Monthly Archives: April 2012

Last week, Senate Budget Committee Chairman Kent Conrad (D-ND) put forward a budget resolution.  Although on the surface this is an unremarkable event – it is supposed to happen every year, before this time – the particulars were highly unusual.  They underline the degree to which the process of budgeting in Washington is stalled.

The budget resolution, as you know, is an annual outline of the nation’s overall fiscal plan.  It is a “joint resolution,” rather than a law, passed by the House and Senate without the president’s signature or his formal involvement, and it does not have the force of law.  In most years, its major function is to set forth a ceiling for the amount of annual appropriations that the Congress may legislate.  In some years, it also can provide instructions for changes in the law that governs taxes and mandatory (or “entitlement”) spending, which can be passed in the Senate by a simple majority, without the risk of a filibuster.  This year, with political control of the Congress divided, meaningful changes in tax and entitlement policy are far out of reach.  And beyond that, just last August, the Congress and the President negotiated a deal to set appropriations spending levels for this year while increasing the debt limit.  So in some sense, a budget resolution this year might be thought unnecessary.  Even so, many Members of Congress have often repeated, “If you can’t budget, you can’t govern.”  And the Congress has not completed a budget resolution for three years.

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This was a busy week in Washington as the budget battles continue in this election year. Some key highlights from the U.S. fiscal scene:

A Washington Post column this morning repeats what has become a standard entry on three-by-five cards routinely distributed around this town:  “…50 years of economic history show that raising the capital gains tax backfires: It reduces federal revenue, while lowering the tax raises revenue.”

There are several problems with this assertion, perhaps most notably that in the last 50 years, we have increased tax rates on capital gains only twice – in 1969 and 1986.  Continue Reading >>

In an article on the Wall Street Journal, Damian Paletta reports that the federal budget deficit is slowly shrinking as corporate and individual income taxes rise due to the improving economy:

Individual income-tax revenue from October through March, the first half of the government’s 2012 fiscal year, hit $484.1 billion, up from $475.6 billion in the year-earlier period. Corporate income taxes rose to $84.5 billion from $55.1 billion a year earlier. The higher tax revenue helped shrink the six-month deficit to $778.8 billion this year, $50 billion lower than the year before.

However, monthly tax data can fluctuate considerably and the deficit could grow again if the economic recovery loses steam.

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This is a rather long post.  It tries to put into a clearer perspective the highly publicized impending end-of-year budget and tax events – called “taxmageddon” by some in the press.  It takes the position that as imposing as these legal developments are on paper, a short-sighted Congress and White House could work their way around the consequences – but only in the near term.  The budget time bomb continues ticking.  What are the fundamental elements needed for a new President and Congress to take this problem on?  We close with a few observations.

You surely have heard of the extraordinary budgetary events that lurk in the nation’s tax and spending law, just waiting to spring out upon us at the end of this year.  The list is long, and frankly frightening.

In the previous decade, temporary laws involving hundreds of billions, even trillions of dollars became highly fashionable.  Then with the financial paroxysm at the turn of the decade, the Congress and the President enacted more temporary legislation to provide near-term stimulus to the economy.  The former actions were based on the assumption that robust economic growth would continue forever; the latter assumed that after the recession, the economy would bounce back vigorously.  Both of these assumptions have proved wrong.  So now, what were once presumed to be routine extensions or expirations of temporary laws have become major policy dilemmas.

Some see the “perfect storm” or “taxmageddon” at the end of this year as a likely occasion to take on the budget problem.  This optimistic view holds that when confronted with all of these issues, elected policymakers finally will get religion and solve the problem once and for all.

I am highly skeptical – not that a change of heart should happen, but that it will, given recent patterns of behavior.  But there is so much at stake that we need a clear view of the next year or so.  Let’s start with an inventory of the dangling issues.

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In The Concord Coalition’s blog “The Tabulation,” Diane Lim Rogers writes about a recently released report from the Congressional Research Service (CRS) titled “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening.”

The CRS report finds that the 200+ tax expenditures for individuals are worth more than $1 trillion per year and “the largest 20 of them represent 90 percent of that revenue loss to the government.” Dr. Rogers adds that “when you look closely at that ‘Top 20’ list, it is easy to get discouraged about the prospects for substantial broadening of the tax base. [T]he largest tax expenditures look a lot more like ‘entitlements’ than ‘loopholes.'”

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In an op-ed in the Wall Street Journal, Fiscal Commission co-chair Erskine Bowles expresses optimism about reaching a bipartisan consensus and cutting the deficit:

While letting all $3.9 trillion in the Bush tax cuts expire and implementing mindless across-the-board cuts is surely not the smart way to solve our long-term fiscal problems, that threat should be enough to force across the finish line a grand bargain similar to the one our commission proposed.

In addition to an improving economy, he points out that “the terms of the fiscal debate have fundamentally changed in ways that make lasting progress on the debt far more likely.”

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