Panelists Discuss Taxes and the Economy
Presidential candidates are not the only people discussing the need for economic growth, deficit reduction, and tax reform. A panel of Columbia Law School professors and graduates had their own debate relating to the topics at Reunion 2012, and each participant offered a different perspective.
“The economy is regrettably fragile right now, and the financial position of the U.S. government is not that great either,” said David M. Schizer, Dean and the Lucy G. Moses Professor of Law; Harvey R. Miller Professor of Law and Economics, who moderated the panel. The $1.3 trillion federal deficit is more than twice what it was in 2008, and approximately 11 percent of the nation’s gross domestic product, he said.
“The deficit will decline only if the economy starts to grow,” Dean Schizer added. “The question is how to do that.” The federal government’s $862 billion program to stimulate the economy has not done much to stimulate the economy, he said, noting that economic growth was just 1.5 percent in 2011 and that 13 million Americans are unemployed, half of them for six months or more.
Schizer, one of the nation’s leading experts on tax law, said he is a fan of the policy known as “paygo,” or pay-as-you-go, which requires that every expenditure have a source of funding. First adopted by Congress in 1990, the policy was credited with playing a significant role in eventually turning deficits into a surplus. It expired in 2002, and was later revived as a rule, not law, with modifications in 2011 that limit its effectiveness.
Professor Michael Graetz, Visiting Professor Rebecca Kysar, Peter C. Canellos ’67, and Stephen Friedman ’62 joined Dean Schizer on the panel.
Graetz, Columbia Alumni Professor of Tax Law and the Wilbur H. Friedman Professor of Tax Law, favors a value-added tax, or VAT, as a solution to the current fiscal dilemma. “It exists in 151 countries, so it’s clear we can administer it,” he said. Proceeds from the VAT, which is similar to a national sales tax, could be used to exempt from federal income tax those earning less than $100,000 a year—some 150 million Americans, he said.
Graetz said his proposal—for a 12.5 percent value-added tax, a 15 percent corporate rate, a 15 percent income-tax rate for people earning between $100,000 and $200,000, and a 25 percent or 26 percent rate for those earning more than $200,000—would lower the corporate tax rate, save billions in administrative costs, and put money in consumers’ pockets. It would neither increase nor decrease the amount of money coming into the government, according to the non-partisan Tax Policy Center.
Friedman, who is chairman of Stone Point Capital, a private equity firm in Greenwich, Conn., said regulation is crucial to the economy, although he added that he is concerned about unintended consequences of recent legislation because the law is too hard to understand. Bad risk management on the part of financial institutions was a major factor in the financial crisis, he said, and while the Federal Reserve and Treasury provided liquidity when market mechanisms failed, he is not convinced they could do it again. “The political thrust against bailouts and TARP [the Troubled Asset Relief Program], which saved us, is such that I’m not sure they would be able to do the emergency measures necessary to avert another crisis.”
Many Americans perceive the current tax system to be unfair and biased in favor of the wealthy, said Canellos, a former chairman of the New York State Bar Association Tax Section who is of counsel to the law firm of Wachtell, Lipton, Rosen & Katz. The tax rate on capital gains is less than half of the top income tax rate. In addition, wealthy donors are able to dispose of appreciated assets without ever paying taxes, he said.
Kysar, whose teaching and research focuses on federal income tax and international tax, said the U.S. tax system, which applies to domestic and international income, has led some citizens to renounce U.S. citizenship and move abroad. More importantly, she said, it encourages new companies to incorporate outside the U.S. and invites gamesmanship on the part of companies with foreign subsidiaries. She noted that most other countries use a territorial tax system that taxes income in the country in which it is earned. On the corporate side, she added, there is a stronger argument for switching to a territorial tax system in the U.S.
Above all, said Schizer, there needs to be a plan to reduce the deficit, something Congress has avoided. He cited a recent Gallup poll showing that Americans believe the government wastes an average 51 cents of every dollar it spends.