1 A Proposal to Reduce the Federal Deficit and the National Debt By Robert Kleine, Senior Economist Although this report was first issued in February 1988, it is just as timely today. The budget deficit declined as a share of GNP from 1986 to 1989 because of fairly strong economic growth and a slowdown in spending. Federal government outlays rose 15.4 percent during that period, compared with a 22.5 percent increase for the previous three years. Outlays are expected to rise only moderately in FYs 1990 and 1991, but owing to a sluggish economy the federal deficit is again increasing, despite the help of the Social Security surplus (see below). Congress and President Bush are negotiating a package of spending cuts and tax increases designed to meet the Grarnm-Rudman-Hollings deficit target of $64 billion; the prospects of success are not promising, although the chances are greater in light of the president's recent willingness to consider tax increases. The federal budget deficit and the national debt continue to grow despite Gramm-Rudman and a general consensus that deficits adversely affect the economy.' The downturn in economic growth expected in late 1990 and 1991 will result in slower federal revenue growth and larger federal expendim, making the budget situation even worse. This paper examines historical trends in federal revenues and expenditures, discusses the immediate and long-run effects of the deficit and the national debt, and proposes a national tax on consumption. The latter, coupled with obligatory spending limits, would raise enough revenue to eliminate deficit spending in four years and eventually retire a large portion of the national debt. HISTORICAL TRENDS IN THE DEFICIT AND DEBT Deficit spending (a technique of fiscal policy whereby the government spends more than it receives in revenue) was popularized by British economist John Maynard Keynes in the 1930s. The original objective was to stimulate the economy, by increasing government spending or decreasing taxes, so as to shorten a period of negative or slow economic growth. The U.S. government has used this tool to combat seven recessions since World War 11. Unfortunately, deficit spending has become standard policy, regardless of the state of the national economy. Huge annual deficits have become common in the last ten years, even during periods of substantial economic growth. Exhibit 1 shows that the federal deficit has equaled or exceeded $150 biion every year since FY The deficit peaked at $221 biion in FY 1986 and then stabilized at about $150 billion through FY The congressional Budget Office (CBO) is estimating, however, that the deficit could approach $200 biiion in FY 1990 and exceed that figure in FY 1991.~ From 1950 to 1983, the deficit exceeded 3 percent gross national product (GNP) on only four occasions: 1975,1976,1982, and Exhibit 2 shows the deficit as a share of GNP since 1970.~ As recently as 1979, the deficit was only 1.6 percent of GNP. The recession in the early 1980s resulted in a slightly larger deficit by the end of the Carter administration (2.6 percent of GNP in 1981). If Carter's tax and expenditure policies had remained in place after his term of office, the resumption of economic growth that began in 1982 would have reduced the deficit to about percent of GNP in 1982 and beyond. The link between economic conditions and whether the government incurs a deficit ended with the Reagan administration tax cuts and the acceleration of defense spending beginning in 1982.~ The deficit exceeded 5 percent of GNP from ITS 1983 to 1986, the highest 1 I W a Public Sector Consultants, Inc Knapp's Centre 300 S. Washington Square Suite 401 Lansing, MI (517)
2 EXHIBIT 1 Federal Deficit, (in billions of dollars) '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 yw SOURCE: U.S. Department of Commerce. Statistical Abstract of the United States, EXHIBIT 2 Federal Budget Deficit as a Percentage of GNP, '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 Year SOURCE: U.S. Department of Commerce, Statistid Abs~uct of the United States, level since World War 11. Since then the deficit has stabilized at percent of GNP, but it is likely to rise in FYs 1990 and 1991 due to sluggish economic growth. Furthermore, the real size of the deficit is partially camouflaged by the Social Security surplus, an estimated $63 billion in FY 1990 and $132 billion by FY In effect, the federal government is spending on current programs the surplus that will be needed to pay benefits in the next century. When the bill comes due, the options will be sharp reductions in other expenditures, higher taxes, or huge deficits. Senator Daniel Moynihan (D-New York) has proposed that the Social Security Tax be reduced to use up the surplus and prevent it from being spent on cumnt programs. This proposal has merit, since the tax is very regressive and should not be used to finance general spending. The rate could be increased when additional funds are needed to pay for the large number of retirees expected in the next century. Moynihan's proposal has generated much debate in Congress and is not likely to pass, as it would require concrete action to reduce the budget deficit. (PSC will issue a report on this topic in the next few weeks.) The national debt and interest payments on the debt have been growing since 1970 (see exhibits 3 and 4). As a percentage of GNP, the national debt has increased at a remarkable rate since (see Exhibit I IW- Public Sector Consultants, Inc
3 EXHIBIT 3 Federal Debt, (in billions of dollars) SOURCE: U.S. Department of Commerce, Slatistical Abstruct of the Unired States, EXHIBIT 4 Interest on Debt, (in billions of dollars) '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 Year SOURCE: U.S. merit of Commerce, Statistical AbSb.oct of the United Stater, ). The size of the debt and the market interest rate affect the government's interest payments, which have risen as a percentage of total federal outlays each year but two since 1975 (see Exhibit 6). In 1989, interest payments accounted for 14.8 percent of total federal outlays. Although moderate changes in tax and expenditure policy could significantly reduce the annual budget deficit, more extreme and concentrated efforts are needed to make a dent in the current $2.9 trillion national debt. ECONOMIC EFFECTS OF THE DEFICIT AND DEBT Although the degree to which deficit spending improves or hinders the economy is open to theoretical debate, there is general agreement on the following broad principles. Increases in government spending (whether within or beyond revenue raised) can boost demand for goods and sewices in the economy and reduce the length and severity of a recession. Such expansionary fiscal policy also can cause inflation if the economy aiready is growing at a healthy rate. -44 IWm Public Sector Consultants, Inc.
