US fiscal imbroglio: Nigeria’s wakeup call?

The hottest issue in US politics is centered on choosing the better of two evils, prioritizing spending cuts or tax increases. The issue is on the front burner at the moment because of the major economic concern it poses to the American economy now. Other than that, it’s an age-old politico/economic issue in the US.

On the one hand, there are those who believe that tax increases should be prioritized for the reasons that it will enable the government to ensure that services to citizens are available, and necessary expenditures on infrastructure are met without the need for excessive bond issuances. This argument is mainly propounded by the Democrats

On the other hand, there are those who advocate that spending cuts should be prioritized because tax increases would put too much pressure on the poor. According to New York Times these tax increases on the whole population would make the average American pay three and half thousand dollars more in taxes. The republicans are the sellers of this idea

Here are excerpts of the arguments for and against by two opposing Americans:

According to the New York Times, there is a direct correlation between the amount of money provided to Congress for the national budget and the quality of living in the US. In a study conducted by the Bureau of Economic Statistics, in the past 7 years, the average standard of living has been determined through looking at adjusted income per person and the poverty rate. In the years with a higher annual budget, the standard of living has risen higher than in years with a lower annual budget. The Board of Economic Advisors concluded from this study that the national budget reflects directly upon the standard of living in the U.S

The government on us imposes taxes so that they can benefit us. Taxes are imposed so that roads get fixed. They are imposed so that we get an education. They are imposed so that people don’t invade our country. They are imposed to protect our rights. What right do we have to say that the government shouldn’t impose taxes on us? If we don’t pay for government programs, that money comes from excessive bond issuances.

According to the Department of Labour and Infrastructure, the lack of funding in their departments have caused the pushing back of almost a decade’s worth of renovation and projects to the point where many projects may never be finished

By raising taxes, we will be able to ensure that our nation is up to date and has all the necessary expenditures to develop, and we can lower the poverty rate and invest more heavily in programs that will help improve the living conditions and living quality of Americans today.

Increasing tax rates also mean new jobs. The tax rates were increased in 1990 and 1993. Capital gain rates were cut slightly in 1996. And, 21 million new jobs were created in the 90s. That is about a 20% increase in the number of jobs available in the United States. The infamous Bush tax cuts passed in 2001, and even before the Bush recession began, job growth lagged behind GDP growth. After the Bush recession, we had a net job growth of 0%. And, thanks to population growth, no new jobs mean record high unemployment, according to the Tax Policy Center.

We are currently in a 16 trillion dollar debt that is rising at the rate of 6 billion dollars every single day, according to the Department of Treasury. That’s almost 4 million dollars every minute.

To put our current situation into perspective, judge, our national debt at present is greater than the combined economies of China, the United Kingdom, and Australia. Should the burden of this debt be spread to all Americans, each American family in the US would owe about $50,113.78 to various countries in the world.

Argument against

The confluence of fiscal policy changes, referred to as the “fiscal cliff” posed serious challenges for policy makers early this year. One area of disagreement is the increase in tax rates for high-income taxpayers resulting in part due to the sunset of elements of the 2001 and 2003 tax cuts. President Obama has called for the reinstatement of the higher top tax rates in his budget submission to the Congress, while key Republican members of Congress have called for their extension. The increase in the Medicare tax and its expansion to unearned income for high-income earners under the Patient Protection and Affordable Care Act of 2010 (PPACA) further contributes to the increase in top tax rates.

The concern over the top individual tax rates has been a focus, in part, because of the prominent role played by flow-through businesses, corporations, partnerships, limited liability companies, and sole proprietorships in the US economy and the large fraction of flow-through income that is subject to the top two individual income tax rates. These businesses employ 54% of the private sector work force and pay 44% of federal business income taxes. The number of workers employed by large flow-through businesses is also significant: more than 20 million workers are employed by flow-through businesses with more than 100 employees.

This report uses the EY General Equilibrium Model of the US Economy to examine the impact of the increase in the top tax rates in the long-run. While a recent Congressional Budget Office (CBO) report examined the near-term effects of all of the federal government fiscal policies under scrutiny at the end of 2012 and found them to be of sufficient size to push the economy into recession at the beginning of 2013, this report focuses on the long-run effects of the increase in the top tax rates. This report examines four sets of provisions that will increase the top tax rates:

•The increase in the top two tax rates from 33% to 36% and 35% to 39.6%.

•The reinstatement of the limitation on itemized deductions for high-income taxpayers (the “Pease” provision).

•The taxation of dividends as ordinary income and at a top income tax rate of 39.6% and increase in the top tax rate applied to capital gains to 20%.

•The increase in the 2.9% Medicare tax to 3.8% for high-income taxpayers and the application of the new 3.8 percent tax on investment income including flow-through business income, interest, dividends and capital gains.

This report finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages. Specifically, this report finds that the higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages when the resulting revenue is used to finance additional government spending.

Long-run macroeconomic impact of increasing tax rates on high-income taxpayers in 2013

Through lower after-tax rewards to work, the higher tax rates on wages reduce work effort and labour force participation. The higher tax rates on capital gains and dividend increase the cost of equity capital, which discourages savings and reduces investment. Capital investment falls, which reduces labour productivity and means lower output and living standards in the long-run.

•Output in the long-run would fall by 1.3%, or $200 billion, in today’s economy.

•Employment in the long-run would fall by 0.5% or, roughly 710,000 fewer jobs, in today’s economy.

•Capital stock and investment in the long-run would fall by 1.4% and 2.4%, respectively.

•Real after-tax wages would fall by 1.8%, reflecting a decline in workers‟ living standards relative to what would have occurred otherwise.” http://waysandmeans.house.gov...

As stated at the outset of this page, the debate for and against spending cuts and tax increases is an aged-old one. And it seems to be as much political as economic, and will remain for as long as the US remains a nation.

For the moment, though, it would seem that assuming the middle ground might just be the only way of eschewing the persisting politico/economic debacle, at least for the moment between Democrats and Republicans.

What can Nigeria glean from all of this? Considering the dearth of infrastructural currently experienced in the country occasioned by a deepening debt profile, there can be no gainsaying the fact that Nigeria needs a semblance of a mishmash of spending cuts and more revenue from taxation, not necessarily imposition of higher taxes.

More revenue could come from taxes if the three tiers of government had up to date records of all taxable business and individuals according to law, and enforce payments there from.

In terms of spending cuts, there has been a plethora of literature of the federal government’s need to reduce its spending. The mere fact that more than 75 percent of the federal government’s spending goes on recurrent expenditure speaks volumes of how much is left to be desired.

The good news is, with fiscal discipline, Nigeria needn’t borrow money, especially to fund recurrent expenditure.