The Economy, Taxes, and Federal Spending
Economic Stimulus | Low Tax Rates Promote Economic Growth | The Federal Budget Deficit | Commonsense Earmark Reform | To Learn More about the Federal Budget
A healthy and growing economy improves our citizens’ standard of living, enables employers to create new jobs and pay better wages, provides the public and private sectors with the resources needed to protect our environment, and enables us to defend our country and its interests from a position of strength. No other economic system in human history has ever offered such a great amount of opportunity to so many – even when economic times are tough. It is a system that empowers individuals and encourages the spirit of free enterprise.
I believe individuals and families do best when government taxes least. I trust them to know best how to spend their own hard-earned incomes. I believe small businesses do best when they are allowed to thrive, free from excessive government regulation and government meddling. Free enterprise – not government – creates the vast majority of jobs our citizens want and need.
Americans are concerned about the state of the nation’s economy. Home values have declined and foreclosure rates are up. Energy prices are rising. The stock market is volatile and so is consumer confidence.
The Federal Reserve has responded to the economic turmoil with a series of interest rate reductions, and it has pumped $200 billion into the banking system to help ease the growing credit crunch. Congress passed a modest economic stimulus bill, promising tax rebate checks to most taxpayers in an effort to prompt consumer spending, as well as tax incentives to try to stimulate business investment and adjustments to federally-backed home loans for high-end mortgage holders.
Congress can and should do much more. After all, a $300 or $600 rebate check won’t go far. Most people would prefer a job – or knowing their current jobs are secure – to a one-time payment of a few hundred dollars. There are better things Congress can do to help businesses create jobs, expand and invest in new equipment, and pay better wages.
During an economic downturn, the last thing government should do is take more money out of the economy by increasing taxes. Everyone benefits when low tax rates enable businesses and entrepreneurs to expand and create more jobs. In the words of President John F. Kennedy, “A rising tide lifts all boats.”
The first thing Congress must do to help the economy is reassure taxpayers that taxes will remain low by maintaining existing income-tax rates, marriage penalty relief, current rates on capital gains and dividend income, and relief from the dreaded death tax. Under existing law, the tax relief enacted in 2001 and 2003 will expire after 2010. Extending current tax rates now would give individuals and small businesses the certainty they need to plan their family budgets and permit small businesses to make critical long-term investments in our nation’s economy that will increase job growth now and in the future.
Unless the tax relief is extended, 43 million working families with children will face a $2,300 tax increase. Small businesses will see their taxes increase by an average of $4,100. The death tax will rebound from zero in 2010 to a whopping 55 percent. The tax on capital gains will increase 33 percent, and the dividend tax rate will increase an astounding 164 percent, affecting 18 million senior citizens who will see their taxes rise by an average of $2,200.
Seniors, in particular, benefit from the lower capital gains and dividend tax rates in current law. Thirty percent of taxpaying seniors claim capital gains income, and more than 50 percent of taxpaying seniors claim dividend income.
Allowing current favorable rates to expire and taxes to increase would cripple the economy. As noted earlier, the worst thing Congress could do when the economy is already ailing is raise taxes.
Congress must do more than simply prevent tax increases, though. It must restore public confidence in our housing markets and financial institutions by adopting measured responses that responsibly target the problems affecting those sectors of the economy. No homeowners or financial institutions that borrowed or lent more than could be repaid should receive a bailout. Doing so would only encourage more speculative behavior in the future. However, Congress can enact targeted measures to boost public confidence and create certainty for individuals:
- Create a temporary tax credit for the purchase of single-family homes held by distressed homeowners in the amount of $5,000 a year for three years (for a total of $15,000). Providing such a credit would help those most directly affected by the current downturn, while making homes more affordable for those who might otherwise find home-ownership beyond their reach. Homes eligible for the tax credit would include new homes where a building permit was issued and construction began on or before September 1, 2007, owner-occupied homes whose first mortgage loan is in default, or single-family homes that have been foreclosed on and are owned by a mortgagor or its agent.
- Index the capital gains income exclusion on one’s home (currently $250,000 for single taxpayers, $500,000 for married filing jointly) for inflation. Indexing would preserve the value of the exclusion over time and encourage individuals to purchase new homes.