4 EXHIBIT 5 Federal Debt as a Percentage of CNP, (in billions of dollars) '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 = r I ear SOURCE: U.S. Department of Commerce, Statistical Abstract of the United States, EXHIBIT 6 Interest on Debt as a Percentage of Outlays, (in billions of dollars) '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 Year SOURCE: U.S. Department of Commerce, Stdistcal Abstract of the United Stales, Significant hikes in taxes or reductions in government expenditures designed to reduce the deficit just before or during an economic downturn could worsen its effects. Deficit spending leads to government borrowing, which may result in higher interest rates. Government borrowing that elevates interest rates also raises international demand for the U.S. dollar, pushing up its value. A dollar of higher value relative to other currencies expands imports to the United States and hurts our export industries. Persistent annual deficits may reduce investor confidence in the U.S. government and economy, making it more difficult for the government to borrow and causing instability in worldwide financial markets. Deficit spending results in an unrealistically optimistic evaluation of the U.S. economy as long as investors believe that nothing will be done to reduce the deficit or debt. Loss of confidence can occur if the level of indebtedness becomes so large that investors believe the federal government must address the problem. It is impossible to predict at what point investor -11 Iwm Public Sector Consultants, Inc.
5 confidence will waver, although most analysts agree that the current deficit level has some effect on investment decisions. Although deficit spending permits the government to live beyond its means and indirectly allows higher levels of personal consumption and income, there are negative effects. Annual deficits are added to the public debt, on which interest must be paid each year, and this reduces government revenue available for other purposes. In addition to current interest payments, the growing debt itself must be paid at some point; this will reduce future levels of personal income and consumption It is arguably inequitable for future generations to pay so heavily for this generation's overspending. Some economists do not believe the federal budget deficit is a problem. In a recent commentary in Business Week (July 30, 1990), Paul Craig Roberts states that the deficit does not matter and presents supporting arguments from severd prominent economists. Robert Eisner, past president of the American Economic Association, calls the deficit "the nonproblem." A recent study by Harvard economist Robert J. Barro finds no connection between deficits and higher interest rates. In his latest book, Robert L. Heilbroner refers to the debt and the deficit as "fake alarms." Although it is debatable whether large deficits affect economic growth, it is clear that the large interest payments on the debt restrict budget flexibility and reduce funds available for needed programs. Whether deficit spending is wise in a particular year usually depends on the economic climate; a case often can be made for increasing government spending or lowering taxes to ameliorate the negative effects of a recession. The proportions to which the federal deficit and debt have grown, however, make the costs of future deficit spending and of ignoring the debt much greater than the benefits of continuing the policy. Our total indebtedness and propensity to overspend excessively each year have had the following negative effects. Faltering confidence in the U.S. economy is causing problems in international fmancial markets and making consumers wary of long-term investments. Our debt has grown to nearly 55 percent of annual GNP. Unless an effort is made soon to reduce this debt, the burden of doing so will fall on an ever-shrinking number of taxpayers as a larger and larger proportion of the country's population retires from the job market. Real interest rates are at historically high levels, which increases the cost of financing the debt and restricts government revenue. Surpluses in Social Security trust funds (resulting from 1983 amendments designed to address the problem that will occur when the baby boom generation retires) are being used to offset overspending. Continuing to finance deficits with payroll tax receipts will further jeopardize the Social Security system. The benefits of continued overspending (in terms of higher current consumption) pale compared to these negative effects. A PROPOSAL TO REDUCE THE DEFICIT AND DEBT The revenue needed to shrink the deficit could be raised by increasing existing federal taxes, cutting federal spending, or instituting a new tax. Neither a moderate increase in existing taxes nor a decrease in spending would be much help, however, in reducing the public debt. 11 IWm Public Sector Consultants, Inc.
6 The two major federal revenue sources are the personal and corpordte income taxes. The federal Tax Reform Act of 1986 broadened the base of both taxes and reduced maqghal tax rates. Because of the promises made at that time, many Americans would view a hike in the income tax rate at this point a$ a betrayal. Neither the Bush administration nor any successhl presidential aspirants are likely to support raising the income tax to reduce the deficit, although other taxes may be considered. Moreover, sufficient cvts in annual federal spending are unlikely given growing domestic spending needs. The end of the Cold War will allow defense cuts to be made, but these will not be large enough to solve the problem. If headway is to be made on reducing the deficit and retiring the debt, expenditures will have to grow at a slower rate, and revenue will have to be raised-most probably through a new source. We offer the following solution. Institute a national tax on consumption beginning in Start with a rate of one percent and raise it to 4 percent by The tax base should be broad, and very few exemptions should be allowed. Income-based refunds could be used to reduce the proportion of the consumption tax burden falling on the poor. Earmark a portion of the consumption tax revenue for reducing the current deficit and, later, for lowering the national debt. Restrict government expenditures by requiring that these (including interest payments) not exceed government revenues (net of the earmarked consumption tax revenue) each year after Allow the federal government to spend more than it receives in revenue in any year that there is a national recession or emergency (declared by a two-thirds vote Congress). A VALUE-ADDED TAX VERSUS A SALES TAX A national tax on consumption muld take the form of a national sales tax or a national value-added tax (VAT)? both fall on consumption. The major differences are in (1) the treatment of capital goods, (2) the collection process, and (3) the implications for intergovernmental fiscal relations; The differences between the two and the arguments for and against each are discussed below. The Treatment of Capital Goods Capital goods should be exempted from the tax.6 A consumption VAT allows an immediate deduction for the purchase of capital goods? whereas it is difficult to exclude these under a retail sales tax. Taxing capital goods under a retail sales tax is objectionable because it can result in multiple taxation of a given item and defeats the objective of a uniform tax burden on consumers. The Collection Process A retail sales tax is imposed at the final stage of the production-distribution process and is collected by the retailer, based on the final selling price. The VAT is collected at each stage in the productiondistribution process, based on the value added by each firm. Exhibit 7 illustrates the collection process for a 5 percent VAT. A raw materials supplier sells $100 worth of materials to a manufacturer and pays $5 in VAT. The manufacturing firm then sells its output to a wholesaling firm for $200. The manufacturing firm's VAT liability is $5, which is equal to the VAT due ($10) on its sales less the VAT paid ($5) by the supplier. The wholesaler purchases $200 worth of inputs from the manufacturer and sells $500 worth of output to a retailing firm. The wholesaler pays a VAT of %#= Public Sector Consultants, Inc.
