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Deficit Reduction Versus Job Creation

A Delicate Balancing Act

Mary-Jo Kranacher, MBA, CPA/CFF, CFE

The continuing financial crisis is exacting an enormous price: Poverty is rising in the United States, unemployment remains high, and consumer confidence is in freefall as we watch our elected leaders engage in dysfunctional political tactics that have brought our democracy, and our economy, to its knees. This doesn't bode well for our nation's future.

In recent years, many have voiced skepticism regarding whether the next generation will be better off economically than the current one. Yet the solution to reversing the downward economic spiral has proved elusive. The debate over whether to raise the federal debt ceiling dominated the national discourse earlier this year and demonstrated publicly just how broken our political system is. And while Washington fiddles, Rome burns. Primarily, our economic recovery will hinge on getting people back to work, which will broaden the tax base, raise revenues, and give consumers the income with which they can help spur economic growth. But we also need to start living within our means and paying down our massive national debt.

Government's Role

Some legislators claim that businesses have postponed hiring more workers because of uncertainty regarding regulation, tax rates, and healthcare costs. But I would argue that in our consumer-based economy, uncertainty of consumer demand is what's putting hiring on the back burner—and people generally don't make major purchases when they're unemployed.

With limited resources, the government's best function in job creation is fostering an environment in which jobs are developed in the private sector. But this won't be an easy task. Private industry has learned to do more with less. Consequently, hiring has slowed. In general, businesses have focused on efficiency to improve their bottom line.

President obama recently unveiled his plan to put Americans back to work—the American Jobs Act. Adapted from a White House press release, the following are some of the key features of his plan:

Tax cuts for businesses:

  • cutting the employer portion of the payroll tax in half for the first $5 million in payroll (representing 98% of businesses);

  • allowing a complete payroll tax holiday for hiring new workers or increasing payroll;

  • extending 100% bonus depreciation; and

  • reforming the regulatory structure to help entrepreneurs and small businesses.

Keeping workers on the job:

  • enacting “returning heroes” and “wounded warriors” hiring tax credits;

  • providing funds to state and local governments to prevent layoffs of teachers, police officers, and firefighters;

  • repairing, renovating, and modernizing at least 35,000 public schools;

  • funding and establishing an American Infrastructure Financing Authority;

  • launching a “Project Rebuild” to rehabilitate and refurbish foreclosed properties; and

  • expanding access to high-speed wireless. Putting the unemployed back to work:

  • extending unemployment benefits and reforming the unemployment insurance program, including—

    • unemployment insurance for worksharing arrangements;

    • a new “bridge to work” program for short-term employment; and

    • wage insurance programs for entrepreneurs;

  • instituting a $4,000 tax credit for hiring long-term unemployed workers;

  • prohibiting discrimination against unemployed persons when hiring; and

  • expanding job opportunities for low-income youth and adults.

  • Tax relief for individuals:

  • cutting the employee portion of the payroll tax in half (representing 160 million workers); and

  • lowering barriers in the Home Affordable Refinance Program to allow more individuals to refinance their mortgages at current low rates.

The proposals in the American Jobs Act are intended to be paid for as part of President Obama's long-term deficit reduction plan. Offsetting federal revenues would come from—

  • repealing the Bush-era tax cuts and limiting deductions for high-income taxpayers;

  • closing certain corporate tax loopholes and ending certain subsidies for oil and gas companies;

  • cutting certain mandatory benefit programs, including Medicare, Medicaid, federal employee retirement benefits, and farm subsidies;

  • savings from lower interest payments on the national debt;

  • savings in defense spending from the withdrawal of U.S. troops from Iraq and Afghanistan beginning in 2013; and

  • establishing a new minimum tax on individuals earning $1 million or more.

President Obama's proposals are an attempt to fix the nation's crippling jobs problem while simultaneously addressing the federal government's escalating long-term debt. It is important that the ultimate legislation addresses both sides of this interlocking economic issue. Too often, Washington focuses on a law's impact before the next election and leaves the consequences to future generations. Unless we begin to seriously address our long-term problems, no short-term stimulus will be sufficient to ensure stable employment, broad-based growth, and a robust safety net.

As always, I welcome your comments.

Mary-Jo Kranacher, MBA, CPA/CFF, CFE. Editor-in-Chief. ACFE Endowed Professor of Fraud Examination, York College, The City University of New York (CUNY) mkranacher@nysscpa.org.

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