What Does the Government Shutdown Mean? That We're Not Focusing On Real Tax Issue

Don’t you just love this time of year? The leaves are changing colors, the air is crisp, and Washington is fighting another fiscal battle. Unfortunately, the annual signs of autumn are now accompanied with the Democratic vs. Republican budget showdown. Republicans voted to defund Obamacare, the president has refused to negotiate on raising the debt limit, and our government shut down Tuesday.  How can anyone doubt that the ever-elusive “grand bargain” will never happen?

What gets lost in all this political posturing is the fact that the United States is in desperate need of deficit and tax reform. The last time Congress enacted a comprehensive tax reform, Top Gunwas still in theaters. For those of us too young to remember, the year was 1986, and the president was Ronald Reagan. Democrats and Republicans in Congress worked together with President Reagan to pass the Tax Reform Act of 1986. In today’s Congress that sort of compromise and bipartisanship is unheard of. The Tax Reform Act of 1986 helped propel the American economy forward, paving the way for the boom of the 1990s. Our nation needs a tax code for a 21st century economy.

My goal is to borrow ideas from both sides of the political spectrum in order to find common areas where compromise can be made, and the Tax Reform Act of 1986 will be my main reference for policy ideas.  

President Reagan and Congress raised the maximum long-term capital gains rate from 20% to 28% and lowered the maximum ordinary income tax rate from 50% to 28%. They did this based on the principle that equal incomes should pay equal taxes. This principle should play a major role in any current discussion of tax reform. Is it fair that Warren Buffet pays a lower effective tax rate than his secretary?  A majority of Americans do not think so. Recall the uproar during the 2012 election over the revelation that Mitt Romney paid an effective tax rate of 14%. Since the wealthy receive most of their income from capital gains, and not ordinary income, it is only sensible they pay a similar rate. 

Today, the top capital gains rate (20%) is about 20% lower than the top income tax rate (39.6%). Many economists may argue that this is necessary to encourage investment by the wealthy. This may be true, but there is definitely room for Congress to raise capital gains taxes while still creating incentives for investment. One way to promote investing is to revive a 1985 proposal to index capital gains to inflation, which would provide a tax break to investors. For example, if inflation is 10% during the time one owned an asset, then the first 10% of capital gains would be tax-exempt.  This is just one of the numerous strategies that Congress could use to promote investment while closing the gap between capital gains and income taxes.

Increasing the capital gains tax serves as a positive step towards bringing more equality into our tax code. For those deterred by rhetoric about the battle of the 99% versus the 1%,  a higher capital gains tax is a more sensible, moderate way to reduce some of the tensions created by this perceived income inequality. Currently, the long-term capital gains rate is the same 20%, whether you make $1,000 or $1,000,000 in gains. A progressive capital gains rate (maybe one that mirrors the income tax brackets) may be another innovative policy Congress should consider.

America's Infrastructure Crisis

             Investment in infrastructure creates more “bang for our buck” than any other type of government spending.  A study from the San Francisco Federal Reserve found that, on average, each dollar of infrastructure spending increased state GDP by at least $2 dollars; more than a 100% return on investment. 

            As President Obama mentioned in the State of the Union last month, Americans continue to drive over more than 60,000 structurally deficient bridges everyday.  The lack of investment in infrastructure has left us in a crisis.  In 2002, American infrastructure ranked 5^th globalyl; by 2012 we were 25^th, behind countries like Saudi Arabia, Barbados, and Spain to name a few.  The American Society of Civil Engineers claims that without investing an additional $157 billion per year in infrastructure, the United States will lose over 3 million jobs and trillions of dollars in GDP by 2020.  And we thought the $85 billion sequester was bad?

            We must close our infrastructure gap to stay competitive.  Today, China has over 20,000km of high-speed rail; compared to our one track.  The port of Shanghai, handles more containers than the eight largest US ports combined.  Sitting back and allowing our nation to fall further behind should not be an option.

            We can choose to elect representatives who will maintain the status quo; who will not reform the entitlement spending that is bankrupting our nation.  Or we can elect individuals that will make the necessary investments for our country to succeed.  For the first time, this past election, more millenials (18-35) voted than senior citizens.  As a generation, we must find our voice and make it heard in Washington.  We must get out and demand bipartisan solutions to our nations problems and investments in our future!

Investing in Growth

            The word on everyone’s mind is sequester.  Turn on the news, the radio, or pick up a magazine and you will see it.  The sequester is a series of indiscriminate spending cuts to lower our nations budget deficit.  It will cut government programs across the board; excluding entitlement spending (the true cause of our debt crisis).  Entitlement spending requires more and more of our nations budget each year and yet our leaders in Washington refuse to discuss actual reform.  President Obama has proposed to base future entitlement payments on chained-CPI, which will save a substantial amount of money.  However, this does not address the fundamental problems with Medicare and Social Security (high medical costs combined with an aging population). 

            Even better, the sequester is a manufactured crisis; a result of Washington’s inability to compromise and lead our nation out of a weak recovery.  The purpose of the sequester was to force Democrats and Republicans to work together for real reform.  Who in their right mind would allow these indiscriminate budget cuts?  Our leaders in Washington would HAVE to make a deal before the sequester comes into effect.  Once again the American people have been let down. 

            With all this talk of spending cuts, one key aspect of our recovery is lost in the noise.  Where is the discussion of growth?  How will Washington help the American economy prosper in the 21^st century?  We might be able to cut our way to lower deficits, but we cannot cut our way to more economic growth.  The best way to increase revenues and decrease our deficit is to increase the taxable base.  What better way to increase revenues, then through growth inspired policies?  The faster the economy prospers, the quicker a solution to our debt will emerge. 

            Today’s low interest rate environment puts us in a unique position to invest in our future.  With interest rates at record lows we can borrow and invest to help our nation prosper.  But we must act now!  If the FED’s minutes this week showed anything, it was the fact that interest rates will not be low forever.  Washington’s fiscal policy needs to compliment the FED’s monetary policy. 

            Now some people may argue that the government has tried and failed to steer the economy in the right direction.  They will point to the trillion dollar deficits of the past four years and failed investments in companies like Solyndra and A123.  However, I beg to differ.  Imagine what our economy would look like today if the government spent trillions on research and development, education, and infrastructure rather than bailing out big banks.  What we need today is a smarter government that invests its limited funds efficiently; not a smaller government that you can  “drown in a bathtub”. 

             Like it or not the government plays an instrumental role in steering the economy.  It is time to move beyond the ideology of how we would like our government to be and accept the reality of what government is.  Washington has played an important role in the economy for generations.  President Eisenhower, a republican, invested in America’s infrastructure and help build the interstate highway system, which revolutionized commerce in our nation.  The Apollo program provided advances in technologies ranging from kidney dialysis, to semi-conductors, to athletic shoes.  And we should never forget that the United States Military played an instrumental role in developing ARPAnet, the precursor to the Internet. 

            The American economy is revved up and ready to go; we just need Washington to clear us a path.  Will they decide for a short-term Band-Aid or real investment in our future?  Will they maintain entitlements for the older generations or provide a future for the younger generation?  It is time for millennials to make our voice heard in Washington.  Our government needs incentives to focus on long-term solutions.  It is time for us to stand up and demand a prosperous future!