With considerable justification the Democrats have been gleefully pleased with last Tuesday's election events and been pointedly stating that Republicans have no hope of future electoral success.[1] President Obama has been re-elected and the Dems have managed to retain control of the Senate. And for what it's worth, the Dems filled 2 more seats in the House. This is both a relief and good for the USofA.
Nevertheless, it's entirely understandable why the President hasn't been shouting "gotcha" from the Oval Office. As he properly mentioned in his victory address, there's still a lot of work to do. Most immediately, this political work involves spurring the country's economic growth in a more balanced and sustainable manner.
The President and Republicans will need to first resolve the December 31st "fiscal cliff." I hope Mr Obama will not now begin actual negotiations with John Boehner about the Cliff. The Cliff's curtailments are large, over $650 billion. Unsurprisingly, the Congressional Budget Office has stated the obvious, that if such spending reductions and tax increases are allowed to remain in place for a while, they could drag the economy back into another recession. So there are strong incentives for a political agreement to be forthcoming promptly.
But the President should not negotiate the Cliff; he should use the Cliff to negotiate a broader agreement to foster sustainable and balanced growth. Negotiating in mid-November would diminish the President's leverage, which will only grow as the clock keeps on ticking towards New Years. Instead, he should continue to make clear public statements emphasizing his flexibility and absolutely adhere to increasing taxes on the rich and wealthy. The House Republicans, despite their flimsy denials, are in a self-constructed cage with nefarious help from folks like Grover Norquist. They should not quickly escape the consequences of being caged in by unsuitable policy and dogmatism that lost them the election. And the President should take full advantage of this.
I recommend that President Obama forcefully support a quartet of economic actions that will produce needed economic growth, reduce of our structural deficit and detour the Cliff. These actions are presented below in my November 8th letter to the President. Will the Democrats and Republicans have to make some compromises for this agreement to be successful? Yes, as my letter illustrates. The rich/wealthy must pay more tax, education must be improved and entitlements must be more means-based.
If Republicans remain intransigent (not an unlikely possibility), Mr Obama should be fully prepared to jump off the cliff, let the Bush tax cuts expire and have the sequestered budget reductions proceed. No worries, he's got an election victory and broad public support to act as his parachute. In other words, please Mr President don't blink before the clock strikes 12 on New Year's Eve unless you have received an acceptable and binding agreement from Mr Boehner and Mr McConnell to resolve the nation's broader economic challenges. This Cliff is made for you Mr President and it can be the opportunity that fosters our nation's longer-term economic progress. Here's my letter.
November 8, 2012
President Barack Obama
1600 Pennsylvania Ave., NW
Washington, D.C. 20500
Dear President Obama:
First, congratulations on your impressive re-election win yesterday. Now you are facing the challenge of moving our macroeconomy forward to promote both greater growth and greater equity. This letter offers several ideas about how you (and Congress) can accomplish this.
Like others, I believe your campaign's economic goals are correct; the US needs to increase our economy's growth in a sustainable, equitable fashion that benefits all citizens, not just the richest and wealthiest. I believe sustainable and equitable are necessary descriptors for any macroeconomic policy objectives you may be considering.
I hope you give serious thought to the following quartet of macroeconomic policy actions that I propose for legislation that Congress should pass and be executed by you by Feb. 28th, 2013. I believe these actions will get the US moving in the right direction and involve everybody (including you and me) making changes and sacrifices needed to create this essential macroeconomic re-balancing.
These actions will promote broad gains from higher, fairer GDP growth. As you know, returning to substantive and balanced economic growth will resolve many issues we are now facing as a nation. Increased growth is the most effective antidote for elevated unemployment, middle-class income stagnation and lack of consumer and business confidence.
This quartet of actions focuses on achieving two important, inter-related goals: (1) improving the economic well-being for the majority of citizens (not just the top 1%); and (2) encouraging the GDP to grow more sustainably, at least 3.2% per year. Here are my 4 fiscal policy actions.
