Daily Archives: July 1, 2011

The Bipartisan Policy Centre crunches the debt-ceiling numbers. It finds that the the date on which the Treasury will no longer be able to pay all its bills–the X Date–will be “no earlier than August 2nd and probably no later than August 9th.”

What would happen next? There is no precedent, says the BPC. After looking carefully at the Treasury’s projected daily outflows and inflows, the presentation concludes that federal spending would have to be cut immediately by 44%. With decisions then having to be made on a day-by-day basis,  prioritizing spending would be very difficult and “the reality would be chaotic”. The government has nearly $500 billion in debt to roll over during August, at a time when a spike in uncertainty plus threatened or actual debt downgrades would be pushing up interest rates.

“The risks are real,” says the BPC. No kidding.

Update: The Committee for a Responsible Federal Budget has updated its “Realistic Baseline”:

Under its Extended Baseline Scenario, CBO bases its projections on current law, which assumes many things that are unlikely to occur, including the expiration of all the 2001/2003/2010 tax cuts and the discontinuation of the regular policy of enacting “AMT patches” and “doc fixes.”

Under its Alternative Fiscal Scenario, CBO lays out a more fiscally pessimistic path, where policymakers increase discretionary spending this decade at the rate of GDP growth, revenues stop growing as a share of GDP altogether after 2021, and the cost controls enacted under Health Carereform (PPACA) are ineffective or overridden after 2021.

CRFB’s Realistic Baseline uses a set of realistic assumptions that fall between these two scenarios and is consistent with a “current policy” path. Under this baseline, debt would rise from 69 percent of GDP today to 88 percent in 2020, 140 percent in 2035, and 437 percent by 2080.

The US corporate tax code encourages US firms to retain profits abroad. Their taxes are deferred, and only payable when the money comes home. This is a tax-avoidance opportunity and an artificial inducement to firms to invest abroad rather than in the United States. Robert Pozen has a proposal: move to a modified territorial system.

To reform the current system, Congress should exempt from U.S. taxes corporate income earned in foreign countries with an effective corporate tax rate of 20 percent or higher. Such earnings could be repatriated to the U.S., subject to payment of a 5 percent administrative charge. Such a fee, applied in France and other countries, would be a simple way to account for prior deductions from U.S. taxes by American corporations to generate foreign source income — for example, on salaries of U.S. executives who helped start European operations.

At the same time, Congress should end the current deferral system for foreign source income earned by U.S. corporations in countries with effective tax rates under 20 percent. Instead, that income would be taxed every year in the U.S. at a rate equal to the difference between 20 percent and the actual rate paid by the corporation in the tax haven. For example, if an American company generated $100 million of income in Bermuda, which collected $2 million in taxes on that income, the corporation would pay $18 million in U.S. taxes. And if the company repatriated that income to the U.S., it would pay the 5 percent administrative charge.

The plan is not without its difficulties–but Pozen answers the main objections. It is a good idea.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

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