposed to Democrats, new Republican representatives lead to the decrease in Clean Air Act inspection rates by 11% to 12%.

It seems that the dominance of Republican Party and its ideology in Utah plays a significant part in the lack of air quality enforcement. I hope politicians pay more attention to science and adverse affects of pollution on human health, property and future job losses in clean industries in Utah.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He lives in Ogden.

Targeting Federal Reserve’s independence is misguided, part 2

Published in Standard-Examiner, November 16, 2014, Ogden, Utah

VIJAY K. MATHUR

In part 1 of my column I discussed the Federal Reserve’s (Fed) structure, its responsibilities and implementation of monetary policy, independent of political interference. Here, I discuss different views (of Monetarist and Keynesian schools) on the conduct of monetary policy and the issue of the Fed’s independence from political pressures.

First some background. One of the conclusions arrived at by Professor Ben Bernanke, former Fed chairman, in his path-breaking book “The Great Depression,” is that in all countries monetary contraction was the major cause of the Great Depression of the 1930s. Even with widespread bank panics, sharp price decreases, and output and employment contraction, monetary policy was circumscribed by the prevailing gold standard. Countries that abandoned the gold standard had greater flexibility in initiating expansionary monetary policy (U.S. after 1933) to provide liquidity to banks and stabilize prices, hence output and employment. Bank panics significantly affected supply of output.

Congress created an independent Fed in 1913 to avoid financial panics before World War I. The Fed faced the most severe test in the Great Depression. Some conservative politicians and economists have questioned the Fed’s independence and its discretionary monetary policy.

Nobel Laureate conservative economist Milton Friedman (now deceased), leader of the Monetarist school, argued that discretionary monetary policy could be destabilizing to the economy in the short run. This could happen due to time lags in gathering information and uncertainty about the monetary policy’s effect on the economy. In the long run, monetary policy could be more effective in stabilizing prices. Friedman argued that a rule-based policy, such as a target rate of growth in money supply, is more credible and creates more certainty in markets, thus creating price stability in the long run and encouraging firms to increase output and employment. It is ironic that Friedman was fearful of political pressures on the Fed on its decisions.

Perhaps those politicians who wish to have more control over monetary policy do not like the discretionary nature of the Fed’s policies pursued in the Great Recession of 2007-2009 or their quest for control may be guided by Friedman’s views on monetary policy.

An activist monetary policy for the short run is the Taylor Rule, proposed by Stanford University Professor John Taylor. Andrew Abel, Ben Bernanke and Dean Croushore argue that the Taylor Rule establishes interest rate, rather than money supply, as an intermediate target of monetary policy to provide economic stimulus.

The rule states that the inflation-adjusted federal funds rate (real interest rate) responds to the difference between actual output and full-employment output and the difference between the actual inflation rate and the target inflation (considered to be 2 percent) rate. Therefore, if the economy is at full employment output and actual inflation rate is 2 percent the Fed should set the real interest rate at 2 percent. It should decrease the real interest rate below 2 percent if the economy is weak and increase it above 2 percent if the economy is overheating.

Keynesians recommend a flexible and activist monetary policy, depending upon the state of the economy. Monetary policy could be effectively used not only to stabilize prices but also to promote growth and employment. The Fed followed the Taylor Rule as a guide to achieve its goals in the short run. To make the economy grow in the long run it followed quantitative easing (QE). QE provides liquidity by buying assets such as government securities (Treasuries) and private sector securities. The Fed recently ended QE due to a pick up in economic growth; however, it would keep short-term interest rates very low for the near future.

Total attention of many conservatives to inflation rate is unwarranted. The Federal Reserve Bank Act of 1978 requires the goal of full employment. Despite the limited role played by tax and expenditure policies to combat the recent Great Recession, monetary policy had been very effective in boosting employment and growth, and in controlling the inflation rate.

The inflation rate now is hovering around the target of 2 percent. The current unemployment rate of 5.9 percent is close to full employment unemployment rate, and the U.S. is the only advanced country experiencing potential economic growth of 3.5 percent. Had Congress enacted robust tax and expenditure policies, the unemployment rate and growth would have been even better. Congress even ignored the advice of Professor Bernanke as Fed chair, on fiscal policy in his 2013 testimony in the Senate committee. Political debates and dysfunction in Congress undermined prospects for timely action on fiscal policy. Control of Fed’s monetary policy by politicians, feared by Professor Milton Friedman, will not establish the Fed’s credibility.

The study of 16 advanced countries by Professors Alberto Alesiena and Lawrence Summers found lower average inflation rates in countries with greater independence of central banks. Effectiveness of monetary policy would be compromised with more political intervention and supervision than what we have now.

