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Deborah Cannada, Librarian - West Side Elementary School, Charleston, WV.

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Time for Truth on Jobs, Deficits and Taxes

March 2, 2011

The people most eager to proclaim themselves as deficit hawks are hypocrites, and the current congressional debate over deficit reduction is essentially fraudulent and runs the risk of doing real damage to our economy.

It is often said that “everything must be on the table” and “everyone has to sacrifice” if we are to bring down the deficit.  But not everything is on the table and not everyone is being asked to sacrifice.  In fact, there is little in the current debate that should bring a frown to the faces of millionaires such as Lloyd Blankfein of Goldman Sachs, Rupert Murdoch of Fox Broadcasting or Jamie Dimon of JP Morgan Chase.

As recently as three months ago, Republicans in Congress were demanding—and getting—a two-year extension of tax cuts for the richest 2 percent of Americans, which will increase the federal budget deficit by $100 billion.  Now congressional Republicans want to make up for this budget shortfall with as much as $100 billion in spending cuts that will cost working people hundreds of thousands of good jobs and gut the government functions they depend on, such as workplace safety and health.  Meanwhile, many of the same people demanding tax cuts for rich people are also loudly demanding cuts in Social Security and Medicare benefits.

This is the same thing we have been seeing, in varying degrees, for the past 30 years.  As Warren Buffet famously said, “There’s class warfare, all right.  But it’s my class, the rich class, that’s making war, and we’re winning.”

From 1979 to 2008, the richest 10 percent of Americans captured all of the increase in average income, and average income for the bottom 90 percent actually went down.  The richest 1 percent captured 58 cents of every dollar of increased income.

With this rise in economic inequality, our political system has become increasingly beholden to the interests of the privileged and the powerful.  Growing political inequality, in turn, has made it possible for the wealthy and Wall Street to avoid paying their fair share to rebuild the economy they helped destroy.  The key to escaping responsibility has been erasing their fingerprints from the crime scene and pretending they had nothing to do with it.

Instead of playing along with this charade, we should focus first and foremost on the real causes of our projected deficits: Bush-era tax cuts for the wealthy, two wars that were never paid for, the Great Recession and health care costs.The first three items explain why the budget surpluses that were once projected for the coming decade have now turned to deficits.

Accordingly, tax cuts for the wealthy should be allowed to expire, and troop levels in Iraq and Afghanistan should be reduced rapidly as soon as conditions permit.  Also, we must do everything possible to avoid stalling the economic recovery or causing a double-dip recession, which would make our budget outlook so much worse.

Unfortunately, the current debate in Congress is increasing the odds of a double-dip recession.  Fiscal contraction when the economy is still suffering from a massive shortfall of aggregate demand results in lower economic growth and fewer jobs.  For these reasons, fiscal contraction should be delayed until the jobs crisis is behind us and unemployment falls to 5 percent.

The long-term budget picture is slightly different.  Projected long-term deficits are driven almost entirely by health care expenditures that are growing faster than the economy, which means we will need to take further steps to rein in health care cost growth—on top of the progress already achieved by the Affordable Care Act of 2010.  We should do that by building on the proven payment and delivery system reforms of the Affordable Care Act, providing for Medicare drug price negotiation, easing restrictions on the importation of prescription drugs and offering the choice of a public health insurance option in every state insurance exchange.

We should also learn from the experience of other industrialized countries, which shows that the most cost-effective and equitable way to provide quality health care is through the social insurance model.  Whereas health expenditures in the United States now account for about one-sixth of our economy, countries that have adopted a social insurance model have succeeded in keeping their health care costs below 10 or 12 percent of GDP.  We will continue working with Rep. McDermott (D-Wash.) and Sen. Bernie Sanders (I-Vt.) to introduce legislation that provides a social insurance model for health care reform that is progressively financed and provides a single high standard of comprehensive care for all.

But we cannot solve the problem of excess health care cost growth through increased cost-sharing, which simply shifts the cost to individuals.  For this reason, the AFL-CIO strongly opposes Medicare vouchers, any increase in Medicare cost-sharing and any limitation on the tax exclusion for employer-provided health coverage, which would result in higher out-of-pocket costs for consumers.  We also oppose changes to the Medicaid program that would shift more costs onto beneficiaries, as well as structural changes such as block granting that would reduce the federal commitment to health care services for low-income and disabled Americans.

