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The IMF is advising Washington to, among other things, kill the sequestration budget cuts in order to boost economic growth:
On the fiscal front, the deficit reduction in 2013 has been excessively rapid and ill-designed. In particular, the automatic spending cuts (“sequester”) not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth. These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the Administration’s budget proposal. At the same time, the expiration of the payroll tax cut and the increase in high-end marginal tax rates also imply some further drag on economic activity.
Except that a new study from the San Francisco Fed estimates while US budget policy will knock as much as one percentage point a year from GDP growth over the next three years — 90% of the fiscal drag comes from higher taxes.
So why isn’t the IMF talking about repealing the “super-cyclical” rise in taxes, everything from higher income tax rates for high-income households to the recent expiry of temporary Social Security payroll tax cuts to new taxes associated with Obamacare?
Anyway, the sequester is unlikely to continue in its current form for the next decade. The defense cuts, for one, are way too deep. So, too, cuts in the government’s public investment budget. But the tax hikes shouldn’t get a pass, especially since they were so ill-designed, as the IMF basically concedes when it sketches what smarter tax reform might look like: a) fewer deduction and b) taxing consumption rather than investment:
New revenues could be raised through a fundamental tax reform which would simplify the tax code and broaden the tax base through a reduction in exemptions and deductions, as well as through the introduction of a carbon tax and a value added tax.
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