In an October 21, 2016 op-ed in The New York Times, former Federal Reserve Chairman Paul Volcker and former Secretary of Commerce Pete Peterson argue that while “(o)ur current debt may be manageable at a time of unprecedentedly low interest rates…if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending.”
A day later in his own Times column, Paul Krugman, a Nobel prize winner in economics, responded that while “it’s probably true that something will eventually have to be done to bring spending and revenues in line,” the federal deficit is not an exigent threat. Respected economist Martin Sullivan in an October 31, 2016 article in Tax Notes (subscription required) observed that according to the “most recent Congressional Budget Office projections, by 2024 the federal deficit will reach $1 trillion on its way to $1.24 trillion in 2026.” Still Sullivan was not in favor of “slam[ming] on the fiscal brakes” immediately.
I’m hardly in a position to know who is right about the necessity of tackling the deficit problem without delay or whether addressing it over time is sufficient. What I can comment on is as follows. Both parties agree that the revenue/expense shortfall should be addressed. Their dispute is simply when. The federal budget sequestration was a terrible response to the problem. It led to underfunding national defense and critical domestic programs, as well as denying the Internal Revenue Service the budget it needs to audit taxpayers and address the tax gap between what is legally owed and collected.
What should the Trump administration and Congress be doing? There are, among other priorities, a need to focus on rebuilding our military and infrastructure, as well as creating good employment opportunities for the American people. Medicare and Social Security fiscal issues both need to be dealt with. These all require funding, and the deficit problem can’t simply be ignored long-term — even if it is politically expedient to do so. Politicians never want to tell us to drink the awful tasting medicine even if it will make the country better.
The Trump administration and Congress should be giving serious consideration to things like eliminating the wage cap on old age, survivors, and disability insurance. It should take a close look at notions that Social Security be fully taxed to wealthy recipients; that earnings of American companies outside the United States be taxed immediately, but at a somewhat lower rate than domestic source income; that all business income, not just C corporations, be subject to tax at the entity and owner level, but with some integration offset; that the loopholes in the anti-inversion rules be closed.
They also need to consider a value-added tax. This does not mean that I’m espousing not cutting the corporate tax rate. I believe the corporate tax rate should be reduced — but responsibly, with offsetting revenue.
The foregoing ideas will be unpopular with many influential constituents, as will other revenue generators. Are we, however, better off as a country if our political leaders use tricks like sequestration to ignore vital national priorities, play ostrich with respect to the national deficit, or promise voodoo economics that will allow everyone to enjoy tax cuts and at the same time all our problems will be magically solved? I don’t think so. The Trump administration and Congress must give serious attention to the issues we face, including the deficit. Taking the bad- tasting medicine will be good for the country in the long run.
Philip G. Cohen is a retired vice president for tax and general tax Counsel for Unilever United States and is currently an associate professor of taxation at Pace University’s Lubin School of Business. The views expressed herein are his own.