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Spending & Taxation; Debt & Deficit Reduction



This plank of the Platform deals with the critical issues of government spending, taxation, and deficit and debt reduction.


The Level of  Spending and Taxation Relative to GDP




In order to have a sensible discussion about the appropriate level of government spending and taxes we need to define terms and lay out some history.


All federal government revenues, including taxes for Social Security and Medicare have run a bit less than 20% of GDP, in recent years. (State and local government taxes and expenditures represent another, approximately, 17% of GDP.)


Despite rising expenditures for Social Security, Medicare, and Medicaid overall federal expenditures were at approximately the same level as federal revenues in the late 1990’s. This was true in large part because of the peace dividend from the end of the Cold War, which led to lower defense expenditures as a percent of GDP.


During the Bush administration, as a result of carrying on two wars, federal spending levels were significantly more than government revenues, resulting in federal deficits and a growing national debt. While the Bush era tax cuts are often cited as contributing to the growth of the deficit, they did not materially reduce the level of government revenue below this 20% threshold. The deficit and the national debt began to increase sharply at the end of the Bush administration because of the 2008 financial crisis and various responses to it.


In the last few years, federal government spending for all activities, including transfer payments like Social Security, Medicare, and Medicaid, peaked at somewhat more than 25% of GDP, partly as a result of various stimulus programs enacted in response to the 2008 recession. This level of spending resulted in a further ballooning of the federal deficit and the national debt. More recently, as a result of economic growth since the recession, expenditure levels have returned to approximately 20% of GDP. 


During this entire period the costs of Social Security, Medicare, and Medicaid have been steadily rising absolutely and as a percent of GDP. Given current demographic trends and increasing costs for medical care in general, everyone agrees that if we don’t do something, these programs will consume an ever-larger share of GDP.


At the serious risk of oversimplification, the debate over the budget, the deficit, and the national debt can be sorted out as follows:


Democrats used to be ( think of the Simpson-Bowles proposals) willing to cut government spending somewhat, but only if the Republicans would agree to increase the share of GDP that is taken in the form of federal taxes and only if these increased taxes came from “the wealthy.”  The Democrats have been a bit vague about who is “wealthy” sometimes talking about “millionaires and billionaires” but making proposals that affect those with incomes of $200,000 or $250,000. As a factual matter, significant increases in revenues cannot come from taxing only “millionaires and billionaires,” we don’t have enough of them. Sustaining anything like the current size of the government, without making material changes in the entitlement programs, would require higher taxes for the middle class, which is where the money is. Most of the Democratic presidential candidates in 2020 seemed to have either no concern for the economic impact of higher deficits or believe that they can "soak the rich" to pay for their various government benefits such as free medicare for all, free college education, college loan forgiveness, and reparations for slavery, to name just a few.


The Republicans position is that higher taxes will only further reduce economic growth, increase unemployment, lower tax revenues and increase the size of the deficit. The Republicans used to feel that the way out of the deficit was to reduce government spending. The Republicans now appear to be arguing that if we reduce regulation and taxation the private sector will grow rapidly, reducing unemployment, increasing GDP and raising tax revenues reducing the deficit and ultimately the national debt.


Both parties appear to have abandoned any support for reducing government spending. 


The Position of the New Independent Party on the Level of Spending and Taxation Relative to GDP


We support a long-run target level of federal taxes and spending, including entitlement programs, at about 20% of GDP. This is roughly the level that prevailed prior to the 2008 economic crisis, but it is a challenging target, nonetheless, because of the projected rapid growth of spending for entitlement programs like Social Security, Medicare, Medicaid and the ACA (ObamaCare). 


We view this 20% cap on federal spending and taxation as a policy target rather than a legislatively imposed limit, since one congress cannot constitutionally bind a future congress and since getting a constitutional amendment on this issue seems politically impossible. We also recognize that with no change in entitlements and other programs maintained at current levels federal spending will reach about 35% of GDP by the middle of the century just based on current demographics. Our hope is that we can find a way of controlling the per capita cost of these entitlement programs so that when the baby boom generation passes federal government spending levels can revert to around 20% of GDP.


