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President Barack Obama meets with senior advisors in the Oval Office, Dec. 13, 2012
Dr Peter Morici: Even if President Obama and Speaker Boehner
manage to avert the “fiscal cliff,” Washington’s budget woes won’t be solved.
Simply, politicians on both sides are blind to facts and deaf to reason.
Huge deficits were not caused by the Bush tax cuts and the wars in Afghanistan
and Iraq. In 2007, with both fully burdening the Treasury, the federal deficit
was only $161bn—now it exceeds $1tn.
Spending on health care, social security and other public pensions are up
$666bn—more than total spending for either defense or other civilian activities.
Without systemic reforms, annual entitlement spending will increase another
$1.1tn by 2020.
No tax increase on the wealthy—short of driving offshore everyone who can
provide services via the internet—can tackle that bill.
Yet, President Obama in his February budget and proposals since only asks for
additional taxes on the wealthy, few net savings in spending and no additional
taxes for anyone else.
Raising top rates would hit the wrong people. In jurisdictions like New York and
Maryland, adding in payroll, state and local income taxes, business property
taxes and the like, marginal rates on many small businesses already approach
Anyone who even casually studies economics knows taxing an activity reduces it.
That’s why progressives want a carbon tax to reduce fossil fuels use. Sadly,
that reasoning applies to new investment too, and boosting marginal tax rates on
small businesses above 50% will surely hurt expansion and jobs creation.
That said, wake up Republicans! Taxes are way too low on financial engineering
and many forms of compensation to the richest Americans. Capital gains rates of
15% on investments held merely held a year, and permitting many corporate
executives and private equity engineers to pay similar rates on their
compensation, adds little to real investment or employment—more likely, it ships
Closing loopholes and adjusting capital gains to inflation by the length of time
those are held would boost tax revenues and make the system fairer.
The most sacred cow—the mortgage interest deduction—is simply not needed to
support homeownership. Canada doesn’t have it and enjoys similarly high rates of
ownership. Both countries are land-intensive with more room to spread
populations around major cities than Europe.
Renting among the middle class is highest in North America where land is most
expensive, even though high incomes make the value of the mortgage interest
deduction the greatest—for example, in New York City.
Phasing out wasteful deductions and credits, and tackling entitlement
reforms—rather than tweaking Medicare and Medicaid eligibility rules, payment
rates and the like—are needed for real progress.
With so many Americans living well into their eighties, most folks will have to
work until they are 70 and social security and other government pension programs
should acknowledge this reality.
The prices Americans and federal and state governments pay for health services
are 50 to 100% higher than in Europe, where individual countries rely on a wide
variety of public and private provider systems.
Democrats are about to learn Obama Care may guarantee coverage but only at great
cost. However, Republicans won’t admit that competition, which has been widely
applied in Medicare and private insurance, hardly accomplishes the cost savings
Europeans achieve through competent regulation.
Until both sides focus on getting everyone to pay something meaningful for their
government and requiring taxes on wealthier Americans to be distributed fairly,
and accept the consequences of longevity and necessity for meaningful price
regulation in health care, Washington’s chronic budget woes can’t be solved.
Professor, Robert H. Smith School of Business, University of Maryland,