The problem with sequestration as a tool to force Congress to act responsibly has less to do with the mechanism than the timing.
Americans lament the fact Washington is so dysfunctional it needs an artificial crisis — in this case, across-the-board cuts that will take effect Friday — in order to be fiscally responsible. It is not a new problem. Growth of the federal debt makes sense in a depressed economy, but the federal debt has grown in both good times and bad. In the 73 years since 1940, the United States has had a surplus in only 12.
Almost all economists believe federal debt is a problem. Almost all agree, however, that now is not the time to reduce the deficit. Deficit spending is an important tool in restoring economic growth. The best solution is increased short-term spending combined with long-term cuts. The anemic economy is the greatest contributor to the deficit, so spending cuts — by derailing growth — actually add to the deficit.
While the timing is all wrong, the mechanism of sequester may be necessary.
Congress has two major failings that contribute to escalating debt.
One failing is the temptation to use tax dollars to buy votes. At various times both parties have done it, but Democrats probably are most guilty. A responsible desire to create a safety net for those who need it too easily morphs into giveaway programs. Congress is terrible at cutting inefficient programs because beneficiaries vote.
The other failing involves catering to campaign contributors. Both parties do it, but Republicans probably are the most guilty. As U.S. Sen. Richard Shelby, R-Tuscaloosa, emphasized in a Hartselle speech last week, the tax code is riddled with loopholes he called “corporate welfare.” Deductions and tax credits too often go to the highest bidder.
The top marginal corporate income tax is among the highest in the developed world at 35 percent, but the effective rate is 12 percent, one of the lowest. Despite growing profits, corporate income tax as a share of gross domestic product has steadily declined from 5 percent in 1955 to its current 1 percent.
Huge corporations with massive profits routinely pay little or no income tax.
There is bipartisan support for reducing federal debt once the economy recovers. While proposals differ, there is bipartisan support both for closing corporate loopholes and for entitlement reform. The threat of sequestration could force compromise that accomplishes these goals.
Especially for north Alabama, sequestration would be a disaster. The threat of sequestration, however, could help Congress overcome its budgetary failings.
In the short term, closing corporate loopholes and cutting spending could cause dangerous economic contraction. A budgetary deal that boosts deficit spending until the economy recovers but follows with an elimination of corporate loopholes and with significant spending cuts — including entitlement reform — would be a responsible way to begin the painful process of reducing federal debt.
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