GRAND RAPIDS — Stuart Eizenstat, former U.S. Deputy Secretary of the Treasury, has a problem with President Bush’s tax reduction plan. So he’s come up with a plan of his own.
Nobody likes to pay taxes and most people everywhere believe they’re too high. Having lived in Europe for many years, Eizenstat said he saw how high tax rates stifled growth and innovation.
But for the vast majority of Americans, the tax burden today is the lowest it has been in a generation, Eizenstat told a group gathered for the New Millennium/West Michigan luncheon Monday at the Amway Grand Plaza Hotel. Calvin College, the Economic Club of Grand Rapids and the Grand Rapids Community Foundation hosted the event.
For families that are better off, taxes have increased, but far less than increases in income. The after-tax income of the wealthiest 1 percent of taxpayers almost doubled between 1990 and 1998, he noted.
After 20 years of deficits — and for the first time in more than 50 years — the country has run surpluses in each of the last three years.
The official forecast is for a $5.6 trillion surplus over the next 10 years. The Bush Administration has proposed using a portion of the surplus for a tax reduction of more than $1 trillion, a plan that both the House and Senate are now considering.
Eizenstat agrees with parts of the proposal, such as reducing the lowest tax rates from 15 to 10 percent and doubling the childcare tax credit. But he’s concerned with other parts of the plan.
He explained that 75 percent of the surplus revenue in the President’s tax proposal will only begin to accrue after 2005, but 84 percent of the cost of planning the rate reductions would be in place before that time.
That means that Congress is being asked to reduce taxes now even though a major portion of the surplus, which would justify lower rates, won’t be begin to appear until at least five years form now, he pointed out.
“To those who prefer a greater degree of certainty that the money will be on hand before it’s given out, this is troubling. Moreover, with a surplus of this size, all parts of the government must exercise fiscal discipline. I believe this administration will.”
There’s also considerable uncertainty as to whether growth in the economy will generate surpluses in years to come.
It’s difficult to project the economy’s performance, even in the short term, Eizenstat said. The present plan assumes that this year’s real economic growth will be just under 2.5 percent, which is less than in recent years but still healthy.
But the first quarter of this year showed almost no growth and there’s growing concern it may be headed even lower. The high tech sector, which has powered so much of the economic growth over the past five years, took a big nosedive in the last year. At best, signals are mixed.
“There are very few people who could estimate just how deep that bottom would be and how long it would last,” he said. “In such a murky atmosphere, it’s hazardous to make predictions for the next six months, let alone five or six years, which argues for prudence in terms of reducing taxes until we are certain these surpluses will, in fact, be generated.”
There also is the issue of other uses for the surplus. In particular, to bone up Social Security and Medicare trust funds.
The oldest members of the baby boom generation will become eligible to retire in seven years and there will be a surge of retirees over the next 15 years. The full cost of that retirement will be enormous, Eizenstat said. For social security alone, the country will need more than $2 trillion.
Squirreling away dollars now for social security needs later would create a surplus in trust funds, which, in turn, would help pay down the national debt, he said.
“We have a real prospect, if we take enough of the surplus and apply it against the national debt, to have no publicly held debt as early as 2015. It will lower interest rates, which produces credit and debt. Paying down the debt isn’t just a theoretically good thing to do. It puts money in people’s pockets.”
Then there’s the question of the distribution of the tax burden.
The tax system was established on the principle of ability to pay. Under the proposed tax plan, about half of the benefits would go to families with annual incomes of more than $250,000. Consequently, the average tax deduction for families in the top 1 percent would be 100 times that of families in the middle.
He thinks a better 10-year plan for the ongoing surplus would be for one third to be applied towards a tax deduction, one third towards paying down the debt and one third towards investment in important national needs from defense to education.
Eizenstat also addressed the issue of economic challenges abroad.
In one day more than $1 trillion flows across national and international boundaries, which is more capital than there is world trade in four months, he pointed out. Globalization is a “win” in the United States, he said, because this country is the most creative and innovative society in history.
There is no other country better positioned to compete in a globalized economy, he said. But globalization has its challenges and must be managed. What happens in one small corner of the world can have severe impact on other corners of the world.
Eizenstat said countries that want to receive loans from the International Monetary Fund (IMF) have to be open and honest in their bookkeeping. There is no room in the globalized economy for crony capitalism. Corruption in countries is the enemy of economic development, he said.
Mature democracies, including the United States, have a population growth of 1.5 to 2 percent. All the growth in economies of the world occurs in developing countries. Ninety-five percent of 21st century population growth will occur in developing countries.
“Those are our future customers, so we have a stake in seeing that these economies build up,” he observed.
Some of the poorest countries have such enormous debt built up by corrupt rulers that it’s impossible for them to invest in education. It’s impossible for them to develop a telecommunications infrastructure. And they’ll never get investment unless they reduce their crushing debt burden, he said.
One way for them to do that is through the Heavily Indebted Poor Country (HIPC) debt initiative, created by the World Bank and the International Monetary Fund (IMF) in 1996.
“If countries will reform their economies, we will reduce their debt by buying back, through the IMF and through a multinational fund, so they can free up billions of dollars that they can invest in their people and their infrastructure,” he said.
Over the next decade, the HIPC initiative has the prospect of reducing debt for scores of developing countries, he added.
Another issue of globalization is international trade, which Eizenstat describes as a win-win situation for the nation. Polls indicate the majority of U.S. workers think international trade reduces jobs rather than creates them. However, one-third of all the jobs created in the 1990s came as a result of trade, he noted.
“There is a notion that somehow trade disadvantages us,” Eizenstat observed. “But on a net basis the job gains are infinitely greater and are in areas where we have the advantage. Our market is already the most open market in the world. What we’re trying to do is open other people’s markets.”