7 EXHIBIT 7 Collection of a 5 Percent VAT Raw Materials Supplier Manufacturer Wholesaler Retailer Total Value of purchases Tax on purchases Value of sales Tax on sales Value added Value added tax (Tax on sales minus tax on purchases) $15 on the $300 difference between the VAT due on sales and the VAT already paid on pmhases. The retailer purchases $500 worth of inputs from the wholesaler, sells the final product for $700, and incurs a VAT liability of $10. Total value added is $700, and the total VAT paid is 5 percent of value added, or $35. This example also illustrates the near equivalency of the VAT and a retail sales tax. A 5 percent sales tax levied only on the retail price of $700 also would yield revenue of $35. Intergovernmental Fiscal Relations Some state and local officials are concerned that a federal VAT or national sales tax might make it harder for them to increase their sales tax. A VAT generally is viewed as a form of retail sales tax, and its use at the national level might affect public acceptance of higher state and local sales taxes. In a 1973 report, the Advisory Commission on Intergovernmental Relations concluded that a national VAT and a national sales tax would have similar effects on intergovernmental fiscal relations. The retail sales tax would be as direct an intrusion as possible; it is, after all, the tax instmment used by states and localities. Yet, the value added tax offers nothing salutary either....[it is,] in essence. equivalent to a retail sales tax confined to consumption goods with a singular diffaence being in method and nomenclature. As such, neither tax is likely to assuage fears of federal intrusion into the sales tax field8 How much a federal VAT intmdes on the revenue-raising ability of state-local sales taxes will be determined largely by two factors: rate and visibility. For example, at the relatively high rate of 8 percent, the portion of the VAT that is tacked on at the point of retail sale would reduce states' ability to raise their own sales taxes. Conversely, a VAT with the relatively low rate of 3 percent included in the retail price would have much less effect on states' sales taxing ability. The Michigan experience with the single business tax (a form of VAT) suggests that a VAT may not necessarily be viewed as a retail sales tax; thus it may not be seen as an intrusion into state and local taxing authority, particularly if the additive method is used and the tax is included in the price? Even it a national VAT were to use the tax credit method of ~alculation,'~ the effect on states' ability to use the sales tax is unlikely to be significant if the rate does not exceed 3 4 percent. ma- I W Public Sector Consultants, Inc.
8 Which Tax Is More Desirable? Which is the more desirable addition to the national tax system-a VAT or a sales tax? There are good arguments for each. Richard Lindholm lists a number of reasons for favoring the VAT.." If a retailer evades the retail sales tax, that revenue is lost; evading the VAT would mean losing only that part due on value added from the retailer, since the VAT is collected at several stages. A retail sales tax generally does not cover services, most of which are exempted from existing state and local sales taxation. The breadth of coverage is much less a problem with a VAT. Rather than exempting all services of one type, certain types of businesses (for example, small or labor-intensive firms) can be shielded under the VAT. A retail sales tax often levies a tax on capital goods. The VAT avoids this problem because the tax paid on these goods is deductible by each firm along the production process until the end-use is reached. Under the General Agreement on Tariffs and Trade (GATT), exporters can receive a refund on all VAT paid. The tax also can be levied on imports at the frontier. Used in this way, the VAT can encourage exports and discourage imports, improving the trade balance. The retail sales tax cannot provide these benefits. Exempting small businesses from the VAT would not result in the loss of all revenues from the entire production-distribution process. For example, only small manufacturing firms could be exempted. A national sales tax does not allow this flexibility. The U.S. Department of the Treasury notes that although the two taxes are economically equivalent in their purest form, there are administrative differences between the retail sales tax and VAT that tend to favor the latter. "In particular, a value added tax may be superior to a retail sales tax in freeing capital goods and other business purchases from taxation."12 Among those favoring a national sales tax is Charles McClure, who sees no economic difference between the two and prefers the sales tax for administrative reasons.13 He views the advantages of the sales tax as follows. State and local sales taxes can be piggybacked on a national sales tax, which would not be possible with a national VAT. A well-designed retail sales tax can promote tax consciousness: A direct tax on consumer goods might heighten awareness of the cost of government. Some observers of the European system believe that one weakness is the ease with which the VAT can be raised when revenue is needed. This is unlikely to be the case with a retail sales tax. A retail sales tax involves fewer taxpayers, resulting in lower administrative overhead. Public Sector Consultants believes that, on balance, a national VAT is preferable to a national sales tax mainly because a VAT would be less likely to intrude on state-local fiscal matters, would reduce taxation of capital goods, would provide trade advantages, and likely would be more acceptable to the public than a retail sales tax. Opposition from state and local officials can be deflected by sharing with these governments a portion of the VAT revenues not earmarked for federal deficit reduction. This would reduce public Sector Consultants, Inc.
