By Richard Goldstein
Associate Director of Communications
The federal debt and deficit are rising to never-before-seen heights, and this reality is driving Congress and the president to get serious about deficit reduction. Despite a newfound determination from the political class to deal with the problem, the way forward for federal taxes and budgets remain uncertain, according to three experts who spoke at the University of Florida Levin College of Law.
Students, faculty and staff filled the Chesterfield Smith Ceremonial Classroom, HOL 180, for the second Ellen Bellet Gelberg Tax Policy Lecture on Friday, Sept. 30, when three experienced Washington hands laid out their insights on tax and budget policy.
Click here for a webcast of the lecture.
Annual spending exceeding government revenue — what's known as the deficit — has been customary since World War II, explained Hap Shashy (JD 73), chief counsel to the IRS from 1990 to 1993 and now Partner in Dewey & LeBoeuf LLP.
Shashy pointed to two line graphs showing the deficit bouncing along with a small gap between spending and revenue through most of the post-war period. Until, that is, came an economic shock to the system.
"The deficit transcends time, it transcends political parties ... and it also transcends different versions of the tax system," said Shashy, who sits on the Levin College of Law Board of Trustees. "And then the meltdown hits and the Great Recession hits and that's when the deficit — the gap — became very big, unsustainable, and got everybody's attention and people started thinking seriously about what needs to be done with it."
Three years since the economic meltdown of 2008 and the national debt has grown rapidly, equal to about 100 percent of the economy's yearly output. Even after the economy recovers from its current doldrums, rapidly expanding health care costs and interest on the national debt will keep deficits high, Shashy noted.
This rapid increase in the debt and deficit has spurred on initiatives such as the House-Senate supercommitee, charged with finding $1.5 trillion in deficit reduction through 2021, said Lindy Paull (JD 79, LLM 80). Paull was Republican staff director and chief counsel for the U.S. Senate Finance Committee from 1986 to 1998 and is now principal at PriceWaterhouseCoopers LLP where she guides clients through the governmental tax and regulatory thicket.
"The debt is something a lot of people have started to seize on — the growth of the debt, the size of the debt relative to the size of the economy," Paull said. "And that's why I think you see a lot of alarm bells going off with policymakers, while you really didn't see that in the early days of deficits."
Shashy said solving the problem is likely to include a combination of spending cuts, tax increases and growth for the economy.
How much of any of these elements will contribute to solving the debt-and-deficit problem remains uncertain because of political deadlock over whether to raise taxes; upcoming elections that could alter the political landscape; the knotty issue of tax reform; and the confusing nature of budget deficit and debt projections.
One way to slice through this problem could be a value added tax.
"There has been testimony before Congress that all roads lead to a VAT," Paull said. "Economists believe they don't impact economic growth the way income taxes do."
A VAT, which 140 other countries employ, is similar to a national sales tax but the tax is applied at each level of production. It could raise $3 trillion to $7 trillion in 10 years and that money could be used to lower income tax rates, to lower the deficit or be directed toward health care costs, which many other countries use VAT revenues for, Paull said.
Following other countries in using a VAT for health care costs could make sense in the American context because Medicare and Medicaid represent the largest drivers of the debt, Paull noted.
And then there is the option of comprehensive tax reform. Comprehensive tax reform is often used as shorthand for eliminating deductions for individuals and corporations to simplify the system. Deductions tend to encourage behavior that isn't optimally productive so the more deductions, the less efficient the economy.
Though it is only 10 percent of the nation's tax revenue, corporate taxation policy takes up a seemingly much larger percentage of the tax policy debate, said Eric Solomon, assistant secretary for tax policy in the U.S. Treasury from 2006 to 2009, and now director of Ernst & Young LLP's National Tax Department.
He said the corporate tax system is widely blamed for encouraging American companies to keep overseas profits overseas because companies are taxed if those profits are brought home. Converting to a territorial tax system, which other major economies use, might help solve that problem. The repatriating of American companies profits could create jobs, increase economic growth and thus restrain the deficit.
While altering the tax system might goose economic growth, it almost certainly would redistribute the tax burden. But it might not raise much more revenue for the government as a percentage of the Gross Domestic Product.
Another of Shashy's graphs showed that taxes raised by the government as a percentage of GDP have stayed constant at about 18 to 19 percent of GDP. Sashay, the former IRS counsel, notes that every change in the tax regime since World War II has prompted a change in the behavior of taxpayers so that roughly the same percentage of national income goes to the taxman.
"That's the business you're going to be in pretty soon: Responding to tax changes, helping tax payers figure out some way to navigate this morass we call the U.S. tax system," Shashy told UF Law students.
Gelberg (LLM 77), who sponsors the lectures, was a practicing tax attorney and partner in the firm of Lamont Neiman Interian & Bellet, P.A., which has offices in both Miami and Boca Raton. She is a member of the Levin College of Law's Board of Trustees.
The lecture series examines tax policy and how its implementation affects the economy and people's lives as well as the underlying policy considerations that lead to the tax rules, which tax professionals deal with everyday. Gelberg holds a J.D. and an LL.M. in taxation from the college of law.