On December 15th, 2012 the Department of Economics hosted a debate on the “Fiscal Cliff”. The Liberal perspective was presented by Dr. Ben Judd, Associate Dean and Professor of Marketing and Quantitative Analysis, the Conservative perspective by Dr. Kamal Upadhyaya, Professor of Economics. Moderator for the debate was Arzu Inan, a Graduate student from Turkey.
The debate was well attended by faculty, staff, students and friends of the College of Business. Each presenter was provided with an opportunity to make their argument, without interruption. Then, the Moderator posed a few questions to each participant, participants posed questions to each other, and the audience asked questions. Unlike many other “debates” we witnessed during this most recent political season, this debate contained much substance and was conducted in a respectful manner.
Dr. Judd’s opinion is the Cliff is not so much of a fiscal one as it is a political one, that Ayn Rand’s inspired anti-government ideology distorts the facts. He believes the United States is under-taxed, especially when compared to other members of the OECD (Organization for Economic Cooperation and Development), and as a result underinvested. Tax policy has caused imbalances, the wealthiest Americans pay less than their fair share, this is in part to blame for the widening wealth gap between the richest and the poorest – a situation he believes is shrinking the middle class.
Dr. Judd’s solution is to increase taxes, both to close the budget deficit as well as to increase revenues that should be used on important investments. Dr. Judd frequently emphasized that spending should be invested prudently, and that not all government spending has a good return on investment. In order to accomplish this, he suggests the following representative changes to tax policy:
- Two thirds of the gap should be closed by tax increases, one third by spending cuts
- The most stimulative form of additional spending would be in infrastructure and training
- Cuts are recommended for subsidies in ethanol, and depletion allowances. The carbon tax should also be increased (including the tax on gasoline)
- Caps are needed for some deductions, such as home mortgage interest
- Tax rate increases are needed, probably down to $100K level (the middle class will share some of the cost)
- Dividends need to be taxed at a higher rate (perhaps at the personal income tax rate)
- We need some means to deal with international corporate tax avoidance mechanisms (perhaps a VAT, value added tax)
“Taxes are too low and need to be raised according to ability to pay. The whole ideological basis of GOP strategy is un-American and about to go down in flames”, said Dr. Judd.
Dr. Upadhyaya provided his summary of the mechanical reasons why we are facing this cliff, they include:
- The Bush-era tax cut, which was extended in 2010 will expire on December 31, 2012
- Congress has not agreed to annual inflation based adjustments to the alternative minimum tax (ATM), which are also due for renewal
- In 2010 payroll taxes were cut by 2%, if this cut is not renewed payroll taxes will go up by 2%
- The federal emergency unemployment extension of 2010 is due to expire
- Last, but not the least, as part of the Budget Control Act of 2011, we now face about $110 billion of tax increases per year until 2022
According to Dr. Upadhyaya, “approximately $600 billion will be taken out of the economy at a time when the economy is barely growing and the unemployment rate is very high.”
In Dr. Upadhyaya’s view, Congress has the following options:
- Go over the cliff – triggering a number of tax increases and spending cuts. The result – the economy will go into a recession in 2013. The plus side: the deficit, as a percentage of GDP, would be cut in half.
- Cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States' debt will continue to grow.
- Take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
- The CBO estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but cancelling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.
“Many empirical studies either find negative effect or insignificant effect of increasing government spending on economic growth”, concludes Dr. Upadhyaya.
The consensus of the audience appeared to be that Congress will decide to just “kick the can down the road”.