Congress Urged to Raise Debt Limit

Economists are warning that Congress must allow the country to borrow more to avoid a debt default that would wreak havoc on financial markets and imperil the U.S. economy. Apparently both Democratic and Republican leaders in Congress agree that the debt limit must be increased. At last! Bipartisan agreement!

From Reuters.com:

Threatening not to raise the $14.3 trillion debt ceiling -- the amount of debt the country is legally allowed to issue -- is "like playing with fire," Democratic Senator Charles Schumer said on NBC's "Meet the Press."

"If we didn't renew the debt ceiling ... We might permanently threaten confidence of the credit markets in the dollar, which could create a recession worse than the one we have now or even a depression," he said.

Republican Senator Tom Coburn also predicted a dire outcome if lawmakers were unable to reach an agreement to put the country's fiscal house in order.

"If in fact the bond vigilantes come after the government bonds in the next two to three years, we will have such bigger pain than not raising the debt ceiling," Coburn said on the same television program.

The Obama administration is under pressure to put a cap on spending to curb its $1.3 trillion budget deficit. Coburn said he thought he would vote in favor of raising the debt ceiling only if there was a specific amount of spending cuts on the table.

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Sacred Tax Cows: It's Them or Us

From HuffingtonPost.com:

The National Commission on Fiscal Responsibility and Reform is in a pickle. We can expect Republican members of the Commission to push for cuts in government spending but no new taxes, and Democratic members to argue that tax increases are necessary. With a supermajority required to approve any recommendation, what hope is there of success?

The best hope for bipartisan consensus lies in targeting the $1.2 trillion a year in hidden government spending embedded in the Tax Code in the form of "tax expenditures." These programs are styled as tax savings, but really function as replacements for explicit government spending. Some make sense, but a great many are poorly targeted and would never pass Congress if presented as an outright spending proposal.

Unfortunately, some of the most popular of these tax breaks - in particular, political "sacred cows" like the home mortgage interest deduction, the charitable contribution deduction and the deduction for state and local taxes - are incredibly expensive and give the country very poor returns relative to their cost. Everyone likes these tax breaks, but in light of the long-term fiscal crisis facing the country, we must choose: we can maintain our herd of hideously expensive tax sacred cows, or we can sacrifice them and set the country on the path to fiscal health.

Today the government spends more through tax expenditures than it collects from the personal income tax, and spends twice as much through the Tax Code as it does through explicit discretionary spending programs. Unlike explicit spending, tax expenditures show up in the budget process simply as reduced tax revenues. In reality the tax revenues are there, borne by taxpayers not eligible for the subsidy, and spent on those who do qualify. It's as if the government actually collected roughly twice as much in personal income taxes as it actually does, but then spent all those extra revenues on programs that today are invisible as a matter of budget presentation or debate.

Will a fix to Social Security cure our country’s long-term fiscal problems?

Social Security reform has been a hot topic for some time now. Many people are worried that there won’t be any money in Social Security retirement benefits by the time they are old enough to retire. Health care reform passed, great. Will the issue of Social Security be next on the Obama agenda?

According to CNN Money, a March report from the Congressional Budget Office estimated that starting this year, Social Security will, for the first time; take in less revenue than it has to pay out in benefits. However, when the Social Security system gets strained by the large baby-boomer population all hitting retirement age, then Social Security will be taking in less than it has promised to pay out, and the government will need to make up the difference. How? By paying back the surplus revenue that has been paid into Social Security over the years. That surplus revenue, including the interest owed will allow the system to continue paying out 100% of benefits promised until around 2037. After that, the program would only be able to pay out 76% of promised benefits …if we don’t do something. Experts agree Social Security reform will be less painful if it is implemented gradually.

Here are the options according to CNNMoney.com:

Increase the retirement age: One option that gets a lot of buy-in from policy experts is a slow increase in the retirement age at which one may collect full Social Security benefits. Today, it's 66, and it is scheduled to increase to 67 by 2027.

But Social Security experts say that won't keep pace with increases in life expectancy, meaning retirees are likely to be collecting benefits for longer than the system can support.
Increasing the retirement age by just one month every two years starting in the 2020s could fix 20% of the program's shortfall, said Ron Gebhardtsbauer, who teaches actuarial science at Pennsylvania State University and is on the board of the American Academy of Actuaries. It could cure 30% of the shortfall if, in addition, the retirement age were accelerated to 67 over the next six years, he added.