- Extend the Net Operating Loss (NOL) carryback provision from two years to five years. NOL provisions are designed to allow businesses to “carry back” losses over a longer period of time in order to obtain refunds of taxes paid in past years. Certain industries, such as the homebuilding industry, have suffered losses in recent years and cannot write off those losses against profits. Without changing the law, companies could be forced to further liquidate their inventories of unsold homes at fire sale prices, pushing down the value of everyone’s homes and making it harder for distressed homeowners to refinance their mortgages.
- Rationalize regulation across the financial services industry to provide more transparency and certainty in valuing investments and to prevent businesses from having to deal with multiple and often conflicting requirements. Uniform regulations would provide businesses and individuals with the certainty they need to make sound business decisions, while ensuring the safety and soundness of our financial markets.
Congress needs to ease the burden of higher energy costs on middle class families. To do that, we need to better utilize domestic sources of energy by permitting exploration and development in the Arctic National Wildlife Refugee, maintain oil and gas incentives for domestic production, and extend tax credits that expired last year which would promote the development of alternative energy sources. Congress should also immediately lift the 54-cents per gallon tariff imposed on ethanol imported from Brazil. The tariff needlessly raises prices for consumers in order to protect the already heavily subsidized agricultural industry. By encouraging the development of new domestic and foreign supplies, we can mitigate further price increases.
The global economy is incredibly competitive, yet the United States has the second highest corporate tax rate in the work. Foreign nations, by contrast, are reducing their corporate tax rates in order to give their industries a competitive advantage.
Consider what happened in Ireland after that country reduced its corporate tax rate to 12.5 percent in 2003. Corporations from around the world began flocking to Ireland, investing billions of dollars in manufacturing plants and creating thousands of jobs.
We can make the United States more attractive to foreign investment by reducing our own corporate tax rate, perhaps from its current rate of 35 percent to even 25 percent. That would strengthen demand for the U.S. dollar and keep U.S. companies from locating overseas.
Foreign companies already operating in the U.S. produce more than a half a trillion dollars worth of goods and services in the U.S. each year and employ more than 5 million workers. It’s important that we keep such investment here, as well as attract new opportunities to our shores.
Equally important is gaining access to the markets of fast-growing developing nations abroad. Exports are currently the fastest growing part of our economy, increasing $2.4 billion in January – up 16.6 percent compared to last year. If that pace continues, net exports should add more than one percentage point to overall economic growth. In Arizona alone, manufacturing accounts for more than 8 percent of the state’s economy, and of the manufactured products produced, nearly 80 percent were exported. Expanding free trade would provide American firms with new opportunities to grow.
To do that, Congress should approve pending trade agreements with nations like Colombia, Panama, and South Korea. Colombian goods already enter the U.S. duty free, but U.S. manufactured goods entering that country face tariffs ranging from eight percent to as high as 15 percent. If enacted, the Colombia Free Trade Agreement would lift tariffs immediately on over 80 percent of U.S. consumer and industrial goods, and all goods would be duty free in 10 years.
The U.S. Treasury collected 28 percent more tax revenue in 2007 than it did just six years before, making tax receipts as a percentage of the economy higher than in any year since 1944.
Revenues are rising, yet so is the federal budget deficit. Why? Because federal spending continues to grow even faster than revenues. Federal spending must be constrained.
In 1987, President Ronald Reagan called attention to the emerging problem of so-called “earmarks,” vetoing a spending bill that included 157 earmarked projects that cost an estimated $1 billion. Last year, Congress approved spending legislation that included nearly 12,000 earmarks costing over $17 billion. Earmarks are out of control, and must be reigned in.
Individual Members of Congress often seek “earmarks” of money for projects in their states or congressional districts. Sometimes the projects are well-justified and address a common public good. Other times, they come at the behest of special interests and in ways that avoid scrutiny in the regular budget process. It’s when projects aren’t subjected to normal scrutiny that many wasteful or unnecessary projects are funded – projects like the “Bridge to Nowhere” in Alaska and the Woodstock museum in New York.
I voted against the Bridge to Nowhere and cosponsored the amendment that successfully eliminated funding for the Woodstock museum, which was intended to commemorate the 1969 Woodstock music festival.