9 the need for state and local governments to raise their own sale taxes if they need more revenue in the future. THE BASE OF THE TAX We recommend a broadly based VAT with only a few consumption items exempted. The broader the base, the greater is the revenue potential of the tax and the fewer are the distortions in consumers' purchasing decisions. Although a number of items could be exempted from the tax for administrative or social reasons, we recommended restricting these. Since the rental value of owner-occupied housing is extremely difficult and costly to calculate, it should be exempt for administrative reasons; it follows that all residential rent payments also should be exempt. Foreign travel, local transportation, and insurance and finance expenditures could be exempt for administrative reasons as well. Medical care, education, and religious and welfare expenditures could be exempt for social reasons. Assuming these exemptions, the remaining base in 1988 would have been approximately $2,158 billion. (See Exhibit 8.) FEDERAL DEFICIT AND DEBT REDUCTION The VAT proposed would raise approximately $23 biiion in 1991 (at one percent), $47 biion in 1992 (at 2 percent), $73 billion in 1993 (at 3 percent), and $100 biion in 1994 and each year thereafter (at 4 prcent). l4 A small portion of the revenue should be devoted to low-income credits, which should be equal to the amount of VAT paid by low-income individuals on the level of consumption necessary to maintain a EXHIBIT 8 Estimate of Value-Added Tax Base Using 1988 Levels of Expenditures (in billions of dollars) Total personal consumption expenditures Less: Plus: Sales of new housing Comprehensive value-added tax base Rent4 value of owper- q d tenantoccupied housmg (mcludmg farms) Medical care (including health insurance) Insurance and finance services (other than health insurance) Education Religious and welfare Net foreign travel Local transportation Other: food produced and consumed on farms, military-issued clothing. domestic services, and so forth TOTAL.Lam I w Public Sector Consultants, Inc.
10 minimum standard of living. In the recommended revenue allocation that follows, these credits have not been deducted. From 1991 to 1993, use all VAT revenue to reduce the federal deficit. Assuming a $200 biiion deficit in 1991 (before the extra revenue), this would reduce the deficit to approximately $57 biiion by In 1994, dedicate $57 biion of the VAT revenue to eliminating the deficit and the remaining $43 billion to reducing the national debt. After 1994, prohibit budget deficits (unless there is a national recession or emergency). Allocate half the VAT revenue to general government and half to reducing the national debt. (The portion earmarked for the debt would be used to reduce the deficit in times of emergency or recession) This means that the federal government would have about $50 biion more to spend each year after 1994 than it has from current sources and would eliminate the deficit by This plan could totally eliminate the national debt in about forty years, although that may not be wise. Reducing the debt will have a dampening effect on the economy, and it may be desirable to choose a certain acceptable level; once it is reached, the VAT rate could be reduced and/or the revenue used to reduce other levies (such as the corporate income tax), ensure the viability of the Social Security system, or build surpluses in other vital accounts. OTHER ASPECTS OF A NATIONAL VAT Aside from eliminating the federal deficit and eventually the debt, instituting a national VAT would have the positive effect of diversifying the nation's tax structure and reducing the relative importance of the federal income tax. A national VAT also would have some negative effects, the most important of which relate to prices, administrative costs, and equity. Prices A national VAT of 4 percent levied on the base we propose (about 75 percent of total consumption) probably would result in a one-time rise in the overall price level of about 3 percent. This would mean an increase in inflation of 3 percent (above the level that would have occurred without the tax) in the first year of the VAT. When the European countries instituted a VAT, the effect on prices was limited to the first year. We could expect a similar price reaction if the United States were to institute a VAT. Administrative Costs The U.S. Treasury estimates that administering a national VAT would require 20,000 additional employees and cost about $700 million per year. (Exempting firms with gross receipt below $50,000 could reduce this figure by about $200 million annually, at a cost of 2 percent of the tax base.) Administrative costs would have to be covered by nonearmarked VAT revenue or other federal revenues. Equity The most serious drawback of any consumption tax, whether on retail sales or value added, is that much of the burden falls on the poor unless adjustments are made in either the base or collection of the tax. A VAT without such adjustments would be regressive; that is, the amount of tax paid as a percentage of income would be greater at lower income levels than at higher income levels. This is because individuals with a low income consume a larger percentage of it than do individuals with a high income. Furthermore, 11 IWm Public Sector Consultants, Inc.
