News Column

Fiscal Crisis Postponed: Now It's Time to Rethink Taxes

Jan. 3, 2013

Floyd Norris -- International Herald Tribune

Money at U.S. Capitol

U.S. government taxes, relative to the size of the economy, are significantly lower than they were after President Ronald Reagan cut taxes.

Will the United States follow the European path in 2013?

Let's hope so.

A year ago, the world's markets were watching Europe with rising fear. Some expected 2012 to be the year that the euro zone broke up. Germany did not want to pay to bail out its less fortunate neighbors unless they agreed to severe austerity and to what amounted to a surrender of sovereignty -- ideas that other countries were loath to accept.

What ensued during the year was a series of summit meetings that often seemed to be doing more for the hotel business in European capitals than they were for solving the problem. Agreements in principle were announced, and markets went up, only to tumble back when the details got difficult.

What the naysayers missed was that there really was a common commitment to save the euro, and that in the end they would do what was needed to avert disaster. Finally, in July, the European Central Bank came up with a plan that assured the euro zone banks, and the troubled governments, would have access to money at reasonable rates. Angela Merkel, the German chancellor, went along, angering some of her German colleagues, who thought she was straying from basic principles.

So it could be in the U.S. Congress. The outgoing Congress went up to the final minutes, amid much angst, before it largely averted the automatic enactment of tax increases and spending cuts. There are reasons to grumble about the details -- and more deadlines loom in the new Congress -- but the essential point was that, in the end, the House Republicans allowed a bill to pass even though a majority of them opposed it.

John A. Boehner, the speaker of the House of Representatives, who has often seemed to be scared to do anything that his Tea Party colleagues might oppose, not only allowed a vote on the proposal but voted for it himself.

The first indication of whether this is a new dawn, or simply a case of the House Republicans' having been outmaneuvered, could come when the debt ceiling is addressed. The debt ceiling is an absurd vote to begin with. Raising it simply allows the government to pay the bills for spending that Congress has already approved. To allow the spending bills to pass, but to then refuse to raise the debt ceiling, is equivalent to a family refusing to pay its credit card bill while continuing to spend. That would only destroy the family's credit.

Perhaps some Republicans will threaten to keep the country from paying its bills in order to accomplish something they do not have the votes to accomplish otherwise. But if the European precedent holds, the final result will at least avert disaster.

Whether more than that can be hoped for may depend in part on whether those screaming for major cuts in government spending actually believe their rhetoric -- that the United States could become another Greece.

The reality is that the current budget deficit largely reflects two things: exceptionally low government revenue and the continuing problems caused by the financial crisis and recession that followed the bursting of the housing bubble. Bringing tax revenue back to historic levels, as well as the growth in revenue and reductions in spending that would automatically follow an improving economy, would make a major difference.

There are issues that must be addressed regarding health care costs and Medicare, the government-subsidized health care program for older Americans, as well as the fact that there will be fewer workers for each retiree as the baby boomers retire. But those who see a Greece-type crisis in the United States should ask themselves why the government can borrow at interest rates that remain extraordinarily low. The world's trust in Uncle Sam's ability to pay its debts has remained high.

What is not high are taxes, although a poll would no doubt show that many people think otherwise.

Taxes imposed by the U.S. government, relative to the size of the economy, are significantly lower than they were after President Ronald Reagan cut taxes. During 2012, revenue amounted to about 17 percent of gross domestic product. At the Reagan low point, the figure was a full percentage point higher. In 2009, when the deficit was ballooning, the figure fell to less than 16 percent, something that had happened only once during the more than 60 years for which comparable data are available.

In 2000, revenue approached 21 percent of G.D.P. The assumption that it would continue to grow played a major role in the forecasts of budget surpluses as far as the eye could see. In 2001, aides to President George W. Bush pointed to the figure as proof that Americans were overtaxed.

It turned out tax revenue figures were inflated in two ways by the bull market in technology stocks. Not only were there a lot of capital gains to be taxed, but soaring share prices also produced a lot of ordinary income for those employees and executives who could cash in stock options.

At the time, it was assumed that such options had no significant effect on tax revenue, because the income that went to the employee provided an offsetting tax deduction for the company that issued the options. That might have been true had the companies been paying taxes, but many of the most bubbly stocks were in companies that had never paid -- and never would pay -- a dollar in income taxes.

That revenue would have come down sharply after the technology stock bubble burst even without the Bush tax cuts. But those tax cuts exacerbated the situation and are a major cause of the current deficits.

It might be interesting to consider what would have happened in the 2012 presidential campaign had either candidate been willing to, as the former presidential contender Adlai Stevenson II once said, "talk sense to the American people."

In reality, neither candidate would have dreamed of saying, as an economist did a week ago: "Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans. This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax."

It would have been only a little more likely to hear a candidate say, as another economist said after the fiscal deal was reached, "We need a tax system that can promote economic growth and raise the revenue the American people want to devote to government."

The first quote came from a column in The New York Times by N. Gregory Mankiw, an economist at Harvard University. The second statement was made W. Glenn Hubbard, the dean of the Columbia University Business School, in New York, and the chairman of the president's council of economic advisers when the Bush tax cuts were enacted. He went on to say, a Times article reported, that some Bush- era policies were no longer relevant to the task of tailoring a tax code to a properly sized government.

Mr. Mankiw and Mr. Hubbard were among the top economic advisers to Mr. Romney. If they advised him to make similar statements during the campaign, he did not take the advice.

"Fiscal negotiations might become a bit easier if everyone started by agreeing that the policies we choose must be constrained by the laws of arithmetic," Mr. Mankiw added, in a statement that every member of Congress should take to heart.

Source: (C) 2013 International Herald Tribune. via ProQuest Information and Learning Company; All Rights Reserved

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