Sunday, November 27, 2011
The Not So Super Committee
Last week the so called Super Committee of the US Congress, composed of six Republicans and six Democrats, failed to come to any agreement on deficit reduction. If an agreement had been achieved it would have been subject to an up or down vote in each chamber of Congress requiring only a simple majority to pass. It could not have been filibustered or otherwise side-tracked.
At the same time that this Super Committee failed in achieving its mandate, the European financial system was on the verge of collapse under the pressure of unsustainable debt burdens of many or most European Union countries. The Super Committee had within its power to signal that the United States was not going to go down the same path as Europe, and help right the US financial ship of state – not just by achieving the minimum 1.2 trillion dollar ten year deficit reduction but going much further and recommending a 4 trillion dollar deficit reduction program.
The saddest part of this failure was that there was a deal to be had. All parties recognize that the long term fiscal problem is being driven by the uncontrolled growth of the entitlement programs, and that structural changes in these programs must be implemented. I have previously posted on how I think how our health care system, which represents the greatest entitlement reform challenge, needs to be restructured.
On the revenue side, the Democrats wanted the deficit reduction package to include the wealthy paying more taxes. The Republicans wanted to prevent the top marginal tax rates reverting to the Clinton era levels when the Bush tax cuts expire at the end of 2012. The Republicans in fact wanted the marginal rates to be reduced further. The aims of both parties could have been achieved. This could have been accomplished by eliminating or greatly reducing income tax deductions and loop-holes in both the personal and corporate income taxes while at the same time reducing the top marginal rates. These deductions and loop-holes benefit primarily the wealthy. Thus top marginal rates could be reduced but total tax revenue paid by the wealthy increased.
The loop-holes and deductions have been inserted into our tremendously complicated tax code as a result of the lobbying efforts of special interest groups. As a result of these deductions and loop-holes, individuals and corporations legally evade taxation and guide their activities to behaviors which take advantage of these deductions and loop-holes in order to reduce their level of taxation. This results in a less efficient economic system. A restructuring of the tax system to eliminate deductions and loop-holes would provide a tremendous economic stimulus. The activities of individuals and corporations would now be directed to activities that make economic sense rather than activities upon which the government bestows tax favors.
To his credit, Senator Toomey of Pennsylvania proffered a proposal that breached the doctrinal Republican position promulgated by the lobbyist Grover Norquist that no Republican will ever agree to any increase in tax revenue. Senator Toomey offered to reduce deductions and loop-holes in exchange for a reduction in marginal tax rates. The Democrats rejected this proposal – they claim because the proposal did not go far enough. However, I suspect that in fact the Democrats were more attached to their doctrinal position of not reducing marginal tax rates.
In the end, despite Senator Toomey’s initiative, both the Republicans and Democrats had greater allegiance to their parties’ doctrinal positions than to solving one of the greatest challenges that faces the United States and the developed world. The retort of both sides is that this issue will now be settled in next year’s election. However, as we have seen in Europe, financial markets may decide not to wait while politicians prevaricate, demagogue and electioneer.