U.S. Budget Deficit: Will Tax Hikes And Spending Cuts Widen The Wealth Gap?

Category: Economy / May 10, 2013 5:43PM EDT


The U.S. posted its widest budget surplus since 2008 in April on revenue from tax payments by individuals and corporations, the Department of Treasury said on Friday. Joseph Greco, managing director with brokerage firm Meridian Equity Partners Inc., weighs in with IBTimes TV's Jessica Menton about the federal budget and its effect on the widening wealth gap in the U.S. 


The April surplus was $54 billion more than the same month a year ago. Tax receipts were $407 billion, up 28 percent compared to April 2012, while spending was $294 billion, 13 percent more than the year-ago period, MarketWatch reported.  


After tax hikes due to the expiration of the payroll tax cuts in January, as well as the sequestration cuts that began March 1, is the U.S. cutting spending and raising taxes too soon in the short-term to reduce the deficit?


“Taxes are inevitably arising because there’s just a smaller tax base. So you have to fill the gap and you have to produce whatever budget you approve. You have to still pay for that. And with unemployment staying where it is, with underemployment growing, and with the number of workers who are disenchanted, or rather those who are unemployed falling out of the pool altogether, that money is not being replaced. So taxes have to rise for those who are still earning,” said Greco.


“What does that mean in longer term and bigger picture? That means that the economy is going to stay very fragile, and employers and people who are in position to are going to hold onto as much cash as they can, which means most likely that’s going to be downward pressure on employment. So it continues to be a vicious cycle on top to bottom and both sides,” he said.


According to Pew Research, the wealth gap between the wealthiest and poorest Americans has continued to widen since the Great Recession. How will the sequestration cuts and recent tax hikes affect this growing disparity?


“We continue to see a pushing up against that wealthiest band at the top --  the business owners, the wealthy individuals -- and where they continue to do much, much more, run their businesses, run their operations, with much, much less. They’re less reliant on assistance. They’re less reliant on workers around their mansions, their properties. And for businesses, they’re less reliant on factory workers on the lowest level of employees in terms of wage earning, which is of course what we need to stimulate the economy,” said Greco.


“We don’t need…We would love to have more millionaires, but to have that you actually have to have more people in the work force to begin with. So there’s the upward pressure to push up on the wealthiest where they’re doing much, much more with much, much less in terms of employees,” he added.


“Now in the lowest levels, they are required to do much more with much less, but in reverse. They have to do more and they’re not given much in return for it. So these people are working significantly harder, they’re working significantly longer hours and doing more tasks and more jobs, and they’re getting paid less to do it, in which case that money is being spent out. As you have a little bit of inflation coming into the market, you’re seeing prices rise, even though CPI may not be moving, real inflation is hitting the market place, is hitting the pizzeria, the gas pump, school costs, education costs, and the retail market. So those people are required to pay a lot more, but they’re earning a lot less. So it is, most definitely, providing or producing a much wider gap in between the lowest and the highest bands of the economic strata,” he said.


According to The Century Foundation, a progressive non-partisan think tank founded in 1919, one of the worst developments in 2012 from the lessons from the Great Recession include the over-reliance on the Federal Reserve’s monetary policy and ability to help the U.S. economy.


“For monetary policy, one of the worst developments in 2012 was the over-reliance and overconfidence in the Fed's ability to help the economy. The Fed is far from powerless even when we are in a deep recession, but there are limits to the Fed's ability to help the economy recover in these circumstances. By focusing too much on the Fed's role in the recovery, and not enough on the failure of Congress to implement the necessary fiscal policy actions—for example, an aggressive program of infrastructure development to take advantage of low interest rates and provide employment—fiscal policymakers have been let off the hook. It's unlikely that a stronger focus on fiscal policy would have resulted in more expansionary policy, political gridlock stood in the way. But a more intense focus on fiscal policy issues might have helped to prevent one of the worst ideas about fiscal policy not just in 2012, but ever—that austerity can be expansionary in a deep recession—from taking hold,” said the article ‘Lessons from the Great Recession: Best and Worst Monetary Policy of 2012,’ published on The Century Foundation’s website.


Is there risk of an over reliance on the Fed if something does happen in the financial markets?


“As we’ve already started to see, the Fed is starting to telegraph a message that they are interested in backing away from the asset purchase program that was in place, and has pretty much put the market where it is now back at all-time highs day after day for the last few weeks,” said Greco.


“The question mark is over what happens when they step back. What happens when $85 million in asset purchases drops down to 80, drops down to 70, drops down to even 50. Does that significantly impact the market, or does private investment come in. does all of the sudden the investor return to the market with gusto and support that pull back on the bid side.  And that’s going to be the real questions. So we’re not going to really see an answer in the market place till probably the end of the fourth quarter the year, the beginning of next year 2014. And that’s simple because thus far, the market reaction to any talk of that has been met with a big head shake. ‘No, no no, that’s not good.’ And what we’re seeing worldwide is of course global concerted effort for central banks to continue to get involved, and continue to essentially print money. So I would be very surprised if the government would be able to back away aggressively before the end of this year, even though they are starting to test the waters and what the public opinion of it is,” he said.