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October 2011, Week 3

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[The following is excerpted from the Economic Policy
Institute report, "Federal Budget Deficits and Taxes."
For the full report, use the link below -- moderator.]

For Joint Select Committee, Many Good Options

Progressive revenue proposals would narrow budget gap by
trillions

By Andrew Fieldhouse | 
October 13, 2011
Economic Policy Institute
http://www.epi.org/publication/ib316-joint-select-committee-good-options-progressive/

As the Joint Select Committee on Deficit Reduction
negotiates the second phase of deficit reduction under
the Budget Control Act, it is imperative that its
proposals include greater revenue to equitably balance
the sole focus on spending cuts in the first phase.
President Obama has produced a set of recommendations
for the committee that would balance additional spending
cuts and a winding down of war spending with new
revenues and fully financed job creation measures. This
issue brief analyzes the revenue proposals in the
president's recommendations and offers a menu of
alternative or supplemental progressive revenue options
to reduce the deficit and/or finance job creation
initiatives. As detailed in this brief:

 * The president's revenue recommendations for the joint
   committee mark a step toward revenue adequacy and a
   more equitable tax code relative to current tax
   policies by raising $1.3 trillion in new revenue over
   the next decade relative to current tax policies.

 * The president's proposed tax changes would
   predominantly affect the top 5% of earners (with
   incomes above $227,000) while cutting average taxes
   for the bottom 60% of earners (with incomes below
   $65,000).

 * The president's revenue recommendations, however,
   fall $3.4 trillion shy of projected revenue under
   current law. Revenue inadequacy and the Bush-era tax
   cuts remain prime drivers of budget deficits and are
   only partially addressed by the president's
   recommendations.

 * Beyond the president's recommendations there remains
   substantial scope for increasing the progressivity of
   the tax code and raising additional revenue to
   finance job creation, ease budgetary pressures
   elsewhere, and reduce deficits.

This brief also identifies eight progressive revenue
policies that could complement the president's
recommendations and principles for tax reform.
Collectively, these policies would also return revenue
levels roughly to those scheduled under current law.
These policies and their associated revenue relative to
the president's recommendations (over 2012-21) include:

 * enacting a millionaire surcharge ($383 billion);

 * taxing capital gains as ordinary income ($168 billion);

 * further limiting the tax benefit of itemized deductions ($888 billion);

 * enacting a progressive estate tax ($73 billion);

 * enacting a financial speculation tax ($821 billion);

 * enacting a cap-and-trade program and a refundable
climate dividend ($472 billion);

 * enacting a sweetened beverage tax ($184 billion); and
ending the deferral of foreign corporate income ($114
billion).

Severe Drawbacks Of A Spending-Cuts-Only Approach To
Deficit Reduction

The Joint Select Committee on Deficit Reduction is
charged with negotiating a plan to reduce federal
deficits by at least $1.5 trillion over the next 10
years. It is essential for the long-term health of the
nation and the economy that its proposals include
equitable amounts of increased revenue. The Budget
Control Act (BCA) of August 2011, which mandated the
creation of the committee, has already reduced budget
deficits by $895 billion over the next decade by
focusing strictly on the spending side of the ledger.
Statutory spending caps will reduce discretionary
outlays by $756 billion, program integrity and education
provisions will cut $5 billion in net spending, and debt
service will fall by $134 billion (CBO 2011a). Moreover,
these cuts build on the spending cuts in the 2011 full-
year appropriations bill, which lowered the trajectory
for discretionary outlays by $122 billion over the next
decade (CBO 2011b). Relative to the Office of Management
and Budget's (OMB) higher baseline for discretionary
spending, the BCA cuts to discretionary outlays total
$992 billion, or $1.2 trillion when debt-service savings
are included (OMB 2011a).

A spending-cuts-only approach to deficit reduction is
unacceptable for numerous reasons:

 * Deep cuts to spending programs will defund key public
   investments and undermine economic security programs.

 * Without more revenue, spending cuts will
   disproportionately fall on lower-income and working
   families.

 * Spending cuts are more damaging to the economic
   recovery than tax increases, particularly tax
   increases on upper- income households.

 * Tax policies of the last decade are responsible for
   much of the structural budget deficit and roughly
   half of debt accumulation over the last decade
   (Fieldhouse and Pollack 2011).

 * At the same time that tax policy was adding to the
   deficit, income and wealth have accrued
   disproportionately to high-income individuals, and
   tax policy over the last decade has reinforced these
   trends.

Thus, relatively modest tax proposals aimed at the top
can generate large sums of revenue (Fieldhouse and
Shapiro 2011), potentially exceeding the Joint Select
Committee's deficit reduction mandate. Evenly splitting
the primary budget savings (excluding net interest)
required by the BCA between spending cuts and revenue
increases would require roughly $1 trillion in revenue
from the Joint Select Committee's recommendations to
match the roughly $1 trillion in spending cuts already
enacted.

In his recommendations to Congress for the Joint Select
Committee, the president is seeking near-term job
creation measures and long-term deficit reduction that
exceed the committee's mandate. The recommendations
propose that Congress undertake comprehensive tax reform
to raise $1.5 trillion over the next decade. This new
revenue and the $1.2 trillion in spending cuts from the
first phase of the BCA would meet the Joint Select
Committee's mandate, but are also coupled with $1.1
trillion from capping funding for Overseas Contingency
Operations, $320 billion from health savings, $257
billion from other mandatory savings, and an additional
$436 billion in debt-service savings. The president also
proposed the American Jobs Act, a package of tax cuts
($254 billion) and job creation spending ($193 billion)
frontloaded for 2012 and 2013, as well as offsets for
its $447 billion cost. Net of the American Jobs Act, the
president's recommendations represent $3.2 trillion in
new savings and $4.4 trillion in savings with the
spending cuts from the first phase of the BCA, relative
to OMB's Budget Enforcement Act (BEA)-adjusted baseline.
For the contingency that Congress fails to overhaul the
tax code, the recommendations also propose $1.6 trillion
in specific revenue policies as a backstop, including
$479 billion in offsets for the American Jobs Act.

___________________________________________

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