That’s right, you read the title correctly – America’s budget deficit is shrinking rapidly, some worry too rapidly. Just 3 months ago, in February, with the income tax rate increase for the wealthiest Americans and the Sequestration budget cuts both in effect, the non-partisan Congressional Budget Office (CBO) estimated this fiscal year’s deficit would be $845 Billion, 5.3% of GDP. That was a big improvement over the $1.4 Trillion deficit in Fiscal Year 2009, the first full fiscal year after the Great Recession hit in the fall of 2008, and the deficit has exceeded $1 Trillion every since. But just last week the CBO revised that estimate, lowering the projected deficit by almost 20%, with a deficit of only $642 Billion, 4% of GDP. And they estimate the deficit will continue to shrink, falling to only 2.1% of GDP in 2015. That’s better than the average of 3.1% of GDP we’ve averaged over the last 40 years with deficits, which include 20 years of Presidents Ronald Reagan and the two Bushes. And it’s better than the original Simpson-Bowles Plan which called for reducing the deficit to 2.3% by 2015, achieved through drastic cuts to Social Security, Medicare, Medicaid, and other social programs.
How are we achieving the rapid improvement in government finances? Not from the $85 Billion in Sequestration budget cuts, most economists believe that is just putting a damper on economic growth. Nope, the deficit reduction is being achieved almost entirely from the Republican derided Democratic goal of higher revenues – higher than expected tax payments from individuals and businesses, as well as an increase in payments from Fannie Mae and Freddie Mac, the mortgage finance companies the government took over in the Great Recession. In revising its estimates for the current year, the budget office also cut its projections of the 10-year cumulative deficit by $618 billion. Those longer-term adjustments are mostly a result of smaller projected outlays for the entitlement programs of Social Security, Medicaid and Medicare, as well as smaller interest payments on the debt.
But is their a darker side to the brighter outlook for the deficit? The International Monetary Fund has called the country’s pace of deficit reduction “overly strong,” arguing that Washington should delay some of its budget cuts while adopting a longer-term strategy to hold down future deficits. The economy continues to perform well below its potential and that unemployment has so far failed to fall below 7.5 percent, many economists are cautioning that the deficit is coming down too fast, too soon.
“It’s good news for the budget deficit and bad news for the jobs deficit,” said Jared Bernstein of the Center on Budget and Policy Priorities, a left-of-center research group in Washington. “I’m more worried about the latter.”
You can bet those 7.5% of our workforce who are looking for a job are more concerned about job creation than our deficit. I’m with them, but I think we can do both – continue to reduce our deficit by getting those people back to work, paying income taxes instead of receiving government support. Spending money, driving up economic growth, and paying sales taxes. And here’s how we can do it: 1) Get U.S. corporations to bring home the estimated $1.7 Trillion they have sitting in oversea banks, and 2) Invest in our infrastructure.
U.S. Corporations have an estimated $1.7 Trillion dollars sitting in banks overseas primarily for one reason: overseas profits earned by U.S. corporations is not subject to U.S. Income taxes until they bring it back to the U.S., and they think the current 35% tax rate is way too high. They want a “tax holiday”, drastically lower tax rates, to bring that money home . Apple Corp. alone has an estimated $100 Billion sitting overseas, and CEO Tom Cook will be making the rounds in Washington this week to push for a tax holiday to motivate companies to bring home those overseas profits. He already gave an interview to the Washington Post advocating that a 35% tax rate is too “burdensome” for American companies. But that’s the other reason American companies have so much money sitting overseas – every so often they manage to con Washington politicians into giving them a “tax holiday” so they can repatriate those overseas profits at low tax rates. The last time was in 2004 when President GW Bush and the Republican controlled Congress allowed a set of major corporations to bring back overseas profits at a tax rate of only 5.25%, promising this injection of money would be a major boost our economy. It wasn’t, it actually hurt the economy. In the words of Treasury official Michael Mundaca:
“There is no evidence that it increased US investment or jobs, and it cost taxpayers billions … the nonpartisan Congressional Research Service reports that most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 – despite overall economy-wide job growth in those years – and many used the repatriated funds simply to repurchase stock or pay dividends.”
