Washington Watch - August 3, 2011


Washington Watch - August 3, 2011

Quick Look: Debt Ceiling Agreement

Yesterday the Senate cleared legislation (S. 365) that will extend the debt limit as well as establish deficit reduction measures. A total of six Democrats and nineteen Republicans voted against it. In the House, which passed the legislation Monday, ninety-nine Democrats and 66 Republicans voted against it.

President Obama and leaders of Congress negotiated the deal that would raise the debt ceiling through next year and cut $900 billion. It will create a bipartisan committee in charge of offering $1.2 trillion in deficit reduction measures, to be voted upon in December. In the case of no vote, then both defense and non-defense spending levels will face reductions.

Understanding The Nation's Credit Rating

Now that the debt ceiling debate is behind us, where does the U.S. stand amongst creditors? We hear a lot about credit rating, but what does that mean in terms of the country? 

Before we discuss what the credit rating agencies want from the United States and whether the debt ceiling raise will satisfy them, it is important to look at a little history. For over a century the debt of the United States has been rated “AAA”, confirming the long held belief that bonds backed by the U.S. are the safest place to invest. People, corporations and governments from all over the world loan the U.S. money at very low rates.

Earlier this year, one of the largest credit rating companies, Standard and Poor’s (S & P), revised the outlook on the U.S. to negative from stable earlier this year. Although the outlook of negative is based upon S & P’s stated concern that the US will not be able to agree on long and medium term budget issues by 2013, the rating remains AAA at this time. S & P defines AAA as a long term rating means that S & P believes the entity has and extremely strong capacity to meet its financial commitments. A negative outlook means there is a one in three chance of a downgrade in the next two years.

Read more about this topic on SelfMade

Hot Topic: Consumption Taxes

On July 26th, the House Ways and Means Committee held a hearing to weigh the pros and cons of two different consumption tax models: the Value-Added Tax and the FairTax.

The FairTax proposal, formally known as H.R. 25, would replace the federal income tax with a national sales tax and eliminate the IRS. The first panel testifying about the FairTax proposal included Former Arkansas Governor Mike Huckabee, Boston University Professor Laurence Kotlikoff, Sufolk University Professor David Tuerck, and columnist Bruce Bartlett. 

Huckabee opened with testimony in support of the Fairtax. “The FairTax is based on the simple idea that we ought to reward good economic behavior and we ought not to reward irresponsible and reckless economic behavior,” he said.

The Democrats on the House Ways and Means Committee offered a slew of criticisms of the plan, including concerns about its effect on lower- and middle-income workers.

Rep. Sandy Levin (D-Mich.), the ranking member on the committee expressed concern about the plan’s effect on Social Security, “I think it is absolutely — what should I say? — inappropriate, to be charitable, to call this a fair taxation proposal.”

The second panel, including economists and a director from the Government Accountability Office (GAO), testified about the Value-Added Tax. With economic consequences similar to the FairTax, the VAT is a consumption tax on the purchasers of goods even if they are not the end consumer. The VAT system taxes a good little by little as it progresses through the supply chain.

Commenting on the Value-Added Tax, Robert Carroll, a principal at Ernst & Young, noted its benefits. “A broad-based VAT that replaces the worst features of the income tax has the potential to provide significant economic benefits,” he said. “A VAT is fundamentally a tax on consumption and does not tax the return to saving and investment.”

Jim White of the GAO did state some drawbacks of the VAT in the discussion, mentioning the rise in prices that could reduce consumer spending and employment.

Read more about consumption taxes here.

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