Republicans and Democrats the U.S. deficit - Research Paper Example

How Do Republicans and Democrats Want to Handle the U.S. Deficit? Introduction The current U.S. deficit is 100% in excess of the gross national product (GDP) (Thornton, 441). Prior to the 1930s, both democrats and republicans were against building a national deficit and believed that deficits should only be accrued in times of war and crises. However, since the Second World War there has been a steady splintering of sides relative to a national deficit. The democrats took what is known as a Keynesian perspective whereas the republicans took a classical economic position. In this regard, democrats advocated for increases in government spending as a means to expand the government’s budget and its effectiveness in terms of stabilizing the economy and improving and increasing government programs. Republicans on the other hand advocated for “sound finance” and decreasing taxes but also realized that there should be some form of deficit to support government programs in progress (Colander & Matthews, 59). The republican sound finance perspective is based on the economic view that if taxes are cut, there is an incentive to work harder, save and thus revenues are increased (Miroff, Siedelman, Swanstrom, & Deluca, 397). Therefore in addressing the growing national deficit, the Republican Party advocates for government spending habits to be curtailed, and also to amend tax legislation with a view to creating jobs and increasing salaries, reform Medicare and national security, and for the reformation of welfare programs (GOP.gov.com). The Democratic Party takes the position that the wealthy should be compelled to pay higher taxes, so that the government can fund programs meant to strengthen the middle and lower classes (Moving America Forward, 2012 Democratic National Platform). This paper evaluates how democrats and republicans propose to handle the current U.S. deficit and will determine which approach has more merit. The Republican Party’s Approach to the U.S. Deficit During the 2012 Presidential elections, the Republican Party’s Presidential candidate Mitt Romney revealed a plan for dealing with the US deficit. The plan involved an eight-year program in which the federal budget would be balanced (Sahadi). The plan also included a promise that taxes would not be increased and at the same time, retiring Americans would be protected and more would be spent on defense (Rubin). This plan would obviously mean that other government programs would necessarily have to be cut. According to Rubin, we are at least assured by Romney that social security would not be subjected to cuts. However, other government programs could be vulnerable and this would include housing assistance, national parks, food stamps, and any other number of government programs. Wyler provides the details of the plans Romney had for the Republican Party’s approach to the U.S. deficit. To begin with, Romney planned to decrease income taxes by 20%. These income tax decreases would affect all Americans regardless of income status (Wyler). This of course is nothing new for the Republican Party. In 2001 and 2003, former republican president Bush introduced two successive tax cuts across the board which were primarily beneficial to the wealthy (Bartels). For the most part Americans are receptive to tax cuts because they are singly focused on their own “tax burdens” (Bartels, 15). The reality however was that 36% of the tax cuts would benefit the “richest 1 percent of Americans – a share almost identical to that received by the bottom 80 percent” (Hacker & Pierson, 33). It was estimated at the time that within 10 years, the income tax reductions would cost the U.S. $2.1 trillion in revenue (Hacker & Pierson). Middle and lower class Americans were sold on the tax reductions because in less than a month after the initial reductions, taxpayers were receiving rebate checks for at least $600 (Hacker & Pierson). This was one way of passing a policy that would primarily benefit the wealthy and yet nonetheless be accepted by the not so wealthy. Moreover, it is commonly accepted that Americans, like any other nationality, are averse to paying taxes. At the same time however, Americans like any other nationality are keenly aware of the benefits that taxes pay for: education, health care, social security, food stamps, roads, public transportation and so on. Therefore the question usually asked is “can we afford tax cuts” (Kurgman). Nevertheless Romney’s plans to cut taxes were estimated to involve a loss to the US revenue amounting to $5 trillion. However, Romney’s plan would involve the elimination of some “tax deductions” and “loopholes” that would ensure that revenue losses would not be so dramatic and if possible not transpire at all (Wyler). Since Romney failed to identify the deductions and loopholes that would be affected by the tax cuts, it is not altogether certain if the planned tax cuts would benefit the government’s deficit. In fact, in the absence of any realistic means of offsetting the loss of revenue from tax cuts, Romney’s plan could have the impact of adding $5 trillion to the growing deficit. At one of the Presidential debates Romney stated: In order for us not to lose revenue, have the government run out of money, I also lower deductions and credits and exemptions, so that we keep taking in the same money when you also account for growth (Wyler). What Romney explained during the Presidential debates in terms of his plans for the republican government to deal with the deficit is consistent with the party’s classical economics. According to Romney, his administration, if elected, would rely on the possibility that lower income tax would encourage taxpayers to work harder, earn more and thus pay more taxes and “that is how we get growth and how we balance the budget” (Wyler). Republican senator from Florida, Marco Rubio explained further that jobs are created and the middle class strengthened when the private sector experiences growth. The government can facilitate private sector growth via taxing policies that are “reasonable and easy to understand” (Wyler). Rubio goes further to state that by taking this approach, it: ...gets people jobs that gets people raises that how you get the economy growing again. And by the way that’s how you generate the revenue that government is going to need to pay for the things government should be doing, and to lower this debt (Wyler). However, some economists have challenged Romney’s proposed tax cuts and have argued that these tax cuts would most certainly add to the deficit unless Romney’s plans included increasing taxes levied on the middle class (Rosenthal). Nevertheless, in addition to cutting income taxes, Romney’s plan also included the elimination of Alternative Minimum Tax and the removal of estate taxes. Romney’s plan to deal with the budget also included providing vouchers for Medicare and turning Medicaid over to the control of states. According to Rosenthal, these are known as “austerity measures”. For example, in Portugal where austerity measures have been in place for a few years, the “debt-to-GDP ratio” increased (Rosenthal). Bernstein criticized Romney’s plans for tackling the deficit, particularly in relation to tax cuts for everyone. According to Bernstein, there are not enough possible loopholes and tax deductibles to make up for a 20 percent tax cut. The only way to make up for the shortfall in a realistic way is to increase taxes to Americans making between $100,000 and $250,000 annually. This of course is the middle classes. In other words, the middle classes would be forced, at least indirectly, to fund tax cuts accorded to the wealthy (Bernstein). Romney linked his deficit plans to employment and in turn to economic growth and development. According to Romney, he would have created 12 million jobs and thus income taxes would correspond with increased revenue for the budget. However, Moody’s Analytics predicted at the time that approximately 12 million jobs would be created within a four year period regardless of who governed the U.S. (Davidson, Mullaney, Korte, Davis, & Madhani). In order to fully understand Romney’s plans for dealing with the U.S. deficit, other economic plans must be taken into account. Romney planned for cutting taxes and government spending and at the same time increasing spending on defense. Meanwhile, Romney pledged to neutralize the effects of tax cuts on revenue gains by the government by introducing the elimination of tax deductibles and loopholes. While these deductibles and loopholes were not identified by Romney, it has been argued that these deductibles are insufficient to make up for the revenue loss accruing by virtue of a 20 percent tax cut. Nevertheless, Romney expressed plans for the U.S. to become energy independent by the year 2020, to train workers and to promote small businesses (Davidson, et. al.). None of these initiatives can be accomplished unless the government is prepared to fund these programs. With a 20% tax cut across the board, there was no clear indication as to from where the government would obtain funds for financing these projects. Romney’s emphasis on tax cuts as a means to handle the U.S. deficit is based on a classical economic model known as Grover Norquist’s “starve-the-beast” (Bartlett, 229). According to this model, it is believed that an increase in taxes gives way to more spending and tax cuts leads to less spending. However, Bartlett claims that since 1993, this theory has not panned out in practice. The evidence suggests that tax increases have “led to spending cuts” while tax cuts have “led to spending increases” (Bartlett, 229). Regardless, guided by the starve-the-beast theory of economics, the Republican Party believes that it can solve and manage the deficit problems by either decreasing taxes or refusing to increase taxes. Bartlett cautions that his approach to deficit management is entirely counterproductive. If the idea is to increase productivity, employment and higher earnings, the deficit is positioned on a slippery slope. There is a danger that spending will increase and as such the deficit will only grow. Thornton demonstrates that government spending does not correspond with tax revenues at all. Since the 1970s, successive democratic and republican governments have all increased spending regardless of the income generated by virtue of tax revenues. This has been a persistent theme in U.S. history since the 1970s and as a result, the deficit has just as persistently increased (Thornton). This is hardly surprising since most of the U.S. government’s income is derived from income taxes and taxes paid in the Social Security program (Thornton). Critics have argued that the republicans’ tendency toward tax cuts as a means of resolving the deficit problems is predicated on a theory that tax cuts help the rich retain a greater portion of their income after taxes are deducted. This would lead to more flexibility with respect to investments which would have a trickle-down effect on the real economy to the benefit of all Americans. Increases in taxes however would have a negative impact on the real economy as the wealthier citizens would not only look for safe havens for their money, but would likely look more acutely at investment opportunities that would not have a trickle-down impact on the real economy, but would rather distort competition on the investment markets (Sowell). Former President Calvin Coolidge noted that the purpose of cutting income tax was to improve government revenue and thus to avoid