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Business Favors Base-Broadening Corporate Tax Reform, Survey Indicates

MAR. 7, 2011

Business Favors Base-Broadening Corporate Tax Reform, Survey Indicates

DATED MAR. 7, 2011
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NABE Panel Concerned About Rising Fiscal Budget Deficits and Eager to See Federal Spending Curbed

 

National Association for Business Economics

 

 

March 2011

 

 

Economic Policy Survey

 

 

The NABE March 2011 Economic Policy Survey presents the consensus of a panel of 263 members of the National Association for Business Economics. Conducted semiannually, this survey was conducted January 28-February 14, 2011. May be reprinted in whole or in part with credit given to NABE. View the survey results, including complete tabulations, online at www.nabe.com. This is one of three surveys conducted by NABE. The other two are the NABE Outlook Survey and the NABE Industry Survey. Chad Moutray, Pinchfield Consulting & Analytics, LLC (Chair); Robert Fry, DuPont; Lynn Reaser, Point Loma Nazarene University; Cliff Rossi, University of Maryland; Emily Sanchez, American Chemistry Council; and Robert Yerex, Kronos Incorporated, conducted the analysis for this report.

The National Association for Business Economics surveyed its members on a number of policy issues. The respondents expressed concern about rising fiscal budget deficits, and are eager for the president and Congress to curb federal spending. At the top of the list is a desire to curb health-care spending and for some form of comprehensive tax reform. In general, the survey respondents support the recommendations of the Bowles-Simpson commission. There is a high degree of skepticism, though, as 71 percent of those surveyed think that meaningful deficit reduction measures would not pass through Congress this year.

Despite such desires for austerity, these panelists were overwhelmingly in favor of the compromise legislation in December to extend the Bush-era tax cuts, although a sizable number of individuals would have preferred that these tax cuts not be extended for those earning $200,000 ($250,000 for those who are married) or more. In terms of tax reform, 93 percent of respondents favor lowering the corporate tax rate, while also reducing credits and deductions. A similar appetite exists for comprehensive individual tax reform, which would lower marginal rates while also reducing the number of tax breaks. Looking at specific tax breaks, however, the advisability of retaining, reducing, or eliminating these breaks was less certain.

Six out of ten survey respondents feel that the Federal Reserve's program to purchase up to $600 billion in Treasury securities has had a positive impact. About two-thirds of those who responded feel that the actions of the Federal Reserve should continue to be guided by its current dual mandate of price stability and maximizing employment. While more than half of the survey respondents indicate that current monetary policy is about right, there is also a sense that overall monetary policy will become more restrictive over the next year.

Seventy percent of the survey panelists believe that Fannie Mae and Freddie Mac should ultimately be privatized, with most suggesting that this should be a gradual process over several years. When asked about the form of possible successors to the current housing GSEs, over 70% believe that Fannie Mae and Freddie Mac should be consolidated, given their similar purposes. Three-fourths of respondents believe that the government should only guarantee mortgage-backed securities, rather than any debt that might be issued by such entities.

Monetary Policy

A clear majority (62.4%) of panelists responding to the March 2011 NABE Policy Survey felt that the Federal Reserve's program to purchase up to $600 billion in Treasury securities has had a positive impact. This was nearly four times as many respondents as those who indicated that they believed the program has negatively impacted the economy (15.8%), and almost three times as large as those who believe there has been no impact (21.8%). It should come as no surprise then that a total of 59% of respondents indicated the program should continue through its planned termination in June (52.5%), or extended beyond that date (6.5%). The remaining 41% felt the program should either be terminated immediately (16%) or at some time before the scheduled end date in June (25%).

About two-thirds of those who responded felt that the actions of the Federal Reserve should continue to be guided by its current dual mandate of price stability and maximizing employment.

More than half (52.4%) of the respondents felt that current monetary policy is about right, while 40.9% felt it was too stimulative. The remaining 6.7% indicated that current policy is too restrictive. More than two-thirds (67.7%) of respondents would like to see monetary policy over the next 12 months become more restrictive, while only 6.8% would prefer a more stimulative policy. The remaining 25.5% would prefer that it remain unchanged.

Seventy-one percent of the respondents indicated that they expect the Federal Reserve to raise interest rates over the next twelve months, although a sizable 29% expect no change. Thirty percent expect the Fed to raise interest rates by 26-50 basis points, while 17% believe that monetary policymakers will boost rates by 25 basis points or less.

 Increase, but not sure how much                               8.2%

 

 

 Increase by 25 points or less                                16.7%

 

 

 Increase by 26 to 50 points                                  29.6%

 

 

 Increase by 51 to 75 points                                   9.7%

 

 

 Increase by 76 to 100 points                                  4.3%

 

 

 Increase by more than 100 points                              2.3%

 

 

 Remain unchanged                                             29.2%

 

 

Asked about the risk of inflation or deflation over the next three years, 40% of the respondents said they believed inflation posed the greatest problem, although almost as many (36%) indicated that they believe neither inflation nor deflation is a significant risk. Eighteen percent of the respondents cited deflation as the primary near-term risk, while inflation is the longer-term issue.

