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News from EPI EPI releases budget proposal that creates jobs, lets Bush-era tax cuts expire and strengthens social safety net

For Immediate Release: Friday, November 16, 2012
Contact: Phoebe Silag or Donte Donald, 202-775-8810

EPI releases budget proposal that creates jobs, lets Bush-era tax cuts expire and strengthens social safety net

Today, tax and budget experts from the Economic Policy Institute will present a budget proposal, Investing in America’s Economy: A Budget Blueprint for Economic Recovery, at a forum organized by the Peter G. Peterson Foundation, “Post Election: The Fiscal Cliff and Beyond.” EPI is one of five think tanks participating in the foundation’s “Solutions Initiative” this year.

EPI’s budget team, Josh Bivens, Andrew Fieldhouse, Ethan Pollack and Rebecca Thiess, developed the budget keeping three fundamental truths in mind:

  1. The near-term budget deficit is largely a symptom of the poor economy; therefore any fiscal proposal must include a plan to get the economy back on track.
  2. Tax and budget policy should share the same goal as broader economic policy: providing rising living standards and greater economic opportunity and security for all Americans.
  3. A truly sustainable budget provides future generations not only with manageable debt levels but also the building blocks of a prosperous economy: increased investments in infrastructure, education and R&D, and a strong safety net to ensure that future generations have at least the same baseline levels of economic security on which millions of households currently rely.

“This proposal demonstrates that addressing the fiscal cliff can and should be done by boosting job growth; plans that would take a different approach by cutting benefits or engaging in austere spending reductions would have a negative effect on our recovery,” Thiess said.

“Everyone gives a nod to the imperative of job creation and economic recovery, but we put our money where our mouth is—we finance $2.2 trillion of extra government spending over the next three years to rapidly restore and sustain full employment, which absolutely must be the top economic policy objective,” Fieldhouse added.

The plan’s five guiding principles are as follows:

  1. Create jobs now. The main obstacle to economic growth continues to be a huge shortfall in aggregate demand. This shortfall is driven by insufficient spending by households and businesses, spending that pulled back in the aftermath of a housing bubble that wiped out trillions of dollars in household wealth and froze residential and commercial construction. Therefore, boosting aggregate demand with deficit-financed fiscal stimulus remains the most effective policy lever for addressing the jobs crisis. Long-run fiscal sustainability is more difficult to achieve when a long-term jobs crisis has caused people to defer or forgo educational attainment, poverty and malnutrition to rise, human capital to atrophy, business to refrain from investing and physical stock to depreciate from disuse.
  2. Let the Bush tax cuts expire. The Bush tax cuts have already added more than $3 trillion to the national debt and will add another $4.3 trillion over the next decade, if extended. They should fully expire on schedule, and to alleviate the impact of their expiration on lower- and middle-income households, refundable tax credits should be consolidated and expanded. Specifically, a work credit and a family tax credit should replace the personal exemption, standard deduction, and Earned Income Tax Credit and Child Tax Credit.
  3. Preserve and strengthen the social safety net. Benefits should not be reduced. Instead, the safety net on which millions of Americans rely should be strengthened by expanding unemployment compensation, eliminating the payroll tax cap to solidify Social Security’s finances, and attaining long-run efficiency savings and cost containment in the provision of health care.
  4. Return fairness and progressivity to the tax code. Taxing wealth the same as ordinary income, reinstating more progressive estate tax parameters, adding new tax brackets on taxable income over $2 million and enacting a net wealth tax would reverse the weakening of the progressivity of the tax code that has occurred over the past few decades.
  5. Tax goods and services that have significant social costs. Pricing carbon emissions, taxing financial transactions and leverage, and levying taxes on products that pose public health risks would compel businesses to internalize costs that would otherwise spill over to society.

“This plan is gimmick-free,” Pollack said. “We don’t shift costs onto middle-class households or the elderly and disabled, and we don’t produce savings by cutting vital investments in the nation’s infrastructure, education or innovative capacity. We achieve fiscal sustainability by investing in future generations and ensuring that the highest-income households—who have benefited most from economic growth over the last few decades—pay a little more to help contribute to our continued prosperity.”

The budget’s spending policies are designed to promote immediate job creation, strengthen the middle class, and expand mobility and opportunity. The plan repeals the Budget Control Act, which unnecessarily cuts the non-security discretionary budget, and replaces the frontloaded defense spending cuts with the cuts proposed by the bipartisan Sustainable Defense Task Force. The plan invests in infrastructure, education and training, and research and development by financing a permanent increase in public investments of $200 billion in 2013. It finances $425 billion in state and local fiscal relief through 2017, which will protect public investments at the state and local level and boost employment, and devotes $250 billion to a public works and direct employment program over 2013-2014. Recognizing that Social Security is an increasingly important pillar of retirement, the plan phases in a five-year elimination of the cap on both employee- and employer-side payroll tax contributions, in an effort to shore up the program and protect benefits. The budget proposes a wide range of policies that would lower health care costs rather than shift them onto households or state governments and repeals the sustainable growth rate formula for Medicare physician payments. Finally, the plan extends the Emergency Unemployment Compensation program through 2015, fine-tunes agricultural policy, and improves various other provisions of the tax code.

In terms of revenue, the budget improves the current tax code in a number of ways. It allows all of the Bush-era tax cuts to expire on schedule, to be replaced with more progressive, refundable work and child credits targeted toward lower- and middle-income households. It taxes dividends as ordinary income, closing the gap between the tax rate on income from wealth and the tax rate on income from work. The plan adds additional individual tax brackets to reflect that tax progressivity has fallen most sharply within the top 0.1 percent of households by income. On corporate income taxes, the plan eliminates fossil fuel tax subsidies, reforms the international tax system, allows for the expiration of wasteful business tax preferences and repeals the most egregious instances of corporate welfare in the tax code. The budget restructures some individual income tax expenditures because many are skewed towards higher-income households. Finally, the plan shifts the burden of taxation away from work and onto corrective taxes.

Josh Bivens is the research and policy director at the Economic Policy Institute. Andrew Fieldhouse is a federal budget policy analyst at EPI and The Century Foundation. Ethan Pollack is a senior policy analyst at EPI, and Rebecca Thiess is a federal budget policy analyst at EPI.