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Professor Philip Ashley lectures on tax policy in a down economy.

Professor Philip Ashley lectures on tax policy in a down economy.

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  • 1. By Professor Philip S. Ashley
  • 2. The Problem With Too Much Debt Our daunting annual deficits and accumulated public debt constrain government actions. How much debt do we have, and how serious is it?
  • 3. Article I, Section 8, Clause 2 ofthe U.S. Constitution grantsCongress the authority “toborrow money on the credit ofthe United States.”
  • 4. I wish it were possible to obtainan additional article to ourConstitution . . . taking from theFederal Government the power ofborrowing. -- Thomas Jefferson
  • 5. versus
  • 6. A national debt, if it is notexcessive, will be to us a nationalblessing.-- Alexander Hamilton
  • 7. what’s really happening?
  • 8. Let us all live within our meanseven if we have to borrow themoney to do it. -- Artemas Ward
  • 9. How much debt is “excessive?”The annual deficit is the excess of governmentexpenditure over government revenue.For 2001 the deficit was $342 billion.For 2010 the deficit was $1.5 trillion.For 2011 it was $1.3 trillion andThe 2012 estimate is also $1.3 trillion.This shortfall required the government to borrow 40% ofits revenue last year!
  • 10. An Inescapable Conclusion We simply want to live betterthan our tax payments entitle us.
  • 11. Putting the deficit into perspectiveThe 2011 deficit of $1.5 trillion, as a percentageof Gross Domestic Product (GDP) = 10.9%Comparison: During 1988-2008 the averagedeficit was 2.86% of GDP.Comparison: for 1943 the deficit hit 30.2%The 2011 deficit is the highest since the end ofWWII.
  • 12. The DebtThe debt is the sum of our annual deficits minusrepayments.Public debt $10.3 trillion +Intra-governmental holdings 4.7 trillion = $15 trillion.(Does not count unfunded obligations like governmentpensions = $5 trillion, etc.)
  • 13. How serious is the debt?Currently the debt = 102% of GDP. Thehighest it has ever been is 108.6% at the endof WWII.We are nearing historical levels and willexceed them soon if present trends continue.
  • 14. Three Strategies for Recovery1) Cut spending to balance the budget2) Increase taxes to balance the budget3) Expand the economy to balance the budget while avoiding deep spending cuts and sharp tax increases.
  • 15. Strategy #1: Cut Spending
  • 16. How Mandatory Programs Swallow the BudgetCurrently, Social Security, Medicare and Medicaidaccount for 55% of federal spending; that proportionis increasing faster than inflation and the rate ofpopulation growth.Specifically, they cost $2 trillion out of our $3.6trillion total budget. Thus, cutting $1.2 trillion tobalance the budget would wipe out almost everyother government program including defense.
  • 17. The easy cuts have already been made.Making further meaningful cuts will bevery difficult because they will bestrenuously resisted by those who will behurt by their repeal.Some proposed cuts include:
  • 18. Repealing some or all “tax expenditures.”A tax expenditure is a spending programrun through the tax code, usually in theform of a deduction.Tax expenditures currently cost $1trillion our of our total federal budget of$3.6 trillion.
  • 19. Typical Tax Expenditures1) Deduction for home mortgage interest -- $98 billion2) Deduction for state and local income taxes -- $48 billion3) Deduction of charitable contributions -- $43 billion4) Exclusion of interest on state and municipal bonds - - $37 billion5) Deduction for property taxes on homes – $25 billion6) Deductibility of medical expenses -- $10 billion
  • 20. Possible Spending Cuts1) Deduction for interest on a home mortgage(I.R.C. §163) presently costs $98 billion/year.It has not raised the homeownership rate andmay have even made buying a home moreexpensive for lower -income taxpayers.Canada repealed its home ownershipmortgage interest deduction without seriouslong-term harm to its housing market.
  • 21. A Cut that Should be Resisted2) Deductions for charitable giving (§170).Current cost $54 billion/year.Even deduction caps on wealthy donors wouldhurt:taxpayers with over $200,000 (top 2%)account for 53% of giving by individuals and38% of total giving.
  • 22. Why?Philanthropy is the very possibility of doingsomething different than government cando, of creating an institution free to makechoices government cannot [make] withouthaving to provide a justification that will beexamined in a court of law.**Friendly, “The Dartmouth College Case and the Public-Private Penumbra”, 12 TaxesQ. (2d Supp) 141, 171 (1969).
  • 23. The institutional landscape of America is . . .teeming withnongovernmental, noncommercial, organizationsfrom [world class]educational institutions togarden clubs. . . . This vast and varied array hadwidely been recognized as part of the very fabricof American life. It reflects the national belief inthe philosophy of pluralism and in theimportance to society of individual initiative.”The Commission On Private Philanthropy and PublicNeeds, Giving In America – Towards A Stonger Voluntary Sector.The Filer Commission Report,” (1975).
  • 24. Another Cut to Resist3) Inflation IndexingCurrent cost $0.Future cost unknown… but potentiallydevastating to middle- and lower-income taxpayers.
  • 25. 35% Tax Brackets for an 33% Unmarried TaxpayerR 28%ATE 25%S 15% 0% $22,100 $53,500 $115,000 $250,000 $250,000+ TAXABLE INCOME
  • 26. Repeal of indexing would be a taxincrease and tax increases are usuallyjustified on the ground of “ability topay.” But that repeal of indexingwould harm those whose ability topay is already compromised.
  • 27. Strategy #2: Increase Taxes1) Consumer spending accounts for 70% of oureconomy but higher taxes would take money out ofconsumers’ pockets.2) There aren’t enough millionaires to make aserious dent. Last year 384,000 returns showed $1million or more in adjusted gross income. If each ofthose taxpayers paid another $100,000 in taxes, thatwould only raise $384 billion. Compared to our $1.2trillion deficit, that’s a small amount.
  • 28. The “Laffer Curve”
  • 29. Laffer predicted that lowering taxes wouldincrease federal revenue . The empiricaldata, however, is inconsistent and difficultto analyze, because other factors besides taxrates affect federal revenues.Lowering taxes did result in the upper 5%of taxpayers paying a higher percentage oftotal taxes but total revenue did notincrease.
  • 30. Strategy #3: Expand the EconomyDifficulties:1) As noted, consumer spending = 70% of the economy. As long as unemployment is up and households are paying down debt, consumer spending will continue to be lower than pre-recession levels.
  • 31. 2) Many of our overseas customers are in financial trouble (Europe, Japan)
  • 32. 3) Higher taxes, if they are enacted, will reduce entrepreneurial activity.
  • 33. 4) Government borrowing will crowd out business borrowing.
  • 34. The Danger of Government BorrowingFor fiscal 2009, 40% of government revenuewas borrowed, which was about $1.5 trillion.At the same time, corporations borrowabout $21 billion.However, analysts estimate that between2012- 2014, corporate borrowing needs willrise to $700 billion! Where will the moneycome from to support this unprecedentedlevel of borrowing?
  • 35. The High Cost of WaitingTypically, Congress doesn’t “rock theboat” in election years; the radical taxreform that we need will probably bepostponed to 2013.Waiting, however, will make getting outof debt even more difficult.
  • 36. For fiscal 2010, the government paid $454billion just in interest on our national debt.That was 12.3% of government spending. Is thata lot?By comparison, NASA’s budget was $6 billionand the Department of Education spent $31billion.Not only is the interest becoming one of thegovernment’s largest costs, but it is expected togreatly increase when interest rates come offtheir historic lows, as they inevitably will.