I supported a series of amendments to the Honest Leadership and Open Government Act, which became law last year, to reform the process for considering so-called earmarks. One of these amendments made it a Senate ethics violation for Senators to request earmarks that financially benefit themselves or their spouses. Other amendments would enhance the disclosure requirements for congressional earmarks, limited tax benefits, and limited tariff benefits. Such public disclosure will make it much easier for taxpayers to keep tabs on how the government is spending their money and, in turn, make it more difficult for Congress to waste taxpayer dollars. Even before the law was enacted, I publicly disclosed the limited number of funding requests that I had made to the Appropriations Committee.
Congress also passed legislation that I cosponsored – the Federal Funding Accountability and Transparency Act – which directed the Office of Management and Budget to create a searchable database that allows members of the public to scrutinize federal spending and hold their representatives accountable. The key is transparency and disclosure.
I have advocated funding in the past for a limited number of programs in Arizona, but only after determining whether projects are authorized by law; whether they further a legitimate federal purpose; whether they are supported by state, local, or tribal governments (or, in the case of defense-related projects, by the Defense Department and/or base commanders); and whether funding is available from alternative sources on a competitive basis. I may also request funding if, absent a request, Arizona would not otherwise be eligible for certain funding – for example, for federal transportation programs.
I will continue to abide by a policy of full disclosure and request funding for only the highest priorities in Arizona. But it’s important that other Senators and Congressmen exercise the same good discretion. Arizona should not be disadvantaged because our congressional delegation exercises restraint when others do not. With that in mind, I cosponsored an amendment to establish a moratorium on all earmarks for the coming year. This will allow time to even-handedly reform budget rules relating to earmark spending.
Roughly two-thirds of the federal budget is on auto-pilot, outside of Congress’s control in the annual budget process. So-called “entitlement” spending includes spending on such programs as Medicare, Medicaid, and Social Security. As long as people qualify for these programs’ benefits, Congress must allocate whatever it takes to fund them, unless Congress changes the programs – which it is loath to do.
The problem is, entitlement spending is growing so fast that it is expected to overwhelm the federal budget in coming years. Spending on Medicare, Medicaid, and Social Security has increased $513.7 billion, just since 2000. The Social Security trustees reported in March that Medicare is already paying out more in benefits this year than it collects in taxes. Social Security benefits will exceed the program’s income as soon as 2017.
Recognizing some time ago that such spending growth could imperil these vital programs, the President recommended possible solutions back in 2005, but partisanship in Congress prevented constructive debate from occurring. Those who opposed the President’s ideas even failed to put forth alternatives of their own.
It is obvious that any reform plans will require bipartisan agreement and the support of the American people, so I have cosponsored legislation to create a bipartisan national commission to conduct a comprehensive review of federal entitlement programs, identify problems that may threaten the long-term solvency of Social Security, Medicare, and Medicaid, and recommend potential solutions for the consideration of the President and Congress. Congress must move carefully and deliberatively on any proposals affecting these critical domestic programs, but it must move soon.
Only about one-third of the budget – so-called “discretionary” spending – is subject to Congressional approval every year. To control the growth of this part of the budget, the President has recommended placing statutory limits or “caps” on it each year through 2013. The President would hold the growth of non-security discretionary spending to one percent a year – well below the rate of inflation – while allowing adequate funding to safeguard our nation’s security. If discretionary spending exceeds the spending caps, the Office of Management and Budget would be required to reduce it to the level of the statutory caps.
Legislation I cosponsored, the Stop Over Spending Act, would establish a bipartisan commission, modeled after the Base Closure and Realignment Commission which has recommended the closure or downsizing of military installations, to recommend ways of reducing discretionary spending. It would also establish new limits on such spending and mechanisms to automatically reduce spending when those limits are exceeded.
Americans can now see where their hard-earned tax dollars are being spent online at www.USAspending.gov, and see the effectiveness of government programs at www.ExpectMore.gov.
To learn more about the President’s budget proposal, visit www.budget.gov/budget.
The Congressional Budget Office webpage (http://www.cbo.gov/) offers numerous studies and reports.
The Joint Committee on Taxation also publishes many useful reports on its webpage (http://www.house.gov/jct/).