As a side benefit, tying total spending and taxes to GDP would give those who want to see increased government expenditures a stake in seeing the economy grow and in making sure that the government operates efficiently. 


A Proposal for a More Economically Efficient Tax System


We believe that, while the U.S. tax system should remain progressive, the U.S. tax rates on both personal and corporate income should be at or near the lowest levels in the developed world. 


Lower Personal Income Tax Rates and Broaden the Base by Simplifying the Code.


We feel that the temporary changes in the personal income tax rates embedded in the 2017 Tax reform law should be made permanent. We would actually support lower marginal tax rates on the basis of economic efficiency but given the magnitude of the federal deficit and the current political climate on these issues we would not press for further lowering of federal income tax rates.

We would support the elimination, or reduction, of as many tax exemptions, deductions, and credits as possible. This includes eliminating or scaling back the deductions for home mortgage interest and charitable deductions.  Simplification of the personal income tax code will lower the cost of tax compliance and reduce the incentive for interest groups to attempt to influence the political process to get favors written into the code.


Abolish the Alternative Minimum Tax

We support abolishing the Alternative Minimum Tax. If the changes we are recommending for personal income taxes were adopted the original purpose for the tax would disappear. In the absence of significant exemptions, deductions and credits, individuals with significant income would pay significant taxes.


Maintain the Current Estate Tax


The estate tax represents a form of double and, sometimes, triple taxation. The tax laws changes in 2018 raised the exemption to $11.2 million for an an individual and $22.4 million for a couple. This change expires in 2025 and the estate tax reverts to exemptions of $5 million ($10 million for a couple), indexed for inflation, and a top marginal rate of 35%. We support allowing the 2018 changes in the estate tax to expire in 2025 or setting some new limit that would be a politically acceptable and permanent compromise on the issue.


The most economically efficient approach would be to abolish this tax, because so much time and money is wasted attempting to circumvent it. However, we do not believe that abolishing the tax is politically feasible, so the next best alternative is to set relatively high exemptions so most people can ignore the tax. We also believe that settling the issue and indexing the exemptions would provide stability so that estate planning could be conducted without ongoing uncertainty.


Add New, Economically Efficient, Sources of Tax Revenue

Broadening the base of the tax code, by eliminating exemptions, deductions and credits, will  not provide enough revenue to offset the expected impact of raising expenditures of existing entitlement programs. We therefore propose three additional sources of tax revenue. The common theme of these proposed taxes is that those who impose costs on society should compensate society through taxes that reflect these costs.  In some sense these taxes are economically ideal because, by definition, they do not inefficiently distort incentives for economic activity. In fact they create incentives for individuals and firms to act in a way that reflects societies interests.


Externality (Sin) Taxes


It is, in general, a good idea to tax things that you would like to discourage rather than things you would like to encourage. As a consequence, we support so called, “sin” taxes on cigarettes, alcohol, gambling, pollution, green house gases, sweetened drinks that contribute to obesity, and a broad based tax on oil consumption described in the section on "Energy Policy."


The term "sin tax" should not be taken to imply a moral judgment. The correct economic term is an externality tax. Externalities are said to exist when one person's consumption of a good or service imposes costs (or benefits) on others, not directly involved in the transaction. Pollution is the classic example.


Too Big to Fail Tax


Analogously, we believe it makes sense to impose a tax on large financial institutions. The level of this tax should be a function of the scale of the company and it should be inversely related to the company's financial reserves. These financial institutions could avoid the tax entirely by breaking themselves up or by de-leveraging. These companies would have to choose between reducing the "too big to fail burden" that they impose on the rest of society through size and leverage or compensating society for it. We believe this is a better approach than regulatory intervention to break these institutions up.