11 wealthier individuals spend a greater proportion of their income on nontaxable consumption items that would be exempted from the VAT. Adding a regressive VAT to the current federal tax system would reduce its overall progressivity. Some states ease the regressivity of their sales tax by exempting food and other necessities or by allowing an income tax refund for sales taxes paid by low-income persons. Exempting food and necessities is an inefficient way to reduce regressivity, since it benefits the wealthy as well as the poor. We propose that the national VAT reimburse low-income individuals in the amount roughly equal to the VAT paid on the consumption necessary to attain a minimum standard of living. The reimbursement effectively would reduce the VAT burden borne by low-income individuals and would be phased out as income rises. It would be administered as a credit against federal income tax liability, rewable to those below the income tax threshold. The U.S. Treasury estimates that if such a refund is phased out for those with income between 100 and 150 percent of the poverty level, the overall regressivity of the tax would be greatly reduced, and the revenue of the VAT would be decreased by only 5 percent. CONCLUSIONS Political discussions about the current fiscal situation typically pertain to appropriate debt ceilings, the magnitude of the deficit, and the effects on the economy, not whether an annual deficit or a large national debt is justifiable. The discussion should be broadened to touch on this question. We believe that unless expansionary fiscal policy is vitally necessary to the general health of the economy, deficits are not advisable. Their adverse immediate and long-term effects make it unwise economic policy to continue overspending. In addition, this generation should not have the license to spend future generations into debt. The national VAT and expenditure restrictions proposed here would help secure our future by reducing the deficit and the debt, while diversifjling and increasing federal revenue. Notes The federal budget deficit is the amount by which federal government expenditures exceed revenues each year. The national (or public) debt is the total indebtedness, including accrued interest, of the federal government. Whenever annual federal expenditures exceed revenues, that deficit is added to the national debt. These numbers do not include the cost of the savings and loan bailout, which is expected to be well over $500 billion during the next yem. When looking at the deficit and debt over time, the most appropriate measures are relative to GNP (the market value of all fmal goods and services produced in the economy in one year). Today's deficit of more than $200 billion is not as significant in today's $4 trillion economy as it would have been in the 1970 economy of $1 trillion. The Reagan administration inherited a manageable deficit of 2.6 percent of GNP, it also inherited a defense budget that had been declining during most of the Carter administration and a tax system that resulted in record tax revenue as a percentage of GNP. A valueadded tax is collected at each stage in the production process. Value added can be calculated in many ways, but it is simplest to visualize it as the difference between a fm's sales and its nonlabor purchases of inputs. Since the retail sales price of a good equals the combined value added during all stages of production (including the retail stage), a tax on value added at each stage will raise the same amount of revenue as a retail sales tax. Capital goods are those purchased by business to be used in the production process and not to be resold as output to consumers or other fms. A VAT is designed to tax output and not capital goods. Under a consumption VAT (hereafter referred to simply as VAT), businesses are not taxed on capital goods. Other types of VAT include capital goods in the base, but the consumption VAT is the type most often discussed in the United States and used in Europe. A pure consumption VAT would exclude all items not sold as output. In practice, such a VAT would exclude many investment purchases but probably would include many items (pencils, paper. chairs, and so forth) used in the production process. 1 Public Sector Consultants, Inc.
12 8 Advisory Commission on Intergovernmental Relations, The Value Added Tax and Alternative Sources of Federal Rtwenue (Washington, D.C.: 1973), pp. 81 and 84. I 9 Under the additive method, as used in Michigan's single business tax, a fm's value-added tax liability is d calculated by adding together the components of value added-wages, rent, interest, and net profit--and then applying the tax rate to that sum. 10 The tax credit method is used in the European consumption VAT. Ta liability equals the tax rate times gross sales less the tax rate times purchases made by fms. (See Exhibit 7 for an example of the credit method.) 11 Richard W. Lindholm, The Economics of VAT (Lexington, Mass.: D.C. Heath, 1980), pp U.S. Department of 'Ikasury, Tax Reform for Fairness, Simpliciry, and Growth, November Charles E. McClure, Jr., and Norman B. Ture, Value-Added Tar: Two Vis (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1972). 