So, we’ve tried a tax holiday before an all it accomplished was lining corporate coffers and enriching shareholders, while it hurt the economy with job losses. I say let’s offer them a 10% tax rate – but only for the amount of money they document will be used exclusively to invest in U.S. operations, hiring more people and expanding production lines and other facilities. Specify a specific amount of time they have to accomplish this investment and submit a report to the IRS detailing how and where the money was invested. Any shortfall in the amount they planned to invest earns a 25% penalty, taking the tax rate back up to 35%. And offer them a time limited 20% tax rate for other funds they repatriate to US banks – even if they use it for share buybacks, dividends to shareholders or to pay down debt the 20% tax would still be a nice infusion into the Treasury, and the infusion of money into the economy would help keep interest rates low.
And Democratic Congressman John Delaney* Of Maryland has even a better idea. The ASCE (American Society of Civil Engineers) 2013 Report Card for America’s Infrastructure gives our current infrastructure a grade of “D+”, and estimates an investment of $3.6 Trillion is needed by 2020. This is America’s aviation, bridges, dams, drinking water, energy, hazardous waste, inland waterways, levees, ports, public parks and recreation, rail, roads, schools, solid waste, transit, and wastewater. Can you imagine a $3.6 Trillion spending bill making it through Congress? Rep. Delaney’s proposal is the The Partnership to Build America Act, which would finance the rebuilding of our country’s infrastructure through the creation of an infrastructure fund using repatriated corporate earnings as well as through utilizing public-private partnerships. The legislation would create the American Infrastructure Fund (AIF) which would provide loans or guarantees to state or local governments to finance qualified infrastructure projects. The states or local governments would be required to pay back the loan at a market rate to ensure they have “skin in the game.” In addition, the AIF would invest in equity securities for projects in partnership with states or local governments. The AIF will be funded by the sale of $50 billion worth of Infrastructure Bonds which would have a 50 year term, pay a fixed interest rate of 1 percent, and would not be guaranteed by the U.S. government. The AIF would leverage the $50 billion of Infrastructure Bonds at a 15:1 ratio to provide up to $750 billion in loans or guarantees. U.S. corporations would be incentivized to purchase these new Infrastructure Bonds by allowing them to repatriate a certain amount of their overseas earnings tax free for every $1.00 they invest in the bonds. This multiplier will be set by a “reverse Dutch auction” allowing the market to set the rate. Assuming a 1:4 ratio, meaning a company repatriates $4.00 tax-free for every $1.00 in Infrastructure Bonds purchased, a company’s effective tax rate to repatriate these earnings would be approximately 8% and the $4.00 could then be spent by the companies however they chose.
This is win-win for American corporations with huge piles of profits sitting overseas they want to bring home with low taxes, while we get the needed investment to bring our infrastructure up to par with the rest of the developed world. This is a win-win for job creation and U.S. competitiveness. No, not all of our 7.5% unemployed will be building roads, bridges, or schools, or stringing up high speed internet lines. But those who will be doing that will have good jobs and income to spend in stores, hotels, restaurants, and buying cars, creating demand for more jobs in those areas. This is a win-win as it’s not more “big government” at the federal level – state, county and city local governments will be making project decisions, as they know best what they need. It’s a win-win for privately owned businesses, as at least 25% of the projects financed with this AIF must be Public-Private Partnerships for which at least 20 percent of a project’s financing comes from private capital. I urge our Congressmen Ron Barber and Raul Grijalva to join Mr. Delaney in supporting the Partnership to Build America Act.
Our Incredible Shrinking Deficit: let’s shrink it further by putting people back to work while investing in our infrastructure and competitiveness. America’s finest days lay still yet ahead, we need to invest and prepare for our future. What we don’t need is more Republican Austerity.
* Congressman John Delaney:
John K. Delaney (MD-6) is a Democratic Freshman Class President, a Democratic Sr. Whip, and the only former CEO of a publicly-traded company currently serving in Congress.
A business builder, Delaney founded two New York Stock Exchange listed companies before the age of 40, and is a past winner of the Ernst & Young Entrepreneur of the Year Award. Delaney’s companies were both founded in Maryland, CapitalSource, which Delaney launched in 2000 and became a public company in 2003, lent money to thousands of small businesses around the country and has been recognized by the Treasury Department for lending to disadvantaged communities while also receiving numerous awards as one of the best places to work in the Washington D.C. region. John is Chairman Emeritus of CapitalSource. Prior to CapitalSource, he founded HealthCare Financial Partners, a successful company that was started in 1993 and became a public company in 1996.
Profile Credit: The Huffington Post