Tax Reform Principles Part 1: Promoting Economic Activity

The Joint Committee on Taxation (JCT) recently published a report providing an overview of the U.S. federal tax system and certain policies to consider for tax reform. If you're interested, you can read the entire report here. https://www.jct.gov/publications.html?func=startdown&id=5015

The report identified three questions to ask when evaluating a governmental tax system.

1. Does the tax system promote or hinder economic efficiency?
2. Is the tax system fair?
3. Is the tax system simple and easily administered?

In the evaluation of economic efficiency, one criteria considered is how the tax system changes, or potentially distorts, taxpayer behavior. You have probably heard people say that they don't want to work overtime or make more money because they lose too much in taxes. Given the current maximum federal tax rates of approximately 45%, this doesn't make economic sense. Even if you have to give up 45%, you still get to keep 55%. For example, if you earned an extra $1,000,000 and had to pay $450,000 in taxes you would still have $550,000 after taxes. Would be be better off making the extra $1,000,000 or not? However, the truth is the tax code does alter behavior, some good, and some not so positive. 

Another aspect is the extent to which the tax code promotes economic growth. This factor includes effective and marginal tax rates, but it also includes the vast number of incentives contained within the code. Advantageous depreciation provisions and solar energy credits are two examples. Certain depreciation rules allow taxpayers to deduct all, or a significant portion, of the cost of new equipment in the year of acquisition rather than recouping the cost over several years. Solar energy credits reduce the after-tax cost of the equipment and make the overall cost of solar energy more competitive to cheaper fossil fuels. Not only are these incentives designed to benefit the purchaser, but they are also intended to spur economic growth and manufacturing activity by helping to create demand for products. Tax rules also help achieve certain public policy goals, such as creating more green energy.

The final measure is the encouragement to produce domestic goods and services. As many barriers to global business enterprises have been removed in the past 50 years, there has been a lot more focus on how the U.S. is competing with foreign businesses. This was a major issue during the 2016 election cycle and was probably the key to President Trump's victory. Many people have felt the negative impacts of a global economy, especially in the manufacturing sector and are looking for Washington to encourage domestic manufacturing and production. There is a general consensus within Washington that U.S. tax policy is making it more difficult for manufacturers to complete with foreign companies. Since politicians across the political spectrum favor some type of corporate tax reform, it's reasonably likely corporate tax changes will be enacted in the near future.

The next articles will focus on fairness and tax administration.

Given these three criteria, do you think the U.S. tax system promotes or hinders economic activity?

Deficit Spending: The Exception or the Rule

Deficit spending occurs when expenditures exceed revenues. In the past 80 years, the U.S. government has spent less than it received a mere seven times. It has happened only once since 1960 (in 2000). With this track record, it seems fairly clear that deficit spending is the Rule for Washington and not the Exception. 

There may have been lots of economic, political and social reasons why the government has incurred a budget deficit, but the pattern is clear. The U.S. government continuously spends more than it receives. 

With this track record, any sane financial adviser would tell you to change your behavior. You simply can't spend more than you make forever, and neither can the U.S. government. Despite the warnings and some attempts by Congress to balance the budget, Congress has not been able to break the habit of overspending. Based on the current budget projections, the U.S. will continue to deficit spend for the next decade.

What will it take for our government to change the habit from deficit spending to balanced budgets, at least more than once every 50+ years?

Debt and Deficit-The Purpose

Concerned about the $19 trillion debt the U.S. government has accumulated? 

Confused about what is fact; what is fiction; what is truth; and what is political spin?

Connect with other like-minded people though the Debt and Deficit website and blog to enhance your comprehension of the issues involving the U.S. debt and deficit. We don't pretend to have all of the answers. However, we're committed to understanding the issues and exploring potential solutions to the daunting financial issues facing our country. 

We encourage you and others to get involved in the conversation on this site, through similar sites, organizations and in the political process. This site is not intended to be an echo chamber where everyone has the same political affiliations or espouses the same ideas. We encourage people to share different perspectives and ideas. Therefore, it's important to be respectful of others who disagree with your ideas and positions. You can criticize an idea without attacking a person or group of people in the process. Harassing and inappropriate comments or posts will be deleted.

The issues are immense and the solutions are elusive, but in some way, we intend for this site to give some voice to We the People who want to help secure the financial future of our great nation. We welcome you to the conversation.