Congress would be more productive if it settles on certain principles of its own to guide debt, tax and expenditure decisions in a timely manner to deal with recessions and inflation episodes, rather than being mired in endless political debates and indecisions.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He also writes online for this paper. He lives in Ogden. Part one of this two-part series was in the Nov. 9 Standard-Examiner.

Targeting Federal Reserve’s independence is misguided, part 1

Published in Standard-Examiner, November 9, 2014, Ogden, Utah

VIJAY K. MATHUR

The Federal Reserve System (Fed) played a major role in averting depression in 2007-08. Historically, rigidity in monetary policy was one of the main causes of the Great Depression of the 1930s. However, it is alarming that many media pundits, politicians and Americans lack even rudimentary understanding of this institution and its role in stabilizing prices and the economy.

Many Republicans and some Democrats in Congress are calling for more transparency and congressional control over the Fed. Former Congressman Ron Paul even wants to eliminate it. Most are unaware of the fact that the Fed is already subject to congressional oversight. There are audits by the GAO, external audits and regular congressional hearings on Fed’s policies. It appears that politicians who disagree with the monetary policy want more control. This should concern all Americans.

It would be a travesty if monetary policy were conducted in the political theater. In this column I attempt to familiarize readers with the Fed and its role in the conduct of monetary policy, while in part 2 I will discuss different views on the conduct of monetary policy. Monetary policy requires deliberate flexible and timely strategies and actions to deal with recession and inflation episodes. Had monetary policy been subjected to political debates and media hysteria in 2007-08, we would have had a financial panic here and abroad and perhaps worldwide depression.

To avoid bank panics like those in the 19th century and early 20th century, Congress passed the Federal Reserve Act in 1913 to create the Fed. The Fed is the bank for banks and not the bank for individuals and businesses. A Board of Governors provides the leadership, and the president appoints its chairperson and six other members. Currently, economist Janet Yellen holds that position. There are 12 regional Federal Reserve Banks (Fed banks) with boards of directors, in 12 districts, to provide services to members of the Fed in their districts and carry out policies. Utah’s banks are in the 12th District, under the supervision of the Federal Reserve Bank in San Francisco. Member banks in the district are owners of the district Fed bank. The Federal open market committee (FOMC) is the main policy making body.

The Fed’s goals are price and financial stability, low unemployment rates and economic growth. Monetary policy deals with decisions on money supply (quantitative easing is an extension of this policy) and interest rates. Among many different measures, M1 is the simplest measure of money supply. M1 consists of currency in circulation held by non-bank public and deposits in checking accounts of banks (demand deposits). Fed does not print money to change the money supply, as some media pundits and politicians believe. As shown later, it can change M1 by affecting demand deposits of depository institutions.

The Fed supervises and regulates domestic and foreign banking institutions, and other large complex financial firms. Fed banks provide services such as check clearing, wire transfers and electronic payments to depository institutions. Fed banks also hold members’ reserve accounts, lend money to members and distribute currency to meet public demand.

Fed banks are not profit-making banks, as some believe. However, they do provide services to the U.S. Treasury, and other U.S. government and international agencies. They receive deposits of the U.S. Treasury for items like federal unemployment taxes, income taxes, corporate taxes, payroll taxes and certain excise taxes. They earn their income from interest on government securities, which they hold in the conduct of monetary policy, and fees for services to depository institutions. Excess of annual earnings over expenses of the Fed are returned to the Treasury.

Three main tools of the Fed to change money supply and interest rates are 1) required reserve to deposit ratio (RR), 2) discount rate (interest rate on loans to depository institutions) and 3) open market operations by FOMC (buying and selling of securities, such as Treasury securities, Government bonds and mortgage-backed securities). Increasing (decreasing) RR, increases (decreases) banks’ reserves with the Fed, leads to less (more) lending by banks, hence less (more) demand deposit creation, and therefore less (more) money supply. Increasing (decreasing) discounts rate incentivizes banks to borrow less (more) from the Fed and lend less (more), thereby contracting (expanding) money supply.

The open-market operation is the most effective tool of FOMC. Since most people and institutions, domestic and foreign, hold securities in their asset portfolios, selling (buying) securities at attractive prices decreases (increases) money supply in the economy. All the tools affect banks’ reserves at the Fed and hence money supply. Banks’ reserves also affect the federal funds rate (short-term interest rate) banks charge on mostly overnight loans to other banks that need funds, thus affecting other short-term interest rates in the market.

