Taxing Soda to Close the Deficit

A bipartisan panel tasked with finding a way to reduce the deficit has latched on to the “Soda Tax.” The problem with sin taxes is this: they are designed to increase the cost of a specific “bad thing,” like smoking, drinking, or in this case, consuming sugary beverages. The aim is to raise revenue, and to dissuade people from partaking of the “bad thing.” The problem comes in when people actually stop buying the taxed thing. Fewer people buying, means less tax revenue raised. This is exactly why sin taxes cannot be depended on to fund anything long term. I’m hard pressed to find an example of a sin tax that actually raised as much revenue as was projected.

From NYTimes.com:

The second bipartisan panel to issue a big deficit report has come out in favor of a tax on soda and other sweetened beverages.

The panel — chaired by former Senator Pete Domenici, a Republican, and Alice Rivlin, a Democrat and former White House budget director — said a soda tax would “help reduce long-term health care spending to treat obesity-related illnesses – including diabetes, heart disease, cancer, and stroke.” The tax would be “an excise tax on the manufacture and importation of beverages sweetened with sugar or high-fructose corn syrup.”

The tax would raise more than $15 billion in 2015, the panel estimated — similar to the amount of savings the government might get from eliminating all earmarks.

We’ve written about a soda tax before here at Economix. The beauty of it is that it falls on the very behavior — the gallon-a-week-per-person national soda habit — that imposes costs on society: namely, higher medical bills. Unlike so many other beverages and foods, Coke and Pepsi have no nutritional benefit, as food researchers often emphasize. Yet per-capita consumption of sugary drinks has nearly tripled in the last 30 years, accounting for about half the total rise in calorie intake over that period.

A big reason Americans are drinking more soda is that it’s so much cheaper than it used to be. The American Heart Association, which has also endorsed a soda tax, notes that children and teenagers are especially price-conscious consumers and are also especially big soda drinkers today.

How to Fix US Deficit: Stick to the Law

According to the Christian Science Monitor, projections from the Congressional Budget Office on deficit assumptions show that if we stick to the current tax law, federal revenues should pay for spending over the next few decades. Check out the following opinion article by guest blogger Diane Lim Rogers explaining why the current tax law is in fact fiscally responsible.

I haven’t had a chance to digest CBO’s long-term outlook yet (released earlier today), but luckily I did see Ezra Klein’s post on it, which featured two charts highlighting the difference between CBO’s current-law baseline, and their “alternative fiscal scenario” which is more of a “policy-extended” baseline – similar to how the Obama Administration gauges their budget proposals.

As Ezra points out, current law, taken literally as CBO must assume, is fiscally responsible:

In theory, CBO’s deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades.

Note that the chart shows that under CBO’s “extended baseline” scenario, reflecting current law, “primary balance” is achieved, where there is no “fiscal gap” between non-interest spending and revenues. That doesn’t mean the federal budget is perfectly balanced, because interest costs take total federal spending above revenues, but it does mean that the deficit is pretty small–as a matter of fact, less than 3 percent of GDP by 2015, which means it’s economically sustainable (because at 3 percent, the stock of federal debt is growing at about the same pace as the economy).

Coincidentally, this picture above could also be labeled “2015 Goal of President Obama’s Fiscal Commission”– because the commission’s goal is also to achieve “primary balance” and a “sustainable” level of deficits by 2015.

Continue reading at CSMonitor.com…

More Than a Million May Lose Jobless Aid Due to Deficit Concern

From Bloomberg.com:

Since the U.S. recession began in December 2007, Congress has extended the duration of weekly unemployment benefits for the jobless three times. Now, the lawmakers may have reached their limit.

They are quietly drawing the line at 99 weeks of aid, a mark that hundreds of thousands of Americans have already reached. In coming months, the number of those who will receive their final government check is projected to top 1 million.

It’s a deadline that has rarely been mentioned in recent debates over jobless benefits, in which Republicans have delayed aid because of cost concerns. The deadline hasn’t been lost on Teauna Stephney, a 39-year-old single mother from Bothell, Washington, who said she could become homeless once her $407 weekly checks stop in June.