14 This assumes that consumption as a percentage of GNP would remain constant over time. The values are in real (ition-adjusted) dollars with a base year of PUBLIC SECTOR CONSULTANTS publishes PUBLIC SECTOR REPORTS, the BILL ANALYSIS SERVICE for HEALTH, the Health Policy Bulletin, and the Health Care Legislation Abstracts; offers strategic and tactical counsel and issue management for retainer clients; undertakes specialized research studies; provides public relations services; and, through its textbook division, produces research and reference works, including Michigan in Brief: An Issues Handbook and The Michigan Government Directory. Its principal consultants are Gerald A. Favman, Ph.D., Chairman and Senior Consultant for Public Policy Craig Ruff, M.PP., President and Senior Consultant for Public Policy William R. Rustem, MS., Vice President andsenior Consultant for Environmental Policy and Economic Development Robert J. Kleine, M.B.A., Senior Economist and Editor of PUBLIC SECTOR REPORTS Christine F. Fedewa, Director of Operations and Senior Consultant for Public Policy Michael French Smith, Ph.D., Director of Research and Senior Consultant for Marketing and Economic Development Donald A. Wheeler, M.A., FACHE, Director of the Health Care Division and Senior Consultant for Health Policy William E. Cooper, Ph.D., Senior Consultant for Environmental Science Linda Headley, Senior Consultant for Education and Environmental Policy David Kimball, Senior Consultant for Public Policy Peter Pratt, Ph.D., Senior Consultant for Health Policy and Editor of BILL ANALYSIS SERVICE for HEALTH Gerrit Van Cowering, Senior Consultant for Taxation and Revenue Policy Keith Wilson, Senior Consultant for Waterways Development Wilma L. Harrison. Senior Editor andresearch Associate Frances L. Faverman, Editor of the Health Policy Bulletin and Consultant for Health Policy Kimberly S. Gamer, Consultant for Public Relations Frances Spring, Economist Diane Drago, Conjerence Coordinator Harriett Posner, Editor and Graphic Designer Elizabeth Johnston, Editor and Community Service Projects Coordinator ma1 I W Public Sector Consultants, Inc
Michigan Expenditures and Revenues: Comparisons With Other States, FY 1988-89 by Frances Spring and Steve Genyk The U.S. Bureau of the Census recently released its annually reported data on federal, state,
POLICY BRIEF Visit us at: www.tiaa-crefinstitute.org. September 2004 The 2004 Report of the Social Security Trustees: Social Security Shortfalls, Social Security Reform and Higher Education The 2004 Social
CONGRESSIONAL BUDGET OFFICE U.S. Congress Washington, DC 20515 Douglas W. Elmendorf, Director June 6, 2014 Honorable Elizabeth Warren United States Senate Washington, DC 20510 Dear Senator: As you requested,
1 Supplemental Unit 5: Fiscal Policy and Budget Deficits Fiscal and monetary policies are the two major tools available to policy makers to alter total demand, output, and employment. This feature will
WikiLeaks Document Release February 2, 2009 Congressional Research Service Report RL34660 Federal Government Debt Collection: An Overview of the Treasury Offset and Federal Payment Levy Programs Gary Guenther,
CONGRESSIONAL BUDGET OFFICE U.S. Congress Washington, DC 20515 Douglas W. Elmendorf, Director June 4, 2014 Honorable Elizabeth Warren United States Senate Washington, DC 20510 Dear Senator: As you requested,
820 First Street NE, Suite 510 Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 email@example.com www.cbpp.org Revised October 11, 2007 THE ESTATE TAX: MYTHS AND REALITIES The estate tax has been
The Case for a Tax Cut Alan C. Stockman University of Rochester, and NBER Shadow Open Market Committee April 29-30, 2001 1. Tax Increases Have Created the Surplus Any discussion of tax policy should begin
Cash Versus Accrual Accounting: Tax Policy Considerations Raj Gnanarajah Analyst in Financial Economics Mark P. Keightley Specialist in Economics April 24, 2015 Congressional Research Service 7-5700 www.crs.gov
The National Accounts and the Public Sector by Casey B. Mulligan Fall 2010 Factors of production help interpret the national accounts. The factors are broadly classified as labor or (real) capital. The
Tax Reform in Kentucky Serious Problems, Stark Choices Institute on Taxation and Economic Policy June 2009 ITEP Institute on Taxation and Economic Policy 1616 P Street NW Washington, DC 20036 (202) 299-1066
HANDOUTS Property Taxation Review Committee Legislative Services Agency September 1, 2004 Criteria For Good Proposals for Property Tax Reform Dr. Thomas Pogue, University of Iowa DISCLAIMER The Iowa General
National Small Business Network WRITTEN STATEMENT FOR THE RECORD US SENATE COMMITTEE ON FINANCE U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON WAYS AND MEANS JOINT HEARING ON TAX REFORM AND THE TAX TREATMENT
CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE Percent 70 The Distribution of Household Income and Federal Taxes, 2008 and 2009 60 50 Before-Tax Income Federal Taxes Top 1 Percent 40 30 20 81st
820 First Street, NE, Suite 510, Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 firstname.lastname@example.org http://www.cbpp.org Revised April 4, 2001 COST OF TAX CUT WOULD MORE THAN DOUBLE TO $5 TRILLION
Defining Surpluses and Debt Politics, Surpluses,, and Debt Chapter 11 A surplus is an excess of revenues over payments. A deficit is a shortfall of revenues relative to payments. 2 Introduction After having
820 First Street NE, Suite 510 Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 email@example.com www.cbpp.org August 7, 2009 AN EXCISE TAX ON INSURERS OFFERING HIGH-COST PLANS CAN HELP PAY FOR HEALTH
03-Seidman.qxd 5/15/04 11:52 AM Page 41 3 An Introduction to Business Financial Statements In this chapter, we build on the basic knowledge of how businesses are financed by looking at how firms organize
Commentary: What Do Budget Deficits Do? Allan H. Meltzer The title of Ball and Mankiw s paper asks: What Do Budget Deficits Do? One answer to that question is a restatement on the pure theory of debt-financed
Tax System Challenges in the 21 st Century American taxpayers paid about $1.9 trillion in combined federal taxes, including income, payroll, and excise taxes, in fiscal year 2004. These taxes, along with
Statement by Dean Baker, Co-Director of the Center for Economic and Policy Research (www.cepr.net) Before the U.S.-China Economic and Security Review Commission, hearing on China and the Future of Globalization.
