Original Post
August 6, 2011
by Eric Wieffering
Last week's vote to raise the debt ceiling left the United States facing the worst of all worlds: the prospect of a weaker economy and the likelihood of higher debt levels, since the planned spending cuts will not offset the surging cost of entitlement programs.
So, rather than instill confidence, the budget measure contributed to the spasm of selling that has gripped Wall Street and other world markets in recent weeks.
Now a joint congressional committee has until Thanksgiving to come up with $1.5 trillion in deficit reduction. In theory, this is a chance to get things right.
Will it happen? Probably not, and only if everyone takes a deep breath and abandons many of the talking points and outright fallacies that have shaped, and to some degree poisoned, the substance and tone of the debate to date.
Here's my partial list of the acceptable conventional wisdoms that should be ditched because they are, at best, misleading if not flat-out wrong.
ACW: The budget can be fixed by slashing frivolous items that most people won't notice.
Reality: Almost 60 percent of the federal budget is sucked up by entitlement programs such as Social Security, Medicare and Medicaid. These budget amounts are determined by formulas set decades ago, and are the primary reason government spending is out of control.
Why this matters: If entitlement programs are off-limits, all cuts must come from discretionary spending, including defense. If the military is off-limits, that limits cuts to departments and programs that currently comprise about 15 percent of the total federal budget, such as the FBI, the Drug Enforcement Agency, the National Park Service and the National Institutes of Health. Cutting those programs to the bone won't offset the growth in entitlement spending. The upshot: Everything has to be on the table if we really want to get spending under control.
ACW: The Bush-era tax cuts benefited only the rich.
Reality: Just about everyone saw their tax rates go down, with some of the biggest declines coming among lower-income groups. Joint filers with a taxable income of $65,000 are now in the 15 percent tax bracket, versus the 28 percent bracket in 2000.
Why it matters: The last across-the-board federal tax increase occurred in 1993. The Bush tax cuts lowered rates for everyone, but those in the top two brackets still pay more than they did in 1992. Raising only their taxes may be unfair, and it would do little to reduce the deficit.
ACW: The United States has the highest corporate taxes in the world. This tax on "job creators" partly explains why the unemployment rate remains persistently high.
Reality: Only partially true. The top federal tax rate of 35 percent has been in place since 1993 and is one of the highest in the developed world. But the U.S. tax code has so many loopholes that most companies pay far less, and many of the biggest companies pay nothing.
A Government Accountability Office study released in 2008 found that more than half of all U.S. companies paid no federal income taxes in at least one of the seven years studied. Earlier this year, the research firm Capital IQ, in a study performed for the New York Times, found that 115 firms in the S&P 500 paid a total corporate tax rate -- both federal and otherwise -- of less than 20 percent over the past five years, and that 39 of those companies paid a rate of less than 10 percent.
An analysis by Citizens for Tax Justice, meanwhile, found that 12 large companies that had combined profits of $171 billion over the past three years had an effective federal tax rate of negative 1.15 percent, thanks to a dizzying array of loopholes, shelters and special tax breaks.
Why it matters: Tax simplification was on the table at one point during the budget discussions and should be brought back. Eliminating deductions and loopholes would help pay for lower corporate rates, which would make the U.S. more competitive for domestic firms and foreign firms considering expansion options. Instead of stashing cash abroad in foreign subsidiaries, where it is exempt from U.S. tax collectors, U.S. firms might expand at home. That would mean more jobs.
ACW: The U.S. national debt has increased more under Obama than any other president in recent history.
Reality: Not true. In percentage terms, the national debt increased faster under Ronald Reagan than any other president of the past 50 years: 187 percent. In second place was President George W. Bush. During his eight-year watch, the national debt rose by $5 trillion, or almost 88 percent. During Obama's time in office it has increased by almost $4 trillion, or roughly 35 percent. If he wins a second term, the national debt would have to almost double to more than $30 trillion for Obama to take the crown rom Reagan.
Why it matters: The U.S. economy has a lot of moving parts, many beyond the influence or reach of the party that controls the White House. For example, 10 of the last 11 recessions began when a Republican occupied the White House. Concluding that Democrats do a better job of managing the economy based on this fact is no more accurate than holding President Obama responsible for all our current woes.
Every president and Congress inherits some economic forces that have been years in the making. We would be better off if they spent more time working together to confront and solve problems and less time assigning blame.