GECON200-Topic #4 Taxes and a Path Forward

In chapters 4 and 5 of Wessel’s ” Red Ink there is a discussion about the source of federal tax revenue, as well as the path forward on fiscal policy. Tax revenue is currently not sufficient to pay for all anticipated spending for the next few years. There are several options on the table for increasing tax revenue, not limited to increasing corporate tax rates, increasing income tax rates, or increasing payroll tax rates. Current law is in place such that the tax cuts initiated by during the George W. Bush administrations and extended during the Obama administration are set to expire at the end of this year. Also the payroll tax cuts passed during the Obama administration are set to expire at the end of the year.

Additionally, when the Congress passed the Budget Control Act in 2011 to raise the debt ceiling, they agreed to cut another $1.2 trillion from spending over the next decade, as well as stick to caps cutting another $1 trillion of discretionary spending. Projections are that the U.S. deficit would essentially be eliminated much sooner if all the tax cuts expired and all these spending cuts were extended.

However, politics is a different game. There are some proposals out there to tinker with these programs around the corners, but few serious politicians have actually suggested allowing for all these tax cuts to expire, and few serious politicians have suggested allowing for the sequestration of the Budget Control Act to be extended without alteration.

Questions you might answer:
You should take one of two approaches in this discussion. Try to avoid blaming one particular individual, or group for the current situation, and think about the political feasibility of our future. Wessel examines three idealistic plans to control the “Deficit”, “Unemployment”, and “Spending” in chapter 5. Examine these proposals for not just their potential to cut or eliminate the deficit (and when), but also the CURRENT political feasibility. Do not just throw up your hands and declare defeat. Lay out a conceivable path forward.

You might also choose to discuss taxation. Face up to the fact that few seem to think that they are taxed fairly, everyone would like to pay more in taxes, but everyone also expects to receive numerous government benefits at some point in their life. Who should bear the burden of the taxes, and how. If you propose something like a ‘flat tax’, examine the changes that would take place to the tax rates of many families with children, and discuss the development of our current tax program. If you propose higher corporate taxes, higher payroll taxes, or higher income taxes across the board, examine the consequences, and benefits of this action.

The book provides a lot of numbers, but try to go deeper into some of these details with outside information where possible.

16 thoughts on “GECON200-Topic #4 Taxes and a Path Forward”

  1. In his book, David Wessel examines three approaches that address the U.S. deficit issue. He describes these points as the “three poles” of the deficit reduction debate (144). The first “pole” deals with unemployment and is championed by Paul Krugman, a Princeton University economist and New York Times columnist (144). The second “pole” is advocated by Vice-Presidential candidate Paul Ryan, who calls for cutting taxes and shrinking the government (144). The final “pole” is headlined by Peter G. Peterson, who believes that the deficit must be reduced by raising taxes and cutting spending (149).

    The argument that seems the most logical and ambitious is Peter Peterson’s proposal of raising taxes and cutting government spending. Peterson explains that if we continue along this same path, in less than 30 years the interest payments on our national debt alone will account for 20% of the U.S. economy and will consume 100% of federal revenues. This would leave no money to be spent on education or infrastructure and would cripple the U.S. Peterson believes that our only option to substantially reduce the deficit and lower the nation’s debt is through compromise and tough decision-making, like capping discretionary spending and reinstituting the strict pay-as-you go rules from the 1990s. He also believes that taxes must be raised in order to bring in more revenue and stated that “I see absolutely nothing wrong with imposing higher tax burdens on the wealthiest in our society” (152). This is the type of compromise we need in Washington to effectively reduce our nations deficit. We are not going to be able to effectively reduce the deficit and lower the debt by just spending cuts or tax hikes alone. Currently however, this plan seems the least likely of the three as neither Republicans nor Democrats seem willing to budge from their current positions. Many congressional Republicans avoid raising taxes like they’re the plague and Democrats seem unwilling to make concessions on government spending. After the election however, I believe that this strategy will eventually be agreed upon by both political parties as this seems to be the only route that will leave either side somewhat happy. It will not be easy, nor will it be quick by any means, but eventually our political leaders will reach a compromise by increasing taxes and cutting government spending.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.
    http://www.pgpf.org/Issues/Fiscal-Outlook/2010/07/24/Tax-Aversion-Syndrome.aspx