Congressional Budget Office s Preliminary Analysis of President Obama s Fiscal Year 2012 Budget SUMMARY The Congressional Budget Office s (CBO) Preliminary Analysis of the President s FY 2012 Budget released
The Benefits of a Fully Funded Social Security System By Nathan Taulbee I. INTRODUCTION The Social Security system, formally known as Old-Age and Survivors Insurance Disability Insurance (OASDI), began
Facts and Figures on the Middle-Class Squeeze in Idaho For hard-working, middle-class families all over the country, life during the Bush presidency has grown less affordable and less secure. President
CHAPTER 3 THE LOANABLE FUNDS MODEL The next model in our series is called the Loanable Funds Model. This is a model of interest rate determination. It allows us to explore the causes of rising and falling
Florida s Intangibles Tax: The Case for Repeal by Randall G. Holcombe DeVoe Moore Professor of Economics, Florida State University and Chairman, Research Advisory Board The James Madison Institute Policy
Copyright 2011 by Pearson Education, Inc. Chapter 14 Deficit Spending and The Public Debt All rights reserved. Introduction Since 2007, the ratio of the official real net public debt to real GDP has increased
Citizens for Tax Justice! 202-299-1066! www.ctj.org November 30, 2006 (6 pp.) An Analysis of Eliminating the Cap on Earnings Subject to the Social Security Tax & Related Issues Recently, there has been
THE MORTGAGE INTEREST DEDUCTION Frequently Asked Questions Prepared by the National Low Income Housing Coalition Updated April 2013 Owning one s home is a strong American value. Most Americans consider
For Release on Delivery September 13, 2011 at 2 p.m. The Role of Tax Reform in Comprehensive Deficit Reduction and Fiscal Policy Martin Feldstein Thank you, Mr. Chairman. I am very pleased to have this
Debt & Fiscal Balance Debt policy is effectively the result of government spending and tax polices. This section focuses on fiscal balance (the difference between annual revenues and expenditures), debt
820 First Street NE, Suite 510 Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 firstname.lastname@example.org www.cbpp.org Revised March 15, 2006 EXTENDING EXPIRING TAX CUTS AND AMT RELIEF WOULD COST $3.3 TRILLION
Ministry of Finance Chief Economist - Research, State Revenue and International Affairs June 2013 Forecasts of Macroeconomic Developments, State Revenues from Taxes and Revenue from Other Sources, 2013-2014
MACROECONOMIC ANALYSIS OF VARIOUS PROPOSALS TO PROVIDE $500 BILLION IN TAX RELIEF Prepared by the Staff of the JOINT COMMITTEE ON TAXATION March 1, 2005 JCX-4-05 CONTENTS INTRODUCTION... 1 EXECUTIVE SUMMARY...
Chapter 15 review Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Every hour, the federal government spends about a. $250 thousand. c. $250
02/10/2015 C h a p t e r 12 FISCAL BALANCE AND PUBLIC DEBT Public Finance, 10 th Edition David N. Hyman Adapted by Chairat Aemkulwat for Public Economics 2952331 Chairat Aemkulwat, Public Economics 2952331
2013 global economic outlook: Are promising growth trends sustainable? Timothy Hopper, Ph.D., Chief Economist, TIAA-CREF January 24, 2013 U.S. stock market performance in 2012 * +12.59% total return +6.35%
Celebrating Pork The Dubious Success of the Medicare Drug Benefit Dean Baker March 2007 Center for Economic and Policy Research 1611 Connecticut Avenue, NW, Suite 400 Washington, D.C. 20009 202 293 5380
Percent Tax Expenditures and Social Policy: A Primer Daniel Mandel What Are Tax Expenditures? Congress uses the tax code to promote a broad range of policy objectives. Rather than directly spend government
- 5 - Chapter 2 THE NATURE OF THE VALUE-ADDED TAX I. Introduction A value-added tax is a multistage sales tax that is collected at each stage or point in the production and distribution process. ~n a typical
Order Code 96-769 Updated January 24, 2007 Summary Capital Gains Taxes: An Overview Jane G. Gravelle Senior Specialist in Economic Policy Government and Finance Division Tax legislation in 1997 reduced
cepr CENTER FOR ECONOMIC AND POLICY RESEARCH briefing paper Defaulting on The Social Security Trust Fund Bonds: Winner and Losers Dean Baker 1 July 23, 2001 SUMMARY The United States government has never
Macroeconomics Machine-graded Assessment Items Module: Fiscal Policy Machine-graded assessment question pools are provided for your reference and are organized by learning outcome. It is your responsibility
Executive Summary The (LTFP) report is an update from the preliminary report presented in January 2009 and reflects the Mayor s Proposed Budget for Fiscal Year 2010 and Fiscal Year 2011. Details of the
Balance of Payments The Balance of Payments, the Exchange Rate, and Trade Policy The balance of payments is a country s record of all transactions between its residents and the residents of all foreign
APPENDIX B Updated Estimates of the Insurance Coverage Provisions of the Affordable Care Act In preparing the February 2014 baseline budget projections, the Congressional Budget Office () and the staff
1 Module C: Fiscal Policy and Budget Deficits Note: This feature provides supplementary analysis for the material in Part 3 of Common Sense Economics. Fiscal and monetary policies are the two major tools
Martin Feldstein the u.s. savings rate and the global economy The savings rate of American households has been declining for more than a decade and recently turned negative. This decrease has dramatically
HW 2 Macroeconomics 102 Due on 06/12 1.What are the three important macroeconomic goals about which most economists, and society at large, agree? a. economic growth, full employment, and low interest rates
LIFO-PRO, Inc. LIFO and LIFO Software Specialists 920 South 107 th Avenue, Suite 301 Omaha, NE 68114 (402) 330-8573 email@example.com www.lifopro.com April 15, 2013 Mr. Kevin Brady, Chairman Energy Tax Reform
Overview of Policy Options to Sustain Medicare for the Future Juliette Cubanski, Ph.D. Associate Director, Program on Medicare Policy Kaiser Family Foundation firstname.lastname@example.org Medicare NewsGroup Journalism
Reality Check Turning Gold into Straw How Huge Federal Surpluses Quickly Became Equally Massive Deficits ^ iwww.tcf.org A CENTURY FOUNDATION GUIDE TO THE ISSUES 1 Turning Gold into Straw How Huge Federal
GAO United States Government Accountability Office Report to the Ranking Member, Committee on the Budget, U.S. Senate January 2013 PATIENT PROTECTION AND AFFORDABLE CARE ACT Effect on Long-Term Federal
Revenue-Raising Options to Help Close Minnesota s Budget Deficits in FY 2011-13 Minnesota faces billion-dollar deficits in this biennium and the next Minnesota Needs a Balanced Approach to Solving Deficits
READING 11: TAXES AND PRIVATE WEALTH MANAGEMENT IN A GLOBAL CONTEXT Introduction Taxes have a significant impact on net performance and affect an adviser s understanding of risk for the taxable investor.
