Wednesday, November 10, 2010

Balancing the Budget

It looks as though our move toward austerity (balanced federal budget) will be in the form of massive spending cuts and tax cuts. The early proposal from the bipartisan committee comissioned to balance the deficit by 2015 calls for cuts in Social Security, income taxes, and corporate taxes. The tax cuts would also greatly reduce the progression of the tax code (from 8% to 23% down from 10% to 38% on income taxes) furthering our growing income inequality.

The Bowles-Simpson plan

It's not likely this early proposal will pass, but some components of it might. The reduced progression of income taxes is worrysome as income inequality is a growing problem magnified by the current recession.

I don't think balancing the budget should be a priority at the moment. Government spending and taxation don't work like many think they do (see here and here for more), and this misperception could lead to disastrous results. I think our best bet is a payroll-tax holiday. This is the flat 15% (7.5% employee, 7.5% employer obligation) tax on all payrolls that goes toward Social Security and Medicare. Government need not get involved in messy and inefficient spending, tax cuts would boost aggregate demand, and when we start to see the reapplication of our unused capital and labor, then we can worry about balancing the budget and cutting wasteful spending.

UPDATE: Full Proposal can be found here.

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