YOU DECIDE: What divides our economic views?
Date posted: September 28, 2012
Media Contact: Dr. Mike Walden, 919.515.4671 or firstname.lastname@example.org
By Dr. Mike Walden
North Carolina Cooperative Extension
It’s down the stretch for the political campaigns. This year, economic issues top the list of most voters’ concerns. Indeed, many pundits say proposals and answers to these economic questions will be the determinant of how many of us vote.
Clearly the candidates for the public offices differ on their views about economic solutions, and behind these views are some core ideas about the economy. Yet often these core ideas are hard to deduce in the flurry of political ads and rallies.
So let me try to help. In a nonpartisan way, I’ll cut to the essence of the disagreements about four important economic issues of our time. Then I’ll let you decide if there’s logic on one or both sides of the issues.
Tax Rates: The key question here is how tax rates should vary with a person’s income. Should richer people pay a higher rate (tax per dollar of income) than lower income people? If so, this means richer folks pay not only more total taxes, but also a higher percentage of their income in taxes. Supporters argue richer taxpayers can afford a greater tax burden, but they also need to pay a higher tax rate because they benefit more from government services.
The alternative is a flat tax rate, where the rate is the same for all levels of income. Backers say it is simple, avoids decisions about where divisions should be between tax rates and encourages economic growth, especially when applied to the income tax.
It’s on this last point — regarding the relationship between tax rates and economic growth — where there’s the most debate. The question is whether higher tax rates on richer taxpayers, who tend to be the biggest investors, will cause them to reduce the money they put into business and job expansion. Unfortunately, there’s no consistent answer, because economic evidence exists supporting both a “no” and a “yes” answer.
How Many Deductions? Deductions are spending by taxpayers that is not taxed for income taxes, so deductions reduce the income taxes we pay. However, deductions are only allowed for certain kinds of spending, and our elected officials (president and Congress for federal income taxes; governor and general assembly for state income taxes) decide which spending qualifies.
A big issue with deductions is that they reduce the amount of taxable income, meaning tax rates must be higher to collect the same amount of tax revenue. Therefore, there is a debate about how many deductions there should be and who should be able to use them. Should there be fewer deductions and lower tax rates, or more deductions but higher tax rates? Should tax deductions be limited to taxpayers of certain income levels? If a tax deduction is reduced or eliminated, what would that do to the businesses benefiting from the spending? These are all important and difficult questions for which there aren’t easy answers.
When to Address the National Debt? Almost everyone I know thinks the national debt is a big problem. But even worriers about the debt are divided about how quickly it should be addressed.
Obviously, many say “right now” because they see the debt growing every day, and they worry about our indebtedness to foreign lenders as well as potential adverse effects on interest rates and funding available for businesses. In short, they see the national debt as an impediment to economic recovery.
But there’s another viewpoint. Even admitting the debt is a long-run problem, some say it doesn’t need to be handled immediately for two reasons. First, the most direct cost of the debt is the size of interest payments made by the federal government. Due to the tremendous drop in interest rates, these interest payments as a percent of the economy are at their lowest level in two decades.
And second, a quick and dramatic reduction in the debt would have to come from either big tax hikes or big spending reductions, both of which, argue some economists, wouldn’t be helpful while the economy is still weak.
To complicate matters more, there are economic theories and evidence to support both sides.
How Much Control Is Needed Over Markets? In the last four years, new federal regulations were passed impacting two important markets, health care and financial services. Supporters say they were needed because of major problems in both areas — cost and coverage in health care and risk and loss in financial services.
The new regulations are extremely complicated and controversial. Normally, we think that competition and consumers’ bargain hunting will force markets to deliver the best product or service at the lowest price. But is there something fundamentally different about health care and financial services that requires more public oversight? Again, the experts — and candidates — differ.
So I’ve given you the background for not one, but several “you decides.”
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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide
Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/
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