increasing the deficit. Instinctively, it might be felt that since taxes provided the primary source of income for the government, surely tax cuts would naturally mean that the government’s revenue would decrease. Nevertheless, President Calvin Coolidge maintains that he supports: ...those who wish to relieve the small taxpayer by getting the largest possible contribution from people with large incomes. But if the rates of large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden (Sowell, 8). The republican classical economic theory is therefore aimed at modifying taxpayers’ behaviour in a way that encourages economic stimulation. It is believed that tax cuts would improve incentives to work and to invest in the economy. Therefore, Americans, regardless of income would benefit. The government is expected to increase revenues as the real economy improves. However, experience has taught us that regardless of tax cuts over the years, government spending has increased and the real economy has also suffered exponentially. Despite the evidence of the classical theory of economics and in particular the feed-the-beast model, the Republican Party remains entirely loyal to their theory of economics. The Democratic Party’s Approach to the U.S. Deficit During the 2012 Presidential debates President Barack Obama spoke of dealing with the U.S. deficit by increasing taxes applicable to America’s wealthiest citizens and withdrawing the tax benefits to the oil and gas sector and multinational corporations. Obama stated: I have said that for incomes over $250,000 a year that we should go back to the rates that we had when Bill Clinton was president, when we created 23 million new jobs, went from deficit to surplus, and created a whole lot of millionaires to boot (Deloitte, 1). Shortly after assuming the office of the President for the first of two terms, President Obama suggested extending the tax cuts introduced by former President Bush. These tax cuts were set to expire in 2010. However, President Obama was against extending the tax cuts to the wealthy Americans. In this regard, Obama did not want Americans to be making more than $200,000 a year to benefit from tax cuts. However, the republicans who controlled the House of Representatives had their own plan. The republican plan would compel the middle and lower income taxpayers to pay more taxes while the wealthiest Americans “would pay less” (Shepard, 23). In the end the parties met halfway with the result that tax cuts introduced by Bush would be extended for a further two years. In the meantime, America’s wealthiest citizens would benefit from estate tax exemptions (Shepard). Obama laid out his plan for reducing the deficit in four steps. The first step would involve cuts in spending at home and in “non-security spending” (The White House). The second step would involve cutting back on security spending to the extent that spending on security would be held “below inflation” (The White House). However, spending would be based on meeting the ability to safeguard national security duties. Step three involves bending the “long-term cost curve for Medicare” and making Medicaid “more flexible, efficient and accountable” (The White House). The final step involved taxes and would “close loopholes” and put forth a “tax system that is simpler, fairer and not rigged in favour of those who can game it” (The White House). Moreover, tax spending would be commensurate with “lower rates and lower the deficit” (The White House). Sahadi (A) has reflected on Obama’s progress so far with respect to the U.S. deficit. Obama currently has a plan to reduce the U.S. deficit by $1.8 trillion. This would represent a milestone never before reached in U.S. history. However, Sahadi (A) is not optimistic that Obama’s proposal for reducing the deficit would be accepted. Nevertheless, the plan includes a taxing and spending framework aimed at deficit reductions. Some of these savings would emanate from negotiations that the President would conduct and has conducted with the republicans. These negotiations include savings that would flow from the Budget Control Act 2011 but excluding the budget cuts that automatically came into effect last March. Savings would also come from the decreased spending established by a temporary solution for government funding beginning in 2010. The revenue coming from the fiscal cliff deal that was implemented in 2013 would also contribute to the President’s plans for reducing the deficit (Sahadi (A)). The remainder of Obama’s deficit reduction plans would come from his proposals for the 2014 budget. It is believed that Obama’s plan includes tax proposals (Sahadi (A). Sahadi (B) revealed that Obama’s budget proposal for 2014 includes tax increases for America’s highest earners and corporations. The proposed 2014 budget also calls for increases in government spending on “early childhood education and non-defense research” (Sahadi (B)). In the meantime, the deficit will not increase, because Obama plans to make up for the shortfall by implementing revenue increasing measures elsewhere (Sahadi (B)). At the end of the day, President Obama described his deficit reducing policy as predicated on taking steps to reduce the deficit and “growing the economy” in the meantime (Sahadi (B)). Specifically the 2014 budget calls for investing $50 billion in infrastructure including repairs to “highways, transit systems and airports” (Sahadi (B)). Obama has plans to create a National Infrastructure Bank which will “bring together public and private capital for important projects” (Sahadi (B)). These plans in particular have the potential to stimulate economic growth as it would generate employment. Moreover, it could also increase government revenue because improved infrastructure could justify increases in tolls and