Instead of focusing on the real causes of our deficit problem, Congress has been distracted by red herrings such as domestic discretionary spending.  This sliver of the budget represents only 11 percent of federal spending and, under the president’s proposal, would fall to its lowest level since the Eisenhower administration.  Domestic discretionary spending is actually projected to fall as a share of the economy over the long term and is not the source of our budget problems.

The same can be said of Social Security, which has its own dedicated source of funding and has not added one dime to the deficit.  Social Security currently enjoys a surplus of $2.6 trillion, which is projected to grow to $4.2 trillion by 2025, and will be able to pay out all scheduled benefits until 2037 and 78 percent of scheduled benefits thereafter.  Its modest funding shortfall over 75 years can be closed with relatively minor adjustments and without benefit cuts.  The AFL-CIO strongly opposes any cuts in Social Security benefits, given the decline of traditional pensions and retirement savings, and supports an across-the-board increase in benefit levels.

In addition to addressing the real causes of projected deficits, we will inevitably have to find new sources of federal tax revenue if we want to rebuild our economy to ensure long-term growth.  Federal revenues have now fallen to their lowest share of GDP since 1950.

The question is who should foot the bill.  The fairest approach is to start with the small minority of Americans who benefited from the economic policies of the past 30 years, and whose effective tax rates have fallen to their lowest levels in half a century, rather than the vast majority of Americans who have seen little reward for their hard work.

In recent months, three budget blueprints—put forward by the Economic Policy Institute, Rep. Jan Schakowsky and the Citizens Commission on Jobs, Deficits and America’s Economic Future—have identified progressive sources of tax revenue that could help pay for rebuilding the U.S. economy while stabilizing the national debt.

Their recommendations include: a financial speculation tax ($130 billion per year); taxing capital gains and dividends as ordinary income ($88.1 billion); capping the benefit of itemized deduction at 15 percent ($87.9 billion); replacing the pre-tax deduction for corporate debt interest payments with an after-tax tax credit ($77.1 billion); imposing a surtax of 1 percent to 5.4 percent on earnings over $350,000 ($53.2 billion); closing the dividend loophole for foreign-source income ($34.1 billion); closing tax and accounting loopholes that lead to excessive compensation for corporate executives ($17.4 billion); President Obama’s proposals to reform the international tax system ($15.3 billion); President Obama’s original 2010 proposal for a financial crisis responsibility fee ($9 billion); closing the active financing tax deferral loophole for financial firms ($6 billion); a surtax of 1.5 percent on corporate income ($5.8 billion); eliminating a tax subsidy for mergers and acquisitions by returning to the previous rule for writing off “intangible assets” ($5 billion); estate tax reform ($4.5 billion); and President Obama’s proposals to repeal tax subsidies for the oil and gas industry ($4.6 billion).

Together, these proposals would likely generate more than $500 billion per year in tax revenue, which should be used to rebuild the economy or to reduce the deficit, not to cut income tax rates for corporations or individuals.  It is hard to argue with a straight face that deficit reduction requires “tough choices” for seniors and working people, but that corporations and wealthy Americans deserve protection from an increase in their effective income tax rate.

Congress needs to stop promoting policies that lead to greater economic inequality, and focus instead on budget proposals that reduce inequality and lead to balanced growth.  For example, before passing any more budget cuts or tax increases that target working people, Congress should ask Wall Street and the wealthy to pay their fair share.  A good place to start would be providing for the expiration of Bush-era tax cuts for the richest 2 percent of Americans.  “Shared sacrifice” is a joke if it spares those who can most easily afford it.

The AFL-CIO sees the outcome of this debate as central to the future of America as a middle-class society.  Accordingly, we are prepared to mobilize the full strength of the labor movement to ensure that our leaders invest in creating jobs and rebuilding our economy, and we are prepared to fight cuts to Social Security benefits, Medicare benefits or Medicaid, regardless of who proposes them.

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