Economists Andrew Abel, Ben Bernanke and Dean Croushore state that money supply affects economy through changes in interest rates, foreign exchange rate and perhaps supply and demand of credit. The economic effectiveness of monetary policy through these channels requires an independent Fed, free of political pressures.

Mathur is former chair and professor of economics and now professor emeritus, Economics Department, Cleveland State University, Cleveland, Ohio. He also writes online for this paper. He lives in Ogden.

Job market for college graduates not what it used to be

Published in Standard-Examiner, September 24, 2014, Ogden, Utah

By VIJAY K. MATHUR

There is a misunderstanding among many Americans that in today’s economy, those who wish to get a good high-paying job must get a bachelor’s degree. Colleges and universities further confirm this misunderstanding. They emphasize higher average salaries of bachelor’s and/or higher degree holders as compared to those with associate’s degrees and high school graduates, even though there are vast differences in salaries across disciplines for bachelor’s and/or higher degrees.

Data show that high school graduates with technical training and experience would earn more than some college graduates with four-year degrees in arts and humanities. I do not intend to discourage arts and humanities majors. However, many high school graduates would be well advised to pursue some technical training in marketable skills if their goal is to get well-paid jobs. Their net benefit from a bachelor’s degree after six years with overloaded debt, in a discipline with poor labor market demand, would be minimal.

The 2014 study at the Federal Reserve Bank of New York (NY Fed), by Jaison Abel, Richard Deitz and Yaquin Su (www.newfed.org) illustrates well the transformation in the labor market environment for college graduates. They find that even though college grads (with bachelor’s degree or higher) as a group have half the unemployment rate of all workers, the unemployment rate of recent college graduates is much higher than all college graduates from 1990-2013. A tough unemployment rate for college graduates tends to decline with age from late 20s to late 30s, but it significantly increased during 2009 -11 as compared to 1990-2000.

The NY Fed study also finds that the underemployment rate (percentage of college grads working in jobs that do not require a college degree) for all college graduates is around 33 percent and close to 44 percent for recent college graduates in 2012. A significant fraction of underemployed in both groups is earning higher salaries and/or wages in career-oriented skilled jobs such as electricians, dental hygienists, and mechanics, with average salary of $45,000 in 2012. They earn more than the salary of many (close to 15 to 30 percent premium in 2012) with bachelor’s degrees in low-wage jobs.

Abel and Deitz, in another study at NY Fed, Sept. 4, 2014, find that annual wage of bachelor’s degree holders at the bottom 25 percent of the wage distribution is the same as for high school graduates. But data on rate of return of college education based on averages could confuse many. For example, some rough estimates on the rate of return (net of cost of education) generated by Abel and Deitz show that on average a bachelor’s degree earns 15 cents and associate’s degree earns 12 cents on $1 of investment. However, as expected, majors in engineering, math and computers or health sciences earn much more than majors in social sciences or education.

For many high school graduates who are not fully prepared for college, a better option would be to attain an associate degree to acquire marketable skills. According to the Utah Education Task Force Report, May 22, 2013 (le.utah.gov) 18 percent of full-time and 17 percent of part-time students were in remedial courses in Utah’s four-year USHE Institutions in 2010-11. Total completion rate for first time students at a four-year public institution over six years is 32.21 percent, almost half the rate for the nation as a whole. This is not an efficient use of resources in higher education in Utah.

The Wall Street Journal reported, Sept. 12, 2014, that U.S. manufacturers are having a difficult time filling positions in skilled trades in 2014. To meet this skilled gap, President Barack Obama and some state governors want to implement German-style apprenticeship programs. Apprentices would work at jobs for pay and train for a broader range of skills, transferable to other jobs. For many high school graduates, a more rewarding and cost-effective strategy to earn a good wage would be to obtain an associate’s degree in marketable skills. This strategy will also lighten their debt burden and give them work experiences. They can always pursue higher education in the future if they so desire.

It is time to think of a different strategy for providing the workforce for the future. Simply said, all high school graduates going to four-year institutions to obtain bachelor’s degrees is not a cost-effective and welfare-maximizing strategy. Professors Frank Levy and Richard Murnane of Harvard University report in “Dancing with Robots” that since 1980, due to technological revolution, routine manual and other work tasks are declining. Work tasks that require non-routine manual skills, skills to work with new information, and abilities to solve unstructured problems are increasing.

Getting a four-year bachelor’s degree will not assure a promising work future for many. It is hoped that higher education institutions are ready for challenges in education and to prepare students to develop human capital to meet the demands of new technologies and information infrastructure.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He also writes online for Standard-Examiner at http://www.standard.net/Guest-Cpmmentary. He lives in Ogden.

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.