  2. Currently the United States follows a gradual taxing system that charges different rates for various income levels, so that those who make more money will pay a higher tax than those who make less in income. A flat tax is a tax through which everyone pays the percentage of income, no matter the economic situation. Those countries that have shifted into this system have for the most part, seen their economies grow rapidly; some grew “over double what was seen in the world’s mature, industrialized economies.” Those under this system appreciate this form of taxation because it is simple to understand and allows a sense of fairness, that people will pay the same percentage of their income. If this tax system is the answer to their economic woes, then why has the United States not decided to shift to this policy? Most of the countries that reign under this system were previously under rule of the Soviet Union and therefore, it is difficult to determine whether or not their increased improvement in their economies is due to the flat tax rate or to their released rule and own independency. About 47% the United States is within the middle class and while they would still pay the same percentage as those in the upper class, they are left with less money to spend. In the example of someone making one million per year, if they paid an 18% tax, they are still left with about $800,000, whereas a person in middle class making $50,000 would only be left with about $40,000 after this tax. Those against this tax believe that “a flat tax means the rich pay less. And if the rich pay less and we raise the same amount of money, then someone else has to pay more. And the someone in this story is the middle class.” While this method of taxation may be apparent to helping those in other countries, there are other factors involved in whether or not the United States should continue in the current gradual taxing method, or branch out into this flat tax system. If a flat tax is imposed, due to the increased amount of people in the middle class, there is guaranteed to be conflicting thinking regarding the fact that the rich will still have a substantial amount of money, whereas the middle class will have much less, even though they began with much less.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.
    http://www.investopedia.com/articles/tax/09/flat-taxes.asp#axzz29yggoPrC
    http://wiki.answers.com/Q/What_percent_in_the_US_is_upper_class_middle_class_and_lower_class
    http://www.usnews.com/debate-club/is-a-flat-tax-a-good-idea/secret-of-the-flat-tax-middle-class-pays-more-so-rich-pay-less

  3. In David Wessel’s Red Ink, he examines three proposals to reduce the “deficit, unemployment, and spending” to create economic stability. The first plan, supported by Paul Krugman, states that the deficit is a problem, but Americans need to tackle unemployment first. Krugman noted that “premature deficit reduction has risks of diverting attention from the more immediately urgent task of reducing unemployment” (p 146). The second proposal to cut government spending and reduce taxes is supported by Vice-Presidential candidate Paul Ryan, who believes that extreme budget revolution is the way to achieve deficit reductions. By reforming the tax code, Ryan plans to reduce taxes for the wealthy while raising taxes on lower and middle-class Americans. To reduce government spending, Ryan also plans to cut social programs that benefit lower and middle-class citizens. With the current state of our economy, neither of these plans are feasible. Ryan’s proposed plan is too ambitious for our present economy, and although reducing the unemployment rate is important, halting the growth of the deficit is the most critical measure to ensure economic sustainability in the future.

    The third proposal, advocated by Peter Peterson, to cut government spending and raise taxes proves to be the most practical alternative to reduce the deficit and work towards economic stability. Peterson sees the deficit as a big problem, one that is the “transcendent threat to our economic future” (p 144). Although Peterson knows that reducing the deficit requires immediate action, he understands that the economy cannot recover overnight. His statement in Wessel’s book, “the actual belt-tightening should be delayed until the economy has recovered, but it must be done if the nation is to make the investments needed to restore the American dream of rising living standards” (p 151), demonstrates his plan towards economic sustainability, not just immediate recovery. By imposing higher tax burdens on the wealthy and gradually reducing government spending, the U.S. economy will move toward economic sustainability without sacrificing the standards of living for many Americans. Without this change, he states that the federal government will “spend more than four times as much on interest as it spends on education, R&D, and infrastructure combined” (p 151), which means that we will be spending more on our past than on the future. To retain our current living standards, invest in our future, and reduce the deficit, Peterson’s proposal to reduce government spending and increase taxes is the most feasible option for our nation’s economic wellbeing.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.
    http://thinkprogress.org/politics/2012/08/11/677171/12-things-you-should-know-about-vice-presidential-candidate-paul-ryan/?mobile=nc