1. Summary Chapter 2: The public finances under Labour The evolution of the public finances since 1997 mirrors the first 12 years of Conservative governments after 1979: three years of impressive fiscal
Chapter 18 MODERN PRINCIPLES OF ECONOMICS Third Edition Fiscal Policy Outline Fiscal Policy: The Best Case The Limits to Fiscal Policy When Fiscal Policy Might Make Matters Worse So When Is Fiscal Policy
820 First Street, NE, Suite 510, Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 email@example.com http://www.cbpp.org April 10, 2002 OVERALL FEDERAL TAX BURDEN ON MOST FAMILIES INCLUDING MIDDLE-
FISCAL FACT Jan. 2016 No. 493 Details and Analysis of Dr. Ben Carson s Tax Plan By Kyle Pomerleau Director of Federal Projects Key Findings Dr. Ben Carson s tax plan would replace the federal income tax
PwC s Law Firm Services Congressional Proposals Requiring Law Firms to Report Taxable Income on the Accrual Method of Accounting December, 2013 Executive summary Proposals in Congress could fundamentally
32 Daniel Smith/Corbis MONEY for NOTHING The Case for Eliminating US Fossil Fuel Subsidies Special tax provisions subsidize US oil, gas, and coal companies to the tune of $4.9 billion a year but have little
Fiscal Policy chapter: 28 13 ECONOMICS MACROECONOMICS 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to
Macroeconomics Instructor Miller Fiscal Policy Practice Problems 1. Fiscal policy refers to changes in A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.
Order Code RS21992 Updated November 25, 2005 CRS Report for Congress Received through the CRS Web Extending the 2001, 2003, and 2004 Tax Cuts Summary Gregg Esenwein Specialist in Public Finance Government
Debt and Deficits David Rosen Grade Levels: 9,10,11,12 Document Type: Supplementary Materials Description: Examines the national debt and deficits, looks at their size and impact, and discusses various
GAO United States General Accounting Office Testimony Before the Committee on Finance, United States Senate For Release on Delivery Expected at 10:00 a.m. EST on Thursday March 8, 2001 ALTERNATIVE MINIMUM
820 First Street, NE, Suite 510, Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 firstname.lastname@example.org www.cbpp.org ADMINISTRATION TAX-CUT RHETORIC AND SMALL BUSINESSES By Joel Friedman September 28,
820 First Street NE, Suite 510 Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056 email@example.com www.cbpp.org Revised April 26, 2006 JOINT TAX COMMITTEE ESTIMATE SHOWS THAT TAX GIMMICK BEING DESIGNED
The Economic Impact of the Iraq War and Higher Military Spending Dean Baker May 2007 Center for Economic and Policy Research 1611 Connecticut Avenue, NW, Suite 400 Washington, D.C. 20009 202-293-5380 www.cepr.net
The U.S. Current Account: The Other Deficit By Craig S. Hakkio Considerable attention has been focused recently on the size and persistence of the U.S. budget deficit. Somewhat lost in the headlines is
Economic Growth and Government Size By Mark Pingle Professor of Economics University of Nevada, Reno and Mina Mahmoudi PhD Candidate University of Nevada, Reno Short Summary There is good reason to expect
OCTOBER 2013 THE POTENTIAL MACROECONOMIC EFFECT OF DEBT CEILING BRINKMANSHIP Introduction The United States has never defaulted on its obligations, and the U. S. dollar and Treasury securities are at the
Reasons for Congress to Keep the LIFO Inventory Method The last-in, first-out (LIFO) inventory method has been an important provision of the U.S. tax code for the past 70 years however the Obama administration
Statement of Andrew D. Pike * Associate Dean for Academic Affairs and Professor of Law American University, Washington College of Law before the Senate Finance Committee October 24, 2003 Mr. Chairman and
FISCAL Au 2008 No. 141 FACT The 2001 and 2003 Tax Relief: The Benefit of Lower Tax Rates By Robert Carroll Summary Recent research on President Bush's tax relief in 2001 and 2003 has found that the lower
Public Information Notice (PIN) No. 01/94 FOR IMMEDIATE RELEASE September 19, 2001 International Monetary Fund 700 19 th Street, NW Washington, D. C. 20431 USA IMF Concludes 2001 Article IV Consultation
Public Sector Program (RRP RMI 43321-1) A. Summary ECONOMIC ANALYSIS (Republic of the Marshall Islands: Public Sector Program) 1. The Republic of the Marshall Islands (RMI) gross domestic product (GDP)
Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services
C.D. Howe Institute Institut C.D. Howe PROPERTY TAXATION: REFORM OR ABOLISH? By Jack M. Mintz President and CEO C. D. Howe Institute And Arthur Andersen Professor of Taxation J. L. Rotman School of Management,
Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)
Tax Reform: An Overview of Proposals in the 112 th Congress James M. Bickley Specialist in Public Finance January 14, 2011 Congressional Research Service CRS Report for Congress Prepared for Members and