Austerity Measures Are the Proper Response to a Debt Crisis

As Con, I will be arguing that tax increases are better than spending cut in solving debt crisis, a polar opposite position to the resolution. Table of Content Introduction Tax Increases vs. Spending Cut Long-term Growth Effects of Tax-Financed Deficit Reductions Conclusion References 1. Introduction With the failure of the Joint Select Committee on Deficit Reduction to reach an agreement on a $1.2 trillion deficit reduction plan, current law provides that an across-the-board cut to some mandatory programs and to discretionary spending will occur on January 1, 2013, frequently referred to as the "sequester. " In addition to the sequester, Bush tax cuts will expire on December 30, 2012, and tax will increase on all Americans unless Congress acts. 2. Tax Increases vs. Spending Cut - Tax increases must be part of the solution Given that the existing tax system is manifestly indefensible, there has been a unanimous agreement on Tax reform across the political spectrum. Congressional Republicans are inclined to fix the loopholes but unwilling to raise tax revenues whereas Democrats are insisting on raising tax rates for any individual whose income is above $200,000 ($250,000 for couple) in order to restore fiscal strengthen and balance. There are at least two compelling reasons to consider tax increases as part of the fiscal solution: First, the sheer magnitude of the fiscal gap emphatically suggests that a spending-only solution would impose a very substantial reduction on spending that might not be seen as equitable. Deep and unsustained reductions in federal spending are likely to disrupt the fragile economic recovery. [1] Moreover, under the spending-only solution, Social Security and Medicare, two of the key drivers of long-term spending, will inexorably bear the brunt of cuts, thereby disproportionally punishing middle class families and hard workers while leaving the wealthiest Americans untouched. [2] Since spending cuts typically do not have a large impact on high-income households, the only way that high-income households will share significantly in the burden of fixing the deficit is thus through tax increases. [2] As a matter of fact, some of the richest American pay extraordinarily low tax rates by exploiting loopholes and tax expenditures. For example, of millionaires in 2009, a full 22,000 households making more than $1 million annually paid less than 15 percent of their income in income taxes - and 1,470 managed to paid no federal income taxes on their million-plus-dollar incomes, according to IRS data. [3] Moreover, many high-income Americans are paying less than in taxes than middle class American in taxes. Specifically, nearly one-quarter (~25%) of all millionaires face a tax rate that is lower than more than millions of middle-income taxpayers. [3] Therefore It would be deemed to be unfair for middle class earners to bear the pain of the spending cuts while not asking high-income Americans to contribute more. Second, it is more effective to control spending by requiring that it be paid for with current taxes than to allow deficits to grow. [2] Many argue that the most effective approach, which is often referred to as the "starve the beast" hypothesis, to shrink the size of government is to reduce the revenue that feeds it. [2] However, the hypothesis is not consistent with recent experience. Romer and Romer (2009), for instance, suggest that tax cuts designed to spur long-run growth do not lead to lower government spending; if anything, they find that cuts tend to lead to higher spending (1980s, President Reagan tax cut, and 2000s President Bush tax cut). [2] Therefore, their findings seem to suggest that it is better for government to raise taxes to address spending issue instead of lowering taxes. P. S. As a matter of fact, in the 1990 budget deal, 49 percent of the reduction came from higher tax receipts, 34 percent from reduced defense spending, and 17 percent from other cuts in spending. 3. Long-term Growth Effects of Tax-Financed Deficit Reductions Tax increases on the wealthiest Americans would raise a considerable amount of revenue that can be diverted into to deficit reduction. Opponents of high tax rates argue that higher rates would destroy jobs, discourage saving and investment, and slow down economy. A CRS report, however, suggests that an increase in taxes will not necessarily slow long-term economic growth. According to the report, throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capital GDP increased annually by 2.4% in the 1950s. In the 2000s, he average real GDP growth rate was 1.7% and real per capital GDP increased annually by less than 1%. A detailed analysis suggests that the reduction in the top tax rates have little association with saving, investment, or productivity growth. The top tax reductions, however, appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U. S. families increased from 4.2% in 1946 to 12.3% by 2007. In the end, the CRS report concludes that the existing evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic growth, but there may be a relationship to how the economic pie is sliced. [4] The CRS report implicitly suggests that tax increases (from current 35% to 39.6%) may have negligible impact on economy growth. FedEx Chairman and CEO Fred Smith, an adviser to Sen. John McCain"s presidential campaign, said that the notion that tax hikes on the richest Americans would kill jobs was simply "mythology. " [6] In addition to Mr. Smith remark, research on Buffett rule also suggests that tax reforms by increasing tax rates on top earners are unlikely to affect many small business or to deter saving and investment. [3] Therefore, there is no valid reason to oppose tax increases on the wealthiest. 4. Conclusion Although it would be preferable to have both revenue and spending cut on the table, in the absence of such an option, it would be advisable to pursue tax increases, at least on the wealthiest Americans, rather than making unsustainable cuts, which would be deemed to be unfair and unaffordable to many middle class family. The fiscal cliff is imminent, and past experiences have shown that tax and entitlement reform and entitlement reform is a lengthy process. Estimate vary, but most economic analysts believe that if Congress fails to act on the fiscal cliff, about 1 million jobs will disappear from the economy just from the action of 2013 sequester alone, and it seems likely that the nation would fall again into a recession. The problem is real, and the solution will be painful. A sensible, realistic plan requires shared sacrifice and it is time for the Wealthiest Americans to pay their fair shares. Congress must act, and it must act quickly. Thank you 5. References [1]. . http://www.fiscalcommission.gov... [2]. . http://www.taxpolicycenter.org... [3]. . http://www.whitehouse.gov... [4]. . http://www.theatlantic.com... [5]. . http://www.huffingtonpost.com...