Jeremy Cutcher is a political science senior and Mustang Daily liberal columnist.
One of the many issues dominating the beltway media right now is the issue of the debt ceiling.
There seems to be broad consensus that the debt ceiling needs to be raised to prevent the U.S. from going into default on its debt obligations, except among the irresponsible ranks of the Tea Party stalwarts. As a clear forewarning, Standard and Poor downgraded its outlook for the U.S. government’s debt from stable to negative on Monday, and in response, stock markets fell with the Dow Jones closing down 140 points.
Now let me be clear: In principle, I’m also against raising the debt ceiling.
What this means is that, politically, we say it’s OK to borrow more money — that we increase the credit limit on our “national credit card.” In practice what that means is lobbies in power support a growing government without paying the requisite bills. Thus, the current generation in power reaps the benefits yet these bills will come due for future generations. We can have debates about the size of government, but there are no debates to be had about a $14 trillion national debt — that is money you and I will have to repay with interest.
To only focus on cutting spending, as the Republicans are adamant in doing, is to completely disregard the political process of the past decades that has expanded to more adequately address the concerns of the underprivileged.
But our consciences have guided us one way, and our self-interest has guided us another. It has been a failure of that same political process to garner enough support to fully fund the growth of government that has led us to this crisis.
Many on the right believe that if we raise taxes to fund current levels of government, it will reduce economic growth and make us less competitive in the long run. But the growth we experienced even as our government became more expansive was funded on borrowed money. It doesn’t seem fair to say that the level of welfare spending our parents and grandparents enjoyed will not be extended to us simply because they didn’t pay in the first place. Now we have to shoulder their burden and try to figure out how to have a responsible, moral and productive society.
Raising the debt ceiling says, in essence, it is appropriate to put off debt obligations to future generations to meet present short-term political ambitions. This is why principles don’t always function properly in the real world. If Congress doesn’t increase the debt limit, the U.S. will not be able to pay the interest it owes on the debt, which in turn will cause panic and uncertainty in international markets with reverberating effects, and potentially, beginning a depression.
The debt ceiling has become a political football for irresponsible elected officials, but it does not attempt to solve the problem of our national debt. If we are to address our debt issue, two things must occur: we must reform the tax code and we must reform entitlements. Unfortunately, these two issues are too large for a single article, so I will only address tax reform this week.
There are many proposals about reforming the tax code, and I do not have a problem admitting that I’m not sure which proposal would do the best. I do have faith that, when the American people are properly informed (and not misinformed), they often make the best decision for the country.
There are, however, a number of issues people can agree on from the outset. Many economists have noted that there are too many exemptions in the tax code (known as tax expenditures since it is tax revenue we could collect if we didn’t laden the tax code with these tax preferences). This has a number of unintended consequences. Take the home interest deduction. This tax expenditure effects a number of Americans, and over the period from 2006 to 2010, amounted to more than a $700 billion in decreased tax revenue.
What it seems to have actually done is make more people buy larger homes. Some even cite the interest deduction in helping to inflate the housing bubble, though economists are divided over how large an effect it had.
What’s important to realize is that due to our progressive tax structure, wealthier individuals are able to benefit more from tax expenditures because they can deduct a larger total amount (e.g. a larger home mortgage) at a higher rate (35 percent instead of say 25 percent).
Wealthy individuals and businesses also have the resources to employ tax consultants to make sure they take full advantage of these tax exemptions, while most middle and working class take the standard deduction because they don’t have the time and the resources to lower their tax bills in that fashion. This is how General Electric can pay nothing in taxes (and even get a tax rebate), even though the corporate tax rate is 35 percent.
Many economists promote a flat tax, often ranging from 16 to 20 percent, with the only exemption being a standard deduction of say $40,000 for a family of four. The numbers can be altered given a certain target for tax revenue (after all, shouldn’t taxes be collected for a given level of spending rather than collected for the sake of taxation), but the overall structure of a flat tax does have a number of advantages. This would simplify the tax code and do away with the myriad of tax exemptions that clog the tax code.
Critics of a flat tax emphasize the fact that the wealthy, depending on the level of tax exemptions, may face a lower tax bill, which will invariably be picked up by lower and middle income individuals.
I don’t like shifting more of the tax burden onto those with less ability to pay and one way to get around this would be to implement a highly progressive consumption tax along with the flat tax on income earnings. This won’t punish the wealthy simply for controlling more resources, but it will punish them for being irresponsible with their wealth.
Thus, if Donald Trump wants to spend millions to investigate whether President Obama was actually born in the U.S., he may do so. But he will face a tax of say 50 percent on those spent resources. This gives an incentive to save and invest (which is dangerously low for the U.S., with household debt being a contributing factor to the recent recession) and makes consuming for consumption’s sake more expensive. Again, there will be some standard deduction for low-income earners, who often spend most if not all of their income on consumption.
The tax reform debate is really about what kind of government we want. Do we want the level of government we have now and pay for it or would we rather pay current or lower rates and do with less?
Before we can address tax reform, we must have a consensus on this question; otherwise, the solutions we propose won’t actually address the depths of the real issue. I feel some cuts can and should be made, but correcting the deficit problem will undoubtedly require increased revenue. That increased revenue must be collected in a manner that is not only equitable but also manages to eliminate the unintended consequences of our current tax structure and keeps the U.S. competitive internationally.