Daily Tax Update - July 26, 2011: Obama: We Are Left With A Stalemate

OBAMA:  "WE ARE LEFT WITH A STALEMATE":  In a speech last night, President Obama urged Congress to strike an agreement to raise the debt ceiling.  The President said, "Because neither party is blameless for the decisions that led to this problem, both parties have a responsibility to solve it.  And over the last several months, that's what we've been trying to do. . . . . So the debate right now isn't about whether we need to make tough choices.  Democrats and Republicans agree on the amount of deficit reduction we need.  The debate is about how it should be done."  Obama continued, "Congress now has one week left to act, and there are still paths forward.  The Senate has introduced a plan to avoid default, which makes a down payment on deficit reduction and ensures that we don't have to go through this again in six months.  I think that's a much better path, although serious deficit reduction would still require us to tackle the tough challenges of entitlement and tax reform.  Either way, I have told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress - a compromise I can sign.  And I am confident we can reach this compromise.  Despite our disagreements, Republican leaders and I have found common ground before.  And I believe that enough members of both parties will ultimately put politics aside and help us make progress." 

  • In rebuttal remarks, House Speaker John Boehner said, "The United States cannot default on its debt obligations.  The jobs and savings of too many Americans are at stake.  What we told the president in January was this:  the American people will not accept an increase in the debt limit without significant spending cuts and reforms.  And over the last six months, we've done our best to convince the president to partner with us to do something dramatic to change the fiscal trajectory of our country. . .something that will boost confidence in our economy, renew a measure of faith in our government, and help small businesses get back on track."  Boehner continued, "The sad truth is that the president wanted a blank check six months ago, and he wants a blank check today.  That is just not going to happen.  You see, there is no stalemate in Congress.  The House has passed a bill to raise the debt limit with bipartisan support.  And this week, while the Senate is struggling to pass a bill filled with phony accounting and Washington gimmicks, we will pass another bill - one that was developed with the support of the bipartisan leadership of the US Senate.  Obviously, I expect that bill can and will pass the Senate, and be sent to the President for his signature.  If the President signs it, the 'crisis' atmosphere he has created will simply disappear.  The debt limit will be raised.  Spending will be cut by more than one trillion dollars, and a serious, bipartisan committee of the Congress will begin the hard but necessary work of dealing with the tough challenges our nation faces."  Boehner concluded, "The solution to this crisis is not complicated:  if you're spending more money than you're taking in, you need to spend less of it.  There is no symptom of big government more menacing than our debt.  Break its grip, and we begin to liberate our economy and our future.  We are up to the task, and I hope President Obama will join us in this work."
  • The House will take up Boehner’s plan tomorrow.  Republican Study Committee Chairman Jim Jordan (R-OH) said today that there are not enough Republican votes to pass Boehner’s plan.  Jordan said, "I am confident, as of this morning, that there were not 218 Republicans in support" of Boehner’s proposal.  Jordan added, "We just think there’s a better way."
  • Boehner’s plan won’t pass the Senate and Majority Leader Harry Reid’s deficit plan doesn’t have enough votes to pass the House.  Therefore, the stalemate continues and the debt ceiling deadline looms closer.  Today, White House Press Secretary Jay Carney said, "The Boehner bill can’t pass the Senate."  Carney added that Senate Majority Leader Reid’s proposal is "not an ideal option, but a better option" than what has been put forward by Republicans.  Obama suggested that people call their elected representatives to tell them to compromise on debt and deficit negotiations.  Switchboards on Capitol Hill were jammed today and many congressional websites crashed due to the high volume of calls and internet traffic.

WAYS & MEANS HEARING: CONSUMPTION TAXES – FAIRTAX AND VAT:  Today, the House Ways and Means Committee held a hearing on tax reform and consumption-based taxes.  The first panel discussed the "FairTax," while the second panel discussed a value-added tax ("VAT").