1. Improve economic fairness. (A) Individuals with annual gross incomes exceeding $250,000 will be subject to a minimum Federal tax rate of 35% on all income, regardless of source - the current effective tax rate for many wealthy people who earn most of their income from investment returns (rather than wages) is in the range of 14-20%. (B) The social security (FICA-payroll) tax will apply to all earned income, and not be limited (as it is now) to the first $110,100 earned, with no FICA tax applied thereafter. This needed change will accomplish two important objectives, provide more funding for Social Security (see #2 below) and require those most able (richer tax-payers) to pay more for this keystone program. (C) Payroll taxes for employees and independent contractors with incomes less than $70,000/yr (roughly the US median family income) will be cut by 3% for up to 2 years or when the unemployment rate is 7% or below. (D) Salaries and expenses of Congress members and the President will be immediately reduced by 8.1% (see below). Starting Jan 1, 2014, these leaders' salaries will be adjusted yearly by the annual change in median US household income. What's happened to the incomes of Joe and Jane America will equitably happen to our leaders as well. This adjustment will provide a modest fiscal incentive for public leaders like you to create policies that actually increase median income, something that hasn't happened in too long a time. [US real median household income in 2011 was 8.1% less than real median income in 2007.]
2. Remember Sandy: enhance environmental quality, now. Beginning October 1, 2013, the Federal government will institute a national carbon consumption tax. This charge will apply to all fossil-fuel usage that produces air and/or water pollution that is subject to EPA air- and water-quality standards. My proposed tax on fossil fuel usage would be in proportion to the fuel's carbon content and no lower than $100/ton of CO2 produced. The carbon charge will be annually adjusted using the CPI energy cost index. This tax's potentially regressive impact on lower-income people will be reduced by providing an income tax credit (from funds received from the carbon tax) to families whose annual income is 200% or less of the poverty line. [In 2012, the annual income for a family of 4 people earning 200% of the Federal poverty line is $46,100.] Twenty-eight percent (28%) of revenues from the tax will be spent on research and development for non-fossil technologies (e.g., solar, wind, geothermal). [This charge will provide significant economic incentives for fossil-fuel users to switch to greener technologies.]
3. Reduce entitlement program costs fairly. Medicare and Social Security benefits will be reduced by 4% for all people earning more than $250,000/year, by 2% for people earning less than $250,000 but more than $70,000, and no reduction for people earning less than $70,000. In addition, minimum qualifying retirement age for Social Security will be increased by two (2) years starting Oct 2013. [Federal, state and local governments' expenditures on pensions and health care represent 13.6% - $1.96 trillion – of all govt expenditures, the single largest (and fastest growing) type of govt spending. These expenditures are a principal cause of the nation's structural deficit. They need to be trimmed to promote long-term fiscal health and growth.]
4. Implement fiscal policy actions to promote durable economic growth. (A) The Dept of Education will coordinate $50.4 billion of increased spending to invest in teaching and improve the effectiveness of public K-12 schools and public two- and four-year colleges-universities in qualifying states. To qualify, states must first commit to increase their public education funding by at least 5% based on their 2010 public education expenditures. The cost of these government education expenditures will be partially balanced by imposing a 0.03% (a rate of $3 per $10,000) financial transactions tax effective Feb 1, 2013. As Nelson Mandela correctly observed, "Education is the most powerful weapon which you can use to change the world.” [This quite tiny tax has been termed by some the "Robin Hood" tax. It could raise $35B in tax revenues per year. Improved public education will magnify our citizens' economic prospects.]
(B) The Dept of Commerce will administer $40.2 billion of spending to upgrade US internet infrastructure (II). This will include requiring telecommunications and internet providers to install 4G Wi-Fi and broadband fiber-optic cable directly to consumer's residences during the next 30 months. These expenditures will partially fund this needed electronic infrastructure investment by private providers. Internet providers will receive a 5% investment tax credit (ITC – a type of subsidy for business investment) on this new investment to encourage telecommunications/internet providers to implement these needed improvements. This funding will be allocated based on the 2010 population of each state and its population density; the more populous and dense the state, the more funds will be proportionately allocated. With these subsidies, individual customers' internet service charges will not increase more than the annual change in the CPI over the next 3 years. The cost of these government II expenditures will also be partially financed by increasing the Federal Universal Service Charge (telephone) tax and the FCC User Fee by 5%. [US "data highways" are in woeful shape; our internet speeds rank 26th in the world, just behind Hungary. Overall, US speeds are only one-quarter as fast as the top-ranked nation, South Korea. We must do better if we want domestic commerce to grow substantially during the coming decade.]
Thank you.
Sincerely yours,
Bruce A. Smith
[1] The Dems can be forgiven for their glee, but will do well to remember that politics is always kaleidoscopic and changing; just like life in general, nothing is permanent.
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