User Fees


We also support the increased use of user fees such as highway tolls, entrance fees to national parks, and fees for other government services. We believe that many government bureaucracies should be fully self-supporting such as the Post Office, the Patent Office, and the Food and Drug Administration. Such fees, where practicable, place the financial burden of government services directly on the primary beneficiaries. These fees should never be more than the cost of providing these services, since they are meant to recover the costs of these services and not to discourage their use.


What We Would Not do in Terms of Federal Taxation

No Hidden Taxes


We believe that the federal government should not transfer taxation to the state level by expanding unfunded mandates for state spending. We would, also, oppose "implicit taxes," such as requiring employers to provide benefits to employees, without the money ever showing up in the federal treasury.


No National Sales Tax or Value Added Tax


We would oppose the use of a national sales tax or value added tax because they reduce the progressivity of the tax system to no good end. Consumption is not a bad thing. It is, in fact, the ultimate purpose of all economic activity.


For reasons that will be explained later related to maintaining the progressivity of the tax code we would retain the Earned Income Tax Credit and the Standard Deduction. It would be our expectation that the changes described above would result in far more people using the Standard Deduction. Some of this was accomplished with the changes in the tax code in 2017. 


We Would Not Propose a Flat Tax


The Flat Tax, sometimes called the Fair Tax, is an intriguing idea. It would be far simpler to administer and more economically efficient than even our own plan. Unfortunately, it would have the effect of significantly increasing the after tax income of the very wealthy. We view this as politically unachievable regardless of its merits.


Debt and Deficit Reduction


The growing national debt threatens future economic growth and the ability of the government to adapt to changing economic and national security emergencies.  It also threatens the ability of our government to provide services such as Social Security and Medicare that individuals have been led to believe they can depend upon.


The Need for Gradual Action to Start Soon


The debt and deficit problems can best be solved slowly, but that can only be done if we begin to solve the problem in the near future. Therefore we favor a policy of gradual deficit reduction so that we can begin to get the problem under control as quickly as possible, and thereby avoid draconian changes in public policy later on.


Proposals for Reducing the Deficit and, Eventually, Reducing the National Debt


We agree with the Republicans, that higher taxes on work, investment, and savings would be counterproductive at this time. We believe that by broadening the base and simplifying both the corporate and personal tax codes we can keep these tax rates low and provide incentives for investment, work and savings that will spur economic growth and reduce the deficit.


Unfortunately, this will not be enough to begin reducing our national debt. We therefore have proposals for curtailing the rate of growth in entitlement spending (see Social Security and Health Care), for reducing spending in most other areas of the federal budget, and for raising tax revenues in ways that don’t distort the incentives for work, investment, and saving. 


Is the new tax system fair?


The new, economically efficient, sources of tax revenue listed above would shift the burden of taxes away from wages, savings and investing and toward those in society who through their decisions impose burdens on the rest of society.


We think this approach has, at least, an equal claim with "progressivity" for being ethical. For example, if society is going to take up the burden of subsidizing medical care for all citizens (see the Health Care section), society has a vested interest in the health habits of its citizens and therefore has the right, perhaps even an obligation, to tax bad health habits. Similarly, if scale and leverage make it more likely that taxpayers will have to rescue failing financial institutions, it is only reasonable that these institutions should be taxed in proportion to the degree they impose this burden on society.


Also, a more extensive use of user fees will place the burden of government services more directly on the primary beneficiaries. This, too, seems only fair.


Is this system regressive? Absolutely not. The overwhelming majority of taxes will still be collected from the upper-middle and upper income groups. Is it less “progressive” than the existing system? Probably. But the fairness of a tax system should not be judged solely by its degree of progressivity. 


The small loss of progressivity associated with this approach also serves a larger purpose. We belive it is unwise to have a tax system in which any group of citizens pays little or nothing for government services. Such a system only encourages those groups, wholly insulated from the costs of government, to prefer too much of it and those groups paying a disproportionate share of the cost to prefer too little of it.


The proposed system will ensure that everyone, or nearly everyone, pays at least some of the burden of running the federal government, either directly or indirectly. As a consequence, we are more likely to get to a meeting of the minds as a society on the appropriate role of the federal government in our lives.

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