transit ticket prices. Obama also calls for adjusting how inflation is calculated with respect to Social Security benefits. The inflation adjustment rate is intended to reduce government spending because it would introduce a reduction in the cost of living adjustment for accorded Social Security benefits (Sahadi (B)). This new inflation rate is called the Chained CPI and it would apply to other parts of the tax code which allows for inflation adjustments annually for income taxes, standardized reductions and “contribution limits to 401(k)s” (Sahadi (B)). It is projected that switching to the Chained CPI inflation rate can increase government revenue by 4230 billion within a ten year timeframe (Sahadi (B)). In addition, President Obama proposes to place limits on specific deductibles and exemptions applicable to high-income earners. According to Sahadi (B): Normally a taxpayer multiples her top tax rate by the amount of a deduction to calculate the taxes saved. But Obama would cap that rate at 28% which is below the top two income tax rates. So someone in the 39.6% bracket today would save $39.60 on a $100 deduction. Under Obama’s proposal, she would save $28. This strategy is expected to increase revenues by $529 for 10 years. In the meantime, President Obama is proposing what is known as the “Buffett Rule” for reforming taxes. The Buffett Rule involves high income earners paying what is regarded as a fair and commensurate tax rate. For example, those who earn at least $1 million annually should pay no less than 30% in taxes. Even if no caps are placed on deductibles, this tax reform could increase government revenue by $53 billion within a ten year timeframe (Sahadi (B)). President Obama also proposes to establish a new “limit on tax-deferred retirement accounts” (Sahadi (B)). According to Sahadi (B), this proposed change would “set a limit on the tax-advantaged portion of an individual’s savings across IRAs and other tax-preferred retirement accounts”. This proposal has the potential to increase government revenue by $9 million over the next decade. President Obama plans to increase government revenue through the introduction of more federal taxation on cigarettes and tobacco as a means of expanding investment in early education and child care. This new tax could increase government revenue by $78.1 billion (Sahadi (B)). President Obama also plans to increase taxes applicable to investment income. Those who manage private equity, hedge funds and venture capital usually pay 20% in taxes for what is referred to as “carried interest” which is tantamount to “paying the long-term capital gain rate” (Sahadi (B)). President Obama proposes treating carried interest as “ordinary income” (Sahadi (B)). In the end, managers of hedge funds, private equity and venture capital could end up paying up to 39.6% in taxes representing over 2 and a half times the current rate (Sahadi (B)). Sahadi (B) is not optimistic that Obaman’s plans for handling the deficit would be accepted. However, if it were to be accepted it could reduce the deficit by $4.3 trillion during President Obama’s administration. However, it might not appease high income earners and it is doubtful that this approach could be beneficial to the real economy. The Preferred Approach to Handling the Deficit In an examination of fiscal policies and results among Western capitalist governments in Europe and North America, Hibbs found that when conservative or republican governments were in power, employment rose. These findings were specific to the U.S. and the U.K. The study also found that unemployment increased when the U.K.’s Labour Party and the U.S. Democratic Party was in power (Hibbs). However, these findings, particularly in the U.S. must be looked at in context. In the U.S. during the last republican government under Bush, employment necessarily increased as a result of the terrorist attacks on the U.S. in 2001 and the successive wars in which Americans joined the war effort. Both of these incidents would necessarily create jobs for rebuilding infrastructure and providing support to the war efforts. In the meantime however, the economy suffers as a result of federal spending on infrastructure repairs and funding the war efforts. Therefore an increase in employment does not necessarily mean that the economy is improving. Regardless, both republicans and democrats typically target tax reforms when considering the best methods for dealing with the deficit. According to Craig and Linden, a common theme emerges regardless of which government is in place. This common theme is to reform “tax expenditures” which are “spending programs hidden in the tax code” that permits taxpayers to “reduce their tax bill through deductions and exemptions, credits, or preferential rates for certain types of income” (Craig & Linden). According to Craig and Linden, these tax exemptions and reductions can include donations to charities, and specific state deductions and low capital-gain taxes. However, these tax breaks can also “include obscure and narrowly defined tax breaks such as those that benefit only hedge-fund managers, oil companies, or corporate-jet owners” (Craig & Linden). The democrats and the republicans disagree on how these tax deductibles should be handled. The republicans obviously prefer a policy against raising taxes and seek to reduce taxes across the board which should arguably decrease incentives for taking advantage of those tax breaks and encourage investments that would trickle down to the real economy and benefit lower income earners. The democrat approach is to make it limit the extent to which higher income earners can claim deductibles and to increase the rate of income taxes applicable to higher income earners. The democrat approach to the deficit appears to be fairer as it