  4. “For a lot of American’s, the issue isn’t the size of their tax bill, but whether the tax code is- in their mind- fair,” writes author David Wessel in Red Ink. Among many Americans is the ubiquitous notion that perhaps the wealthy are not paying their reasonable share in taxes. People understand the importance of taxes, but when the equality of taxation is questioned, so is their faith in our government. Romney proposes a plan that would enlist a “trickle-down” economy, allowing money from the wealthy to seep into the pockets of the needy while simultaneously stimulating economic growth through tax breaks. With the deficit soaring to $16 trillion, perhaps Washington needs a businessman like Romney who is good with money (CNN). However, I personally believe that a trickle-down economy would not benefit those in need. It merely shifts more of the tax burden to the rapidly deteriorating middle class. According to The Washington Times, a recent report shows that 90% of our nations wealth is controlled by 1% of our population; obviously the wealthy haven’t taken their fair share of the tax burden. In all honesty, the best way to equalize taxation is to increase the tax on those with high incomes. Of course Romney and his 2011 income of $20.9 million would disagree, but what’s better: calling yourself the victim of taxation or swallowing your pride and helping our nation? In the words of President Obama, “Those who have done well, including me, should pay our fair share in taxes to contribute to the nation that made our success possible.” The economy is unbearable, but the solution is simple. The only way America can reduce the long-term budget deficit, maintain vital services, protect Social Security and Medicare, invest more in education and infrastructure, and not raise taxes on the working middle class is by raising taxes on the super rich (Reich).

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.
    http://www.huffingtonpost.com/robert-reich/why-we-must-raise-taxes-o_b_844606.html
    http://communities.washingtontimes.com/neighborhood/curmudgeon-corner/2012/sep/8/president-obama-mitt-romney-trickle-down-economics/
    http://www.cnn.com/interactive/2012/10/politics/undecided.voters/long.term.unemployed.html

  5. David Wessel’s book, Red Ink, discusses the current problems within our economy and how certain politicians plan to fix them. The first issue, or “pole” as Wessel calls them, regards unemployment. Paul Krugmen states that our top priority should be to deal with unemployment and that the deficit is not an “immediate issue” (Pg. 145). Paul Ryan proposes the second pole, in which the idea is to cut taxes for everyone, as well as cutting government spending. His belief is that that these two cuts will lead to economic growth and lower of the deficit significantly.

    The last, and most realistic, plan is that of Peter Peterson’s. His main idea relies on the fact that we will soon be in a situation in which “the federal government spends more than four times as much on interest on the deficit as it spends on education, R&D, and infrastructure combined” (Pg. 151). Peterson has put out that by 2040 the deficit will reach 19% of GDP, while the deficit reaches 233% of GDP. He proposes that raising taxes on the wealthy would allow the government to receive more revenue and lower these percentages significantly. Peterson also wants to reform certain government programs in attempt to keep the deficit lower then projected, including keeping health care funds low by cutting waste, as well as “fixing” social security by gradually increasing the retirement age and increasing revenue gained from workers. According to Peterson, “the nation has to make the investments needed to restore the American dream of rising living standards,” (Pg. 151) meaning that later generations will be brought down by our debt and spending, and their standard of living will be worse then ours currently. While his plan allows our standard of living to stay constant, it also poses to be politically realistic. The American people would be willing for a 1 or 2 percent tax raise in order to keep our standard of living constant, as well as program reforms in order to lower the deficit on the future. Peterson states in Red Ink that the deficit is the “transcendent threat to our economic future” (Pg. 144) and that our government should take immediate action to lower the deficit and debt for the future of our economy.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012

    http://www.pgpf.org/Special-Topics/The-Federal-Budget-Primer.aspx

    http://www.pgpf.org/Chart-Archive/0060_revenue-spending-comparisons.aspx

  6. In the 2011 Pew poll, 55% of Americans said the U.S. tax system isn’t fair. When a majority of Americans think about the American tax system, their thoughts concerning the tax system mainly focus on federal income. The current federal income tax is currently operating on a gradual tax system that charges a higher percentage tax rate to individuals who earn higher incomes. This is the often debated part of the tax system that politicians continually argue for changes in a variety of subjects such as the top 1% of earners are paying or not paying enough in taxes. This is such a popular topic of the system to talk about because it accounts for 47% of federal tax revenues, but this is not how the system always worked.

