Bloomberg News

U.S. Should Avoid Fiscal Cliff, Overhaul Taxes, OECD Says

June 26, 2012

The U.S. Congress should seek longer-term fiscal sustainability while trimming government spending gradually and providing more equal tax treatment, according to the Organization for Economic Cooperation and Development.

The Paris-based OECD released its 2012 economic survey of the U.S. today, leaving intact its projections of 2.4 percent growth for this year and 2.6 percent for 2013 from last month.

“Income inequality and relative poverty are among the highest in the OECD,” the report said of the U.S. “At the same time, there is no consensus in the economic literature that reducing inequality would be harmful to economic growth.”

A so-called fiscal cliff is coming at the end of 2012 when a number of major tax-and-spending changes will take effect unless Congress acts. The George W. Bush-era income tax cuts will expire as will a temporary cut in the Social Security payroll tax. About $1.2 trillion in automatic spending cuts over a decade will be poised to start, expanded jobless benefits will expire and the government will approach the legal limit on federal borrowing.

The OECD said that “legislative decisions are required” to avoid the budget shock. Inaction on Capitol Hill could push the U.S. economy into recession next year, the Congressional Budget Office said last month.

‘Gradual Pace’

The federal budget deficit should be reduced “at a gradual pace so as to put the federal debt-GDP ratio on a downward path and restore fiscal sustainability,” the OECD said.

Federal Reserve officials said last week they see U.S. growth ranging from 1.9 percent to 2.4 percent this year, down from an April forecast of 2.4 percent to 2.9 percent, according to central-tendency estimates. Fed officials predict unemployment of 8 percent to 8.2 percent at year-end, compared with an April projection of 7.8 percent to 8 percent. They expect joblessness of 7.5 percent to 8 percent in 2013, up from 7.3 percent to 7.7 percent.

The Obama administration’s proposals for job training and re-employment, contained in the 2013 budget, “should be implemented without delay,” according to the OECD.

The organization also recommended improvements to education, greater accessibility to home mortgage modifications and high levels of equity capital for banks.

“Equalizing the effective tax rates on debt-financed corporate investment and on housing at the higher rate on equity-financed corporate investment while simultaneously lowering the corporate tax rate would reduce income inequality and improve the efficiency of investment,” according to the OECD.

Tax Rate

The report, citing Congressional Budget Office figures from 2005, said for example the effective federal tax rate on real income from equity-financed corporate investment was 36.1 percent, while the rate for debt-financed investment was minus 6.4 percent.

The U.S. has the fourth-highest income inequality among the 34 OECD nations behind Chile, Mexico and Turkey, according to the organization’s data. “Incomes of the top 1 percent of earners have skyrocketed,” the OECD said.

The OECD helps governments “foster prosperity and fight poverty through economic growth and financial stability,” according to the organization’s website, while taking into account “the environmental implications of economic and social development.” OECD member nations include Australia, Chile, France, Germany, Israel, Mexico, Switzerland, Turkey, the U.K. and the U.S.

To contact the reporter on this story: Caroline Fairchild in Washington at cfairchild2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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