  • The witnesses were:
    • PANEL 1 (FairTax):                                                                             
      • Mr. Mike Huckabee, former Governor of Arkansas, Hope, AR.
      • Dr. Laurence J. Kotlikoff, Professor of Economics, Boston University, Boston, MA; accompanied by Dr. David Tuerck, Executive Director, The Beacon Hill Institute, Professor and Chairman, Department of Economics, Suffolk University, Boston, MA. 
      • Mr. Bruce Bartlett, Columnist, Tax Notes, The Fiscal Times, Contributor, The New York Times, Great Falls, VA.
    • PANEL 2 (Value Added Tax):                                                                         
      • Mr. Michael J. Graetz, Columbia Alumni Professor of Tax Law, Columbia University, New York, NY.
      • Dr. Rosanne Altshuler, Professor and Chair, Economics Department, Rutgers University, New Brunswick, NJ.
      • Dr. Robert J. Carroll, Ernst & Young LLP, Washington, DC.
      • Mr. Jim White, Director, Tax Issues, Government Accountability Office, Washington, DC.
      • Dr. Daniel J. Mitchell, Senior Fellow, Cato Institute, Washington, DC.
      • Dr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, Sloan School of Management, Massachusetts Institute of Technology, former Economic Counselor and Director of the Research Department at the International Monetary Fund, Cambridge, MA.
  • The first panel examined the "FairTax," a plan to replace the federal income and payroll taxes with a national retail sales tax of approximately 23%. A bill to enact the FairTax, the "FairTax Act," has been introduced in both the House (H.R. 25) and Senate (S. 13).  Governor Huckabee testified that, under the FairTax, "no one would be taxed—that is, penalized—for their work, investments, savings, or earnings."  Dr. Kotlikoff, also a supporter of the FairTax, testified that "Compared with the existing federal tax system, The FairTax is a sure winner. It’s more efficient, equitable, transparent, sustainable, and growth-and-jobs oriented. It will help revitalize investment, and with it, expand our economy, create jobs and bring in new revenues." Mr. Bartlett, however, opposed the Fair Tax, stating that, although he supports a consumption-based tax system in principle, the FairTax is "the most pie-in-the-sky major tax reform I have ever heard of.  Even by tax policy standards, it is grossly complex, a virtual Rube Goldberg contraption of pieces that are unworkable individually and become exponentially more unworkable as they are layered on top of each other."
  • The questions and answers portion of the first panel focused on the economic impact of the FairTax, the impact of the FairTax on small businesses, whether the rebate aspect of the FairTax was similar to an entitlement program, and whether or not the IRS could be eliminated if the FairTax were adopted.  In response to a question from Chairman Camp regarding the economic impact of the FairTax, Governor Huckabee stated that the absence of a tax on production would allow US companies to become more competitive.  He also stated that companies would return more money to the United States because there would be no "penalty" for doing so.
  • With respect to the impact of the FairTax on small businesses, Governor Huckabee said that small business owners would "love" the FairTax.  Dr. Kotlikoff agreed that the tax would reduce compliance burdens.  Mr. Bartlett disagreed, stating that "There’s no question that there will be an increase in the burden on small businesses."
  • The second panel discussed the Value Added Tax (VAT). Mr. Graetz and Dr. Altshuler urged Congress to consider enacting a VAT.  Mr. Graetz stated, "Given its widespread application around the world, it is clear that the US can readily administer and comply with a VAT. . . . As in my proposal, regressivity [may be] mitigated through measures directed at low and moderate income households, rather than through VAT exemptions for items such as food and clothing. These kinds of exemptions add complexity to VAT administration and compliance and are wasteful since they also apply to purchases by high-income households."  Dr. Altshuler said, "The fiscal challenges ahead are daunting. Instead of spending the next two years engaging in an endless debate of whether to extend the 2001 and 2003 tax cuts, I urge you to focus on building support for and designing a reform of the current system that can reduce our future unsustainable debt burdens and enhance the growth of the US economy and the well-being of Americans….The VAT is an efficient revenue raiser that is likely to be significantly less damaging to economic growth than increasing personal and corporate statutory rates. After considering the range of issues associated with adopting a VAT, I conclude that the United States may be best served by combining a base-broadening reform of the current income tax system with the introduction of a VAT."
  • Dr. Mitchell testified in opposition to a VAT: "Enacting a value-added tax would be a costly mistake for American consumers and workers. Once adopted, the VAT would prove irresistible to politicians eagerly looking for money to pay for new programs. The VAT would also undermine entitlement reform because politicians could gradually increase the tax to finance promised benefits. The tax rate would doubtlessly climb, financing a surge of new federal spending. The result would be a stagnating economy, higher budget deficits, and fewer jobs for  American workers. The value-added tax may have some attractive theoretical qualities compared to taxes on income and production, but in the real world, it would simply be another burden on an already overtaxed economy."
  • Dr. Carroll observed that the effect of a VAT would depend on how the VAT was designed: "Importantly, a VAT’s economic effects depend critically on key design issues and how VAT revenue is used. Vastly different conclusions can be reached, for example, depending on whether the VAT replaces the worst features of the income tax or is an add-on VAT used for deficit reduction or additional government spending."
  • Mr. White’s testimony summarized a 2008 GAO report on the VAT that examined VAT administration in Australia, Canada, France, New Zealand, and the United Kingdom. Mr. White cautioned that enforcement resources would need to be devoted to a VAT, stating that "The experiences of our five study countries show that all VAT designs have compliance risks that generate considerable administrative costs and compliance burden and that, similar to the US tax system, adding complexity to the tax’s design increases these risks, costs, and burden."
  • Dr. Johnson’s testimony discussed several tax and economic issues.  With respect to a VAT, Dr. Johnson stated that "By itself, VAT is typically regressive and would be significantly more regressive that our existing income tax system. It should be supplemented with an increase in the earned income tax credit and with other adjustments (for people who are retired or otherwise do not work) that reduce the burden on those at the lower end of the income distribution."
  • Testimony can be accessed via: http://waysandmeans.house.gov/Calendar/EventSingle.aspx?EventID=252676
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com

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