    What should really concern Americans are the changes in the amount of payroll taxes and corporate taxes. According to Wessel, a payroll tax is “…levied on wages but not capital gains, interest, or dividends—was imposed in 1937 to finance Social Security.” Since then it was expanded in 1965 to fund Medicare, and before Medicare was created, the payroll tax accounted for about 1/6th of all federal revenue. Nowadays the payroll tax accounts for 1/3rd of federal revenue. In 2011, about 40% of all households paid more in the employee share of the payroll tax than they paid in federal incomes taxes. Yet, if employees are being required to pay more and more for payroll and income taxes, where do corporate taxes fit into all of this? According to Wessel, in the 1950s, corporate income tax accounted for 30% of federal revenues. As of 2011, corporate income tax revenue accounted for low 7.9 % of federal revenue. With an economy as large and as profitable as the United States, with some of the largest corporations on the planet, how can corporations only account for 7.9%? Continual tax breaks from Congress, along with the corporations hiring tax specialist to exploit loopholes or organize themselves into entities that aren’t subject to corporate tax. Individuals who are against taxing corporations will complain the American corporate income tax rate is the highest in the world with 39.2%. What these same individuals will not reveal that 73% of all business profits were organized into entities that aren’t subject to the corporate tax. Men such as Jon Talisman, former top tax official in the U.S. treasury, are paid up to $20,000 a month to lobby for tax breaks or help organize the corporations. By increasing taxes on corporations and ending these non-corporation entity loopholes, federal income tax rates can remain at current rates. This allows federal income revenue to increase while keeping the federal income tax at the current Bush tax break rates; which allows consumers to spend more, in turn stimulating the economy.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012
    http://www.atr.org/u-s-corporate-income-tax-rate-a7260
    http://taxes.about.com/od/payroll/qt/payroll_basics.htm

  7. Just as Doug Elmendorf summarized, “The country faces a fundamental disconnect between the services the people expect the government to provide… and the tax revenues that people are willing to send to the government to finance those services” (158). This creates an obvious dilemma, especially when trying to reduce the deficit. As Wessel made clear, “small changes will not suffice” (161).

    Paul Ryan’s solution is to increase spending through tax cuts and reforming the federal budget. Theoretically, this plan will boost the economy through economic growth and added revenues, bringing down the deficit. This sounds great but there is no guarantee it would provide a boost powerful enough to mend our already weak economy. Therefore this solution may not be strong enough and may be too indirect in reducing the deficit.

    Pete Peterson’s solution would guarantee a reduction in the deficit through tax increases and cuts in spending. This would be successful in fixing the deficit but with the economy already so weak, increasing taxes and cutting spending would strain the economy and prevent growth.

    This leaves solving the unemployment problem as described by Paul Krugman. Through solving this issue and creating more jobs, the economy would naturally grow and be strengthened. Jobs are more easily created with the help of government spending and with an economic boost from created jobs, the government would now be able to focus on reducing the deficit through tax increases. With a low unemployment rate and satisfied citizens, the strengthened economy would be able to handle tax reform and focus on the future prosperity of the nation.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012
    http://www.nybooks.com/articles/archives/2012/may/24/how-end-depression/?pagination=false
    http://www.pbs.org/newshour/bb/business/jan-june12/krugman_06-18.html