“What are people like me supposed to do?” said Stephney, who said almost two years of benefits haven’t proved long enough for her to find work after she lost her last job in August 2008. Referring to lawmakers, she said, “I would like them to come and talk to me and spend a day in my shoes.”

Democrats who have pushed through the past extensions agree there’s insufficient backing to go beyond 99 weeks, largely because of mounting concern over the federal deficit, projected to reach $1.5 trillion this year.

Nation's Soaring Deficit Calls for Painful Choices

From USAToday.com:

Erskine Bowles realized how tough his task will be leading President Obama's war on the federal budget deficit when he told his 90-year-old mother of his appointment.

She was proud of him. Then she said, "Don't mess with my Medicare."

It won't be the last threat Bowles gets this year as he directs an 18-member, bipartisan commission through an ocean of red ink that has never been deeper or more foreboding.

Under Obama's budget plan, the USA's debt in 2020 would be nearly the size of the entire economy then. Interest costs would be $900 billion, five times today's level.

The White House, Congress, budget experts and typical Americans are growing anxious about the nation's mounting debt, which is helping to fuel the rise of the anti-tax, anti-big government Tea Party movement.

Yet the only solutions capable of raising enough money are politically dangerous for the president and Congress: tax increases and major reductions in Medicare, Medicaid and Social Security.

U.S., U.K. Move Closer to Losing Rating, Moody’s Says

From Bloomberg.com:

The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”

The pound fell against the dollar and the euro for the first time in three days, depreciating 0.8 percent to $1.5090, while the dollar index snapped a four-day drop, adding 0.3 percent to 90.075.

The U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody’s said.

Obama Signs U.S. Debt Limit Increase Into Law

After recently passing the Senate, Obama has signed a bill into law that raises the Federal debt from 12.1 trillion to 12.4 trillion. There are many critics to this bill that was passed along partisan lines. However, the Obama administration has stated that they have no other choice. Reuters.com posted a story on how the debt limit has doubled over the past decade.

Congress approved an increase in the debt limit from $12.1 trillion on Thursday, winning two more months of funding for a record U.S. deficit as Obama tries to stimulate economic growth after the country's worst recession in 70 years.

Critics say Democrat Obama is making the deficit worse, but the White House blames the recession and unfunded cuts in taxes and prescription drug aid, which were all inherited from his Republican predecessor George W. Bush.

The U.S. government posted a record $1.4 trillion deficit in the fiscal year ended September 30 and is on track during the current fiscal year to spend at least $1 trillion more than it collects.

The debt has more than doubled since 2001, thanks to wars in Iraq and Afghanistan, tax cuts and the recession, which has caused tax revenues to plunge and safety-net spending to rise.

On Tackling Debt: Some Say 'Just Do It’

There is certainly no easy fix to the government’s massive debt. However, some Senators are saying that Congress is not making any progress in fixing the problem, and that “business as usual” is not working. Senator Evan Bayh (D-Indiana) has proposed that a special commission be created to force Congress to fix the budget deficit.

"Congress is not willing to take short-term pain for long-term pain," Sen. George Voinovich (R-Ohio) told a Senate Budget Committee hearing Tuesday.

"Pain" in this context is defined as Congress enacting spending cuts and tax increases across the board to rein in the nation's massive debt load.

And the country's long-term debt load is massive: The interest on it alone could total $4.8 trillion between 2010 and 2019.

The proposed solution: "Institutional insurrection," as Sen. Bayh put it. "Business as usual in Washington is not going to solve the problem."

Specifically, Bayh and others are proposing the creation of a bipartisan commission that would come up with ways to cut the deficit and then propose legislation on which lawmakers would vote "yes" or "no." Period.

Continue reading at CNN.com…

U.S. Debt $668,621 Per Household

Yesterday I posted an entry titled Leap in U.S. Debt hits Taxpayers with 12% More Red Ink regarding a USA Today article on the federal government’s rising debt. Shortly after posting it, I came across this interesting article on the Atlantic with more details on how the numbers were calculated. I’ve included a portion of their article below, but you can find the full text at The Atlantic.com.

