On New Year’s Day, the Senate and House passed a “fiscal cliff” deal. The terms of the deal contain some good parts. But economic stimulus and job growth issues were largely ignored.
First, the agreement brought positive things. For the first time since 1990, a significant number of Republicans voted to raise taxes. The top income tax rate for the richest l percent of the population climbed from 35% to 39.6%. The estate tax went up marginally, and taxes on capital gains and dividends also increased a bit.
For struggling American workers, unemployment benefits were extended for a year. Five year extensions of tax boosts included the child tax credit, expanded earned income credit, and refundable tuition tax credits. The major social programs, Social Security, Medicare, and Medicaid, were not touched. Unfortunately the expiration of the payroll tax cut adds two percent to every working family’s taxes.
Tucked inside the last-minute fiscal cliff package were more than a dozen tax loopholes, many of which will benefit Wall Street financial firms and some of the nation’s largest corporations. Here are three of the more egregious of these subsidies. First, corporations can book U.S. profits in overseas, tax-free bank accounts. Second, U.S. multinationals pay no taxes on income earned by companies they own abroad. Third, businesses earning interest on overseas lending can defer U.S. taxes on that income indefinitely.
The fiscal cliff deal made no provision for dealing with other rapidly approaching cliffs: the postponed sequester (automatic cuts in domestic and military spending), the return of the debt ceiling, and the expiration of the continuing resolution to fund the government. This sets up another confrontation between the Obama administration and House Republican deficit scolds. These Republicans want low taxes for the wealthy, cuts in domestic spending, smaller government, and deregulation.
The media casts our biggest problem as excessive spending and the resulting budget deficit. So the debate centers on what to cut and how much to cut, a wrong-headed deficit hysteria. Federal deficits as a percentage of the total economy are dropping, and non-military government spending relative to the size of the U.S. economy remains the smallest of any other rich nation.
Rising government spending and declining revenues are mostly consequences, not causes, of the recession. You can’t fix the debt without fixing the economy. Deficit reduction will slow the economy further rather than fixing it as is evidenced by the austerity programs in Europe.
Our economy leaves working people behind while corporate welfare races ahead. Corporate profits soar while wages and other labor compensation decline. The median wage, adjusted for inflation, continues to fall even though the economy grows.
Just trimming the deficit fails to address the real problems of mass unemployment, stagnating wages, increasing insecurity, and rising inequality. We have a backlog of 12.2 million jobless workers looking for work, with additional millions too discouraged to even look. Job growth averaged 155,000 in November and December of last year, a rate half of what we need for a robust economy.
At a time when interest rates for borrowing are rock bottom, we should fund rebuilding and modernizing our crumbling infrastructure. Insourcing manufacturing, growing overseas trade, adding education programs, using clean energy, and investing in research and development also promote economic development. Reducing inequality can be done in several ways: raising the minimum wage, empowering workers to organize and bargain for a fair share of the productivity and profits they help to generate, limiting perverse CEO compensation schemes, and levying a tiny financial transaction tax.
Job growth and wage growth should be the central focus of economic policy, not deficit reduction. In short, we need stimulus spending, not austerity gutting.