  8. As was briefly discussed in David Wessel’s book, Red Ink, I believe that one way to improve the taxation of citizens is to make more brackets in which to tax citizens. Currently there are six brackets that everyone falls under depending on how much their yearly salary is, and pay taxes according to the percent assigned to that bracket. The top bracket is simply anyone making over 388,350, for married or single individuals, who are then taxed at 35% of their annual salary. Yet, there are hundreds, if not thousands of people who could easily be taxed at a higher rate who make much more than this. Take for example, the Fortunate Four Hundred, who’s lowest member made 110 million dollars a year. The range between 388,350-110 million+ is gigantic, and the individuals in Fortunate Four Hundred could easily be priced with much higher percentages, and still be more than comfortable to live off of. Even if the individual making 110 million a year was taxed at 70% (just as an example), they would still be taking away about 33 million- far more than necessary to be comfortable. I believe that if we taxed the Fortunate Four Hundred with a much higher percentage, as well as build in many other tax brackets within each of the existing brackets, the government would more fairly take from individuals based on exact income, instead of a broad example. By slightly rising the percentage of taxes taken in each group, the government would gain more income without changing tax rates at such an extreme rate that would cause riots. With this increase in revenue, the government would not have to cut so many programs Americans find necessary, potentially keeping a happy balance among what the people want and what they are willing to pay for.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.
    http://www.forbes.com/sites/moneybuilder/2011/09/30/2012-federal-income-tax-brackets-irs-tax-rates/

  9. It’s hard to believe now, but there was a time before Medicare and Medicaid. The idea that the government should be supporting its people is relatively new. President Grover Cleveland once said that “Though the people support the government; the government should not support the people.” We need to support ourselves and not just expect the government to fix everything. Something needs to be done about the national debt and soon. The situation has been described as “racing towards a cliff.” Sacrifices have to be made in order to fix this problem before it gets any worse. The money has to come from somewhere. This means new taxes and/or reduced government spending. There is no magic way around this. American citizens have grown accustomed to large government and don’t want to cut programs, so increasing taxes is the way to go. The main issue is how and who to tax. Recently, in my GCOM-122 class, my classmate gave a speech about legalizing marijuana and taxing it. As controversial as marijuana is, I think this makes sense. According to Paul Solman, legalizing and taxing marijuana and other drugs would yield approximately $47 billion dollars annually. This would decrease the deficit by only 3%, but this is actually a significant step in towards lowering the deficit and decreasing national debt.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.
    http://www.pbs.org/newshour/rundown/2012/10/could-legalizing-and-taxing-drugs-lower-the-deficit.html

  10. America has a debt of over $16 trillion. The national debt increases $3.88 billion each day. Clearly something has to be done about this. On December 31, the Bush-era tax cuts will expire, and if nothing is done to prevent that, it will address the debt problem. However, this would likely cause a recession. America needs an alternative plan that deals with the debt, but not in the drastic measures that would take effect on January 1, 2013. If all the automatic tax increases and spending cuts take place, this could cut as much as 4%-5% of GDP. This would stunt economic growth and have a negative impact on the stock market. There is also a predicted loss of 2.8 million jobs per year between 2013 and 2017. However, there should be a modest compromise with some spending cuts and some tax increases. As Pete Peterson said, “’On our current course, we are headed toward an unthinkable situation in which the federal government spends more than four times as much on interest as it spends on education, R&D, and infrastructure, combined’” (Red Ink, pg. 151). Right now, our economy is in no place to handle intense spending cuts and tax increases. What we need is a plan that will address the fiscal cliff by creating a budget that is on a sustainable course and is implemented gradually over the long run, once the economy has recovered.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012
    http://www.pgpf.org/Issues-In-Brief/what-is-the-fiscal-cliff-09282012.aspx
    http://www.taxanalysts.com/www/features.nsf/Articles/2FC6FC97670C0B0185257A40005279CF?OpenDocument
    http://www.taxanalysts.com/www/features.nsf/Articles/2FC6FC97670C0B0185257A40005279CF?OpenDocument
    http://www.brillig.com/debt_clock/
    https://www.fidelity.com/viewpoints/fiscal-cliff
    http://topics.nytimes.com/top/reference/timestopics/subjects/t/taxation/bush_tax_cuts/index.html