I wish I could include the interactive chart it shows, but it breaks down the $668,621 by various components of federal government debt ($546,668) and personal debt ($121,953). Presumably that means this astronomical figure does not even include state and local government debt. I thought it might be fun to put this number into perspective.

Because it's pretty hard to identify what the weighted-average interest rate is for this debt, I show a few different scenarios. That way you can decide for yourself which scenario you find most plausible. The interest rate is shown, along with two different time horizons for each scenario. I then provide the amount of money that would be needed to pay off the debt per household, per year.

Scenario #1: 5%

30 years: $43,469

50 years: $36,603

Scenario #2: 3%

30 years: $34,092

50 years: $25,971

Scenario #3: 0%

30 years: $22,274

50 years: $13,364

So in the hopelessly optimistic best case scenario, each American household would have to pay $13,364 per year for 50 years. That is, of course, assuming that the federal government closes the deficit (fat chance), and each household does not incur additional debt (doubtful). And recall: it does not include state and local debt. According to U.S. Census Bureau data, the 2007 median household income was $50,233 -- before taxes. So you can kind of imagine how impossible even the best case scenario of $13,364 per household, per year would be anyway.

I admit this is a gross oversimplification. It does not consider inflation, which is sure to happen, and which will help a bit. But if you assume the above interest rates are real interest rates (nominal interest rate minus inflation), then this might make the 0% scenario a little more likely -- but probably not for 30 or 50 years, I hope. My scenarios also do not consider U.S. population growth, which there undoubtedly will be.

Despite its simplicity, I think this analysis shows just how dire a situation the nation's debt poses. I know there's a popular argument that we've always been in debt, so it's nothing to worry about. As these numbers continue to grow, however, I think the plausibility of that argument wanes.

Geithner Vows to Cut U.S. Deficit on Rating Concern

From Bloomberg.com:

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concerns about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

The benchmark 10-year Treasury yield jumped 17 basis points to 3.36 percent yesterday and was unchanged as of 12:18 p.m. in London. The Standard & Poor’s 500 Stock Index fell 1.7 percent to 888.33 yesterday. The dollar tumbled 0.5 percent today to $1.3957 per euro after a 0.8 percent drop yesterday.

Gross’s Warning

Gross said in an interview yesterday on Bloomberg Television that while a U.S. sovereign rating cut is “certainly nothing that’s going to happen overnight,” markets are “beginning to anticipate the possibility.” Nobel Prize-winning economist Paul Krugman, speaking in Hong Kong today, nevertheless argues it’s “hard to believe” the U.S. would ever default.

Britain’s AAA rating was endangered when Standard & Poor’s yesterday lowered its outlook on the nation’s grade to “negative” from “stable,” citing a debt level approaching 100 percent of U.K. GDP.

It’s “critically important” to bring down the American deficit, Geithner said.

In its latest budget request, the administration said it expects the deficit to drop to 8.5 percent of GDP next year, then to 6 percent in 2011. Ultimately, it forecasts deficits that fluctuate between 2.7 percent and 3.4 percent between 2012 and 2019.

Ten-year Treasury yields have climbed about 1 percentage point so far this year, in part after U.S. economic figures indicated that the worst of the deepest recession in half a century has passed. The yield on 30-year bonds has jumped to 4.31 percent, from 2.68 percent at the beginning of the year.

The Treasury chief said it’s still “possible” that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the “early stages.”

“The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down,” he said. While “these early signs of stability are very important” this is “still a very challenging period for businesses and families across the United States,” he said.

Initial claims for unemployment insurance fell by 12,000 in the week ended May 16 to 631,000, according to Labor Department statistics released yesterday. Still, the number of workers collecting unemployment checks rose to a record of more than 6.6 million in the week ended May 9.

As of April, the unemployment rate was 8.9 percent, the highest level since 1983. The economy has lost 5.7 million jobs since the recession started in December 2007.