October 22, 2014

Washington Budget Report: Mar. 1, 2011

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Short-term Measure Considered to Avoid Shutdown

Appropriations are on the agenda this week as Congress returns from the Presidents' Day recess. With the continuing resolution (CR) that is currently funding government agencies set to expire on Friday, a government shutdown will occur unless a new CR is enacted before then.

Prior to the recess, the House passed a CR cutting over $61 billion from 2010 levels but Senate Democrats argued that a new CR should continue 2010 levels. This week the House and Senate are both expected to consider a new short-term CR that would keep the government open through March 18 and include an initial $4 billion in cuts.

Of that amount, $1.24 billion would come from program terminations and reductions requested in President Obama's budget and $2.7 billion would come from earmarks.  Most other programs would continue to be funded at 2010 levels.

If approved by Congress and signed by the President, the new CR will provide policymakers with an additional two weeks to reach an agreement on 2011 appropriations.

An Incomplete Economic Report

The administration recently issued the new Economic Report of the President that unfortunately avoids getting into the “tough choices” facing the nation on tax and spending policy.

Another disappointment: While focusing on a “Foundations of Growth” theme, it leaves out an important explanation of how large, persistent deficits can harm economic growth by reducing national saving.

Many of the administration’s ideas for new spending and tax cuts to encourage certain investments in our economy would have benefits. But they would be deficit-financed, and it is often unclear whether those benefits would outweigh the ultimate cost in terms of additional debt and interest payments.

A far better approach would be to pay for good proposals by reducing less productive types of federal spending and tax cuts.

Delay on Debt Limit Could Be Costly

The Government Accountability Office (GAO) warns in a new report that delay in raising the debt limit could negatively impact markets and borrowing costs.

The debt limit does not constrain the ability of the government to run deficits, but its ability to pay the bills. If a delay requires the Treasury to take extraordinary steps such as postponing auctions, GAO says, it will divert resources from other priorities, add uncertainty to the market, and could increase borrowing costs.

GAO recommends that Congress consider ways to more directly link the debt limit to spending and revenue decisions.

Raising the debt limit is necessary to maintain the full faith and credit of the United States, and Congress should not delay action on an increase.  However, policymakers should use the need for such action as an opportunity to develop a plan to put the country on a sustainable fiscal path.

What is Concord's Opinion of the "23 percent Fair Tax"?

The Fair Tax Plan would replace all federal income and payroll-based taxes with a 23 percent national retail sales tax. Supporters claim the switch would be a boon for economic growth, revenue-neutral and progressive in nature due to a “prebate” on all spending up to the poverty level.

The claimed rate, however, is misleadingly low for a variety of reasons. It assumes that there will be no politically popular exemptions, no tax evasion or avoidance, and no exclusion of hard-to-tax items from the tax base. Furthermore, the mark-up at the cash register under a 23 percent rate would actually be 30 percent.

The non-partisan Tax Policy Center suggested in 2008 that under a best-case scenario the tax rate at the cash register would have to be 44 percent to approach revenue neutrality (meaning it wouldn't add to the deficit).

Given the real rate structure required, the fair tax is not as appealing as supporters argue. Furthermore, other types of consumption taxes could potentially raise money more efficiently.