does not place excessive tax burdens on America’s lower income earners. This approach takes account of the injustice of requiring lower income earners to assume a burden that only benefits the wealthy. For example when the wealthy is paying less taxes on their higher income, the rich are getting richer and the poor who relу on government assistance programs more often than the rich, are experiencing a reduction in government spending of welfare assistance programs. Moreover, the government must necessarily look elsewhere for revenue and this more often than not affects the poor. For example, an increase in public transit ticketing and other increases in the price of access to other public programs and services will be necessary for raising revenue. These increases would be funded by the poor and lower income earners in the U.S. as these are the Americans who use these services for the most part. It might be argued that since the poor and the lower income earners benefit from government funded services more often than the wealthy, it is only fair that the poor and lower income earners fund these programs and services. Moreover, the wealthy are aiding in the funding of these services by paying taxes despite the fact that they do not use these services. However, in terms of social justice, it does not appear to be a fair distribution of wealth when the wealthy and the poor are subjected to the same taxes. It also makes no sense to introduce and maintain a taxing system that empowers the wealthy and in doing so, puts the lower income earners in a position that contributes to the empowerment of the wealthy. Moreover, there is no evidence that cutting taxes as a means of reducing expenditure has ever worked in theory. According to Thornton, despite the changes in government since 1973, the U.S. deficit has been growing over the years. Thornton argues that the growth trajectory of the U.S. deficit has occurred because government spending has been increasing each year regardless of government revenue. In other words, cutting taxes has not proven to be an effective method for reducing government expenditure. In the final analysis, I prefer the democratic approach to the deficit not only because it is more conscionable to the fair distribution of wealth, but because it targets the strengthening of the lower and middle classes. On the other hand, the republican approach is to strengthen the wealthier Americans which by necessity weaken the poorer Americans. As Krugman informs, tax cuts have resulted in the government having to choose between cutting back on services and increasing taxes. Since the republicans do not believe in increasing taxes, services that benefit lower income Americans usually suffer. This has been demonstrated via the persistent laying off policemen and teachers and the denial of health insurance (Krugman). The Democratic Party’s approach is to raise taxes on those who can afford to cover the tax burden. It is certainly to their benefit that policemen are hired and kept employed. It is certainly to their benefit that children receive a quality education as this would reduce the risk of unemployment and higher criminal rates. This would be particularly problematic for all Americans with policemen losing their jobs as a means for compensating for the reduction in revenue. Krugman warns that a failure to increase taxes can be problematic for all Americans and this is particularly so with respect to Social Security benefits, Medicare and Medicaid. In other words, services available to the poor and other vulnerable Americans would have to assume the burden while the wealthy become richer. Conclusion History informs that taking the republicans’ “starve-the-beast” approach to the deficit has not worked (Krugman). The “starve-the-beast” approach takes the position that when the government cuts taxes, the incentive to spend is reduced and therefore government spending is reduced. However this approach ignores the fact that the government has bills to pay and the money must come from somewhere. Therefore some government services must be cut and some other means of raising revenue must be implemented. Therefore, starving the beast essentially translates to bleeding the budget and lower income Americans who use government services and programs more frequently than the wealthy. Supply side economics also indicates that tax cuts are necessary for stimulating the economy. This republican approach argues that when an American is burdened by the prospect that large portion of his or her income will go toward taxes, he or she is unlikely to want to earn an income or will seek ways of avoiding taxes or will attempt to take advantage of tax deductions and loopholes that reduce the tax burden. In this regard, the Democratic Party’s approach to the deficit is far more logical. The increase in taxes to the wealthy ensures that the government has the revenue to invest in education, healthcare and other programs that improve social and economic conditions and paves the way for future growth and development for the benefit and empowerment of all Americans. This promises to have long-term outcomes for improving the deficit. Works Cited Bartles, Larry, M. “Homer Gets a Tax Cut: Inequality and Public Policy in the American Mind.” Perspectives on Politics, March 2005, Vol. 1: 15-31. Bartlett, Bruce. The Benefit and the Burden: Tax Reform – Why We Need it and What it Will Take. New York, NY: Simon & Schuster, 2012. Bernstein, Jonathan. “Romney’s Magical Thinking about the Deficit.” The Washington Post, September 14th, 2012. http://www.washingtonpost.com/blogs/plum-line/post/romneys-magical-thinking-about-the-deficit/2012/09/14/353c8a92-fe7b-11e1-98c6-ec0a0a93f8eb_blog.html (Accessed May 4th, 2013). 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