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The May 16^th Deadline Nears

By Children’s Home Society of Florida Foundation

As the debt deadline of May 16th 2011 grows closer, Congress is debating both spending and taxes. Treasury Secretary Timothy Geithner indicates that there are various borrowing strategies that can be used to avoid an imminent default. However, he suggests that Treasury may be facing an actual default on U.S. Bond obligations by August 2nd if there is not an extension of the $14.29 trillion debt limit.

Baucus Speaks

With the impending debt limit, the intensity of discussions on both spending and taxes has increased. Sen. Max Baucus (D-MT) is the Chair of the Senate Finance Committee. Rep. Dave Camp (R-MI) is the Chair of the House Ways and Means Committee.

Sen. Baucus recently discussed the potential tax changes or triggers that could be implemented in a debt reduction agreement. He noted that President Obama has proposed a system called the “Debt Failsafe Trigger.” This plan places a top limit on debt as a percent of gross domestic product (GDP).

Another option suggested by Sen. Baucus would be a “contingency tax.” He noted that in the 1984 budget proposal by President Ronald Reagan, if spending caps were exceeded there was a proposed 1% tax surcharge on individuals and corporations and an increase of $5 per barrel in the tax on oil. However, Sen. Baucus also notes that there are risks with tax triggers. He stated, “We must insure that any trigger we consider would not worsen our economy and leave people out in the cold when they need help the most.” It would be risky to create a tax trigger that might “deepen the economic decline” during a downturn of the economy.

Gramm Speaks

At a hearing before the Senate Finance Committee on May 4, former Senator Phil Gramm discussed the potential for creating spending and tax triggers as part of a deficit agreement. Sen. Gramm joined together with two other senators to pass the “Balanced Budget and Emergency Deficit Control Act of 1985.” This act created specific spending cuts if certain targets were not reached. With the budget discipline of the spending cuts, the increase in federal spending declined from 4.7% in 1986 to 1.4% in 1987. Over a period of four years, the deficit was cut approximately in half as a result of the bill.

Assessment

Chairman Dave Camp expressed concern about tax triggers. He indicated that his preference is to focus on the current spending level of 25% of GDP and hopefully reduce that amount to the historic average of 20% of GDP. Rep. Chairman Camp stated, “I think where we need to rebuild credibility with the American people is on the spending side. Until we do that, I’m not interested in talking about higher tax revenues.”

Editor’s Note: As the May and August deadlines near, there will be sharp debate on both spending cuts and tax increases. Should the deficit solution be primarily spending cuts or should there be substantial tax increases? The discussion in Washington will continue.

Conclusion

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Filed under: Alerts Sign-Up, Taxation | Tagged: Baucus, Chair of the House Ways and Means Committee, Children's Home Society of Florida Foundation, David Camp, Debt Failsafe Trigger, Phil Gramm, taxes, Timothy Geithner, US debt ceiling deadline | 1 Comment »