  11. The deficit is definitely something that cannot be ignored so while unemployment is important, I have to disagree with Krugman idea of focusing on unemployment first than the deficit later. I do agree with him on the fact that other countries are not going to stop lending to the US anytime soon, but fundamentally speaking the less debt the better. As brought up in the final debate about foreign an important part of our country being a leader internationally involves getting ourselves financially sound. Peterson and Ryan have the right idea about focusing on the deficit and balancing the budget respectively (however much of a long shot it might be) but I think Peterson’s notion of informing the public of the problem of the deficit is a good one. As it has been said in the book and many times in class there is a disconnect between the services the people want the government to provide and the amount they want to spend on taxes. I think if the people get a better idea of how much all of these benefits are costing it may be easier to pass tax reform legislation. The path that I think we need to take ahead is to let the Bush tax cuts expire, close some of these tax loopholes for those higher in the tax bracket and to tax the wealthy a little bit more. I think Romney’s plan for simplifying the tax code could also work but is maybe too subtle, I think a more aggressive solution is going to be necessary if we are serious about cutting the budget.

  12. In his book, Red Ink, David Wessel shows that ” most Americans’ federal taxes have not risen over the past couple of decades.” (p. 112) There are very few Americans who believe that they are taxed fairly, let alone support a significant increase in the taxes that they pay to the federal government. There will never be a method that everyone agrees is best for the country. However, there is a method that will be more equitable for every person in the country. One thing that we have to remember is that taxes are just one piece of the puzzle. Without a significant decrease in spending, with an increase in revenue, the deficit will likely never be overcome.
    It seems that removing the loopholes, deductions, and payouts that the government currently gives through the tax code would allow a “broader tax base” while forcing those who have had better luck pay their share. The most significant consequence would be that it would impede economic growth and actually strangle the economy by increasing taxes on the working class, according to Paul Krugman (p. 146). Another possible consequence, along the same lines, would be a decrease in productivity due to a smaller difference between income and opportunity costs.
    The greatest benefit would be a surge in the federal government’s revenue. Nobody is exactly sure how significant of a surge it would be, if a surge occurs, and numbers range from negatives to $180 billion, according to Doug Elmendorf (p. 160). This surge in the federal government’s revenue would provide a significant boost toward a balanced budget. Only through these measures can we prevent the financial disaster that awaits us.

    http://www.factcheck.org/2012/08/romneys-impossible-tax-promise/
    http://economics.about.com/cs/taxpolicy/a/taxing_growth.htm

  13. Far too many people think that two presidential candidate’s tax reform will right economy. However, both parties propose tax reform that is either inadequate or ineffective. President Obama purposes a tax increase on the wealthy. In theory, it could help decrease the deficit by increasing revenue, but let us consider all of the other aspects that accompany a tax increase on the wealthy. First, people with high incomes can and do typically invest their money in other ventures (i.e the stock market). The wealthy also use money to invest in companies and entrepreneurships. With increased taxes on those with money, we are essentially strangling the stock market and entrepreneurships. Don’t worry; Romney’s plan has just as many issues.
    Romney’s plan is just as troublesome. Romney proposes that tax cuts should occur at the top tax bracket. He proposes a decrease from a 35% tax rate to 25% tax rate. However, he fails to consider the repercussions. Romney is assuming that the money would be kept in the American economy, which is silly. The World Bank asserts that American companies and individuals invested nearly 230 billion dollars in direct foreign investments, simply investments. This value does not include the additional revue that is created. He also recommends limiting the number of tax deductions for everyone. However, this plan also has major shortcomings. This would reduce the number of tax deductions for low income families. Typically, low income families rely on the tax refund check. By eliminating the tax deductions, he would basically drive lower income families into the ground.
    So, what do I propose? Simply raise taxes on every taxable category by 3 percent. Yes, people will feel the effects, but the effects will be minimal. Also, no one enterprise, whether it is the people, businesses, capital gains, property tax, etc., will be punished for the shortcomings of an entire market. Side note: cutting defense spending could help.

    http://www.ontheissues.org/Tax_Reform.htm
    http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD

  14. If we want to improve the economy and began paying of our federal debt in the US we essentially need a surplus, which means we need to be taking in more taxes and other government revenues then we are spending. The only feasible option out of the three “poles” Wessel lays out in his book is the third one, to raise taxes and cut spending. But, this is easier said then done. The total government spending in Fiscal Year 2012 was $6.3 trillion and the governments total revenue was $5.0 trillion, which means we had a deficit of $1.3 trillion. In order to create surplus, just based on this year alone, we would need to either raise taxes (revenue) over $1.3 trillion or cut government spending more than $1.3 trillion. Another option could be to cut it down the middle, as Peterson’s plan addressed in Red Ink somewhat suggests, and then we would cut government spending by $.65 trillion and raise taxes by $.65 trillion, but either way these would be huge cuts in spending and huge raises in taxes that could not just happen over night or more specifically over a year. Plus, as Wessel points out in Chapter 4, no one likes taxes and they especially don’t like raises in taxes. So, although Peterson’s plan may make the most sense, it would probably be the hardest to initiate and would take more time to take affect then many politicians and American citizens would prefer.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012
    http://www.usgovernmentrevenue.com/total_2012USrt_13rs1n

  15. Congress has been charged with the task of recommending $1.2 trillion of the federal budget to get cut, however not much is getting recommended. This plan is called the Sequestration Transparency Act and if the congress does not come up with a plan than the $1.2 trillion will automatically get cut. Approximately $600 billion will be cut from military programs and another $600 billion from all non-defense programs, such as health research, education and transportation. Of the programs subject to be cut, defense would lose 9.4% of their funding and nondefense programs would lose 8.2% of their funding. With a reduction in funding to federal programs we can expect to see losses of jobs in the different areas. No one is expecting to Congress to even seriously address the issue until after the presidential election and by then they will only have a few weeks. President Obama has already vowed that he will veto any attempts by Congress to avoid the automatic reductions. Despite Obama’s promises, Congress has already initiated talks about moving the date back from January 2013 to March that year.
    Nobody is going to be happy with cutting spending but everyone agrees something must be done or else we will spend our way further into debt with no way out. By cutting programs you are essentially cutting jobs for the military, health research, and education, which would be a politically unpopular thing to do. My prediction is that the act will just keep getting pushed back and nothing will be accomplished. There is no definitive answer but I actually think pushing the sequestration back would be the best thing to do until a good plan of action can be created.

    http://www.aacr.org/home/public–media/science-policy–government-affairs/aacr-cancer-policy-monitor/aacr-cancer-policy-monitor—november-2011/supercommittee-stalemate-triggers-spending-cuts.aspx
    http://money.cnn.com/2012/09/14/news/economy/white-house-spending-cuts/index.htmlhttp://www.aei.org/article/foreign-and-defense-policy/defense/sequestration-transparency-act-misses-the-mark/

  16. There is a lot of discussion on how to reduce the deficit but is the deficit really the biggest issue we face? Paul Krugman is a proponent of focusing on unemployment before dealing with the debt (p. 144). If we look at the issue of the debt, however, countries and investors are still lending us money. In fact, the interest rates on US Bonds are continuing to stay very low. This means there is a strong confidence in America’s ability to repay. The issue of other countries failing as a result of high debt was not solely because of the amount they owed. Greece, for example does not control their own currency and have not for over 10 years. Because of this, they can’t print the money needed to repay their debt. America on the other hand has complete freedom to print money at basically no cost. The fiat money of America insures repayment of all debt. The obvious problem with printing money is of course inflation. But the value of the American dollar as one of the most important currencies in the world won’t inflate very quickly. Too many countries not only respect its value, but conduct transactions in US dollars. Therefore, the only real cost of the debt is the interest that America pays. But even this is not an issue today. During the 80’s and 90’s America paid interest that equated to over 3% of GDP. Compare this to 2012, where it is estimated that America will pay 1.6% of GDP, a minimal burden due to continued low interest rates.
    Instead of worrying so much about the debt, politicians should worry about job training, increasing GDP, and decreasing unemployment as Krugmen said. Because with a strong economy, comes a large tax base and a small debt to GDP ratio.
    http://www.forbes.com/sites/pascalemmanuelgobry/2012/10/19/no-the-united-states-will-not-go-into-a-debt-crisis-not-now-not-ever/2/
    http://moneyland.time.com/2011/07/15/the-u-s-is-not-drowning-in-debt/

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