Reducing growth in benefit levels: Another measure that has gotten a lot of attention is "progressive indexing." Such a measure would not affect the promised benefits for lower income workers but would lower future benefits for middle- and high- income workers relative to what is currently promised.

Under progressive indexing, the Social Security benefits of higher-income workers would be indexed to inflation rather than to wages, as is currently the case. That would have the effect of reducing benefits from their current promised levels because inflation tends to grow more slowly than wages.

Raising the payroll tax: There is also the option of increasing the Social Security payroll tax rate on wages or raising the cap on how much of wages is subject to the payroll tax (currently it's the first $106,800).

More than likely, a combination of these measures would be proposed.

While answers have long been listed on the Social Security quiz sheet, the political will to implement them has been missing, Bixby said. "Everyone knows what needs to be done, but no one wants to do it."

Yet faced with mounting challenges on the federal balance sheet and a dicey debt environment, that all may change soon enough.

Dow Plunge is Wake-Up Call to Deal With Debt

From CNNMoney.com:

Technical glitch. Violence in Greece. Historic U.K. elections. A combination of these factors sent the Dow plummeting nearly 1,000 points Thursday before regaining two-thirds of the ground lost.

But here's the thing: the market could be in for a very bumpy ride in the coming months -- except it won't have technical glitches to blame. U.S. debts, more likely than not, could be an underlying culprit.

In any case, Thursday's Dow drama should be a wake-up call that policymakers heed, said Allen Sinai, chief economist and president of Decision Economics.

The story now is Greece's debt crisis, and the fear of debt contagion to Portugal, Italy, Ireland, Spain -- and EU's neighbor, the United Kingdom.

All of that may spell trouble for U.S. exports six to 18 months from now, Sinai said.

The Dividend Tax Bill Arrives

As January 1^st, 2011 approaches Democrats in Congress are laying out their fiscal priorities. According to the Wall Street Journal, the Senate Budget Committee passed a fiscal 2011 budget resolution that includes an increase in the top tax rate on dividends to 39.6% from the current 15%—a 164% increase. This huge increase is much higher than the 20% rate President Obama proposed in his 2011 budget.

And that's only for starters. The recent health-care bill includes a 3.8% surcharge on all investment income, including dividends, beginning in 2013. This would nearly triple the top dividend rate to 43.4% in Mr. Obama's four years as President. We suppose the White House would call this another great victory for income equality.

But the driving impulse here isn't equity. It's money. According to the static revenue estimation rules that Congress lives by, maintaining the current 15% tax rate on capital gains and dividends will "cost" the government $347.7 billion over 10 years. The Congressional Budget Office hasn't broken out how much the higher 39.6% dividend rate alone would yield in revenue, but a reasonable guess is $200 billion. Congress simply wants that cash.

But this revenue estimate assumes businesses and investors are dumb and dumber. Dividends which are payouts from business earnings are already taxed once at the corporate rate of 35%. The individual dividend tax is a second levy on that same income and at a rate of 43.4% would take the total tax on each dollar paid in dividends to something like 60 cents.

Preventing State Budget Crises: Redefining 'Tax Cuts' and 'Tax Hikes'

Earlier in the week, David Gamage of UC-Berkeley published a new paper on how state governments can address their recession related budget problems. You can find a section of the abstract below, courtesy of Tax Prof, or download the full PDF at Preventing State Budget Crises: Redefining 'Tax Cuts' and 'Tax Hikes'.

Forty-nine of the U.S. states have balanced budget requirements, and every state acts as though bound by such constraints. These constraints create fiscal volatility - the states must either cut spending or raise taxes during economic downturns, while doing the opposite during upturns. This paper discusses how states should cope with fiscal volatility on both the levels of ordinary politics and of institutional-design policy. On the level of ordinary politics, the paper applies principles of risk allocation theory to conclude that states should primarily adjust the rates of broad-based taxes as their economies cycle, rather than fluctuating public spending. States should raise their tax rates during economic downturns and lower them during periods of growth. On the level of institutional-design policy, the key question is how we define terms like “tax cuts” and “tax hikes.” By adopting a new baseline for defining these terms, states can increase the likelihood of using tax rate adjustments to cope with fiscal volatility rather than (more harmful) spending fluctuations.