Fiscal Policy

The NABE members who responded to the March 2011 NABE Policy Survey see the benefits of stimulative fiscal policy measures, but are also keenly aware of the need to reduce the deficit. Nine out of ten respondents supported the December 2010 compromise between President Obama and Congress to extend the Bush-era tax cuts for two years. However, nearly four out of ten respondents think that the Bush-era tax cuts should not have been extended for those making over $200,000 (or $250,000 for married filers). This plan also included a temporary payroll tax cut and other measures, which were supported by over 61 percent of those who participated in the survey.

Despite the support for such stimulative measures, NABE members are eager for a solution to the fiscal situation, especially in light of a mounting federal debt burden. Almost 87 percent of respondents generally supported the recommendations of the National Commission on Fiscal Responsibility and Reform, which were made in December by Co-Chairs Erskine Bowles and Alan Simpson. Indeed, two-thirds of those who responded to the survey would prefer a more restrictive fiscal policy over the next two years, although they are not necessarily optimistic that that will happen. When asked if they thought that the 112th Congress would pass any meaningful form of deficit reduction this year, 71 percent of the respondents said no, reflecting a high degree of skepticism.

Survey participants were asked to rank a number of possible ways to reduce the deficit in terms of their effectiveness. Containing health-care costs in Medicare and Medicaid was cited as the most useful tool for controlling the deficit. This was followed by the need to pass some form of comprehensive tax reform, which simplifies tax rates and exemptions, and a desire to reform Social Security. Ranked fourth was the enactment of tough spending caps and cuts in discretionary spending. Rounding out the list were reductions in defense spending, cuts in agriculture subsidies, reform of the budget process, and "other."

Among the most prevalent answers for those who checked "other" were: implementing a value-added tax, passing a balanced budget amendment, enacting gerrymandering reform, reducing the overall size of the federal bureaucracy, eliminating or means-testing certain tax benefits (such as the home-mortgage deduction), and raising marginal tax rates on high-income individuals.

              What aspect of their deficit reduction plan would be

 

                  MOST likely to help in reducing the deficit?

 

 

  (Respondents were asked to rank from 1 to 8, with 1 being the most likely.)

 

 

                     Average Rank Deficit reduction options

 

 ______________________________________________________________________________

 

 

 2.5                      Containing health-care costs in Medicare and Medicaid

 

 

 3.4                      Passing comprehensive tax reform which simplifies tax

 

                          rates and exemptions

 

 

 3.7                      Reforming Social Security

 

 

 4.1                      Enacting tough spending caps and cutting

 

                          discretionary spending

 

 

 4.4                      Reducing defense spending

 

 

 5.0                      Cutting agriculture subsidies

 

 

 5.1                      Reforming the budget process

 

 

 6.6                      Other

 

 

Tax Policy

NABE members overwhelmingly support comprehensive tax reform that reduces marginal tax rates while eliminating credits and deductions. More than 93% of survey respondents favor lowering corporate tax rates as part of broader comprehensive tax reform. Over two-thirds (68.3%) favor allowing the immediate expensing of all investment in plant and equipment while eliminating the deductibility of interest on corporate income tax returns. However, slightly less than half of the respondents (47.1%) favor changing the corporate income tax to eliminate the taxation of foreign-source income.

Similarly, 92.5% of survey respondents would favor an individual tax system that reduced the number of deductions and tax credits but provided a lower marginal tax rate for most Americans. There was less agreement, however, over whether to retain, limit, or eliminate specific deductions. Less than half of the respondents favor retaining the full deductions for mortgage interest, state and local taxes, and charitable contributions, but in no case did a majority or even a plurality favor outright elimination. For each of these deductions, the median answer was to limit, but not eliminate, the deduction. The least support for retaining full deduction was for mortgage interest (24.4%) and highest for charitable contributions (47.0%), with state and local taxes in between at 39.6%. Respondents were also given the opportunity to specify another deduction or credit that they would either retain, limit, or eliminate. By far, the most common suggestion (cited by 11 respondents) was to limit or eliminate the deduction for employer-provided health insurance. The only other responses cited more than once were suggestions to eliminate "all others" (four responses) and to eliminate "green" tax credits (three responses).

Fannie Mae and Freddie Mac Reforms

Seven out of ten of the survey panelists believe that Fannie Mae and Freddie Mac should ultimately be privatized. Eighteen percent believe that these entities should return to their prior status as government-sponsored enterprises (GSEs), while 12% think they should remain under government ownership.

Of those survey respondents who endorse privatization of the two housing agencies, most believe it should be a gradual process, with 63% envisioning a 2-5 year process and another 17% believing it should take place over the next 6-10 years. In contrast, about one-fifth call for a faster privatization track, with the transition completed in one year or less.

When asked about the form of possible successors to the current housing GSEs, over 70% of survey respondents believe that Fannie Mae and Freddie Mac should be consolidated, given their similar purposes. Three-fourths of respondents believe that the government should only guarantee mortgage-backed securities rather than any debt that might be issued by such entities.

The panelists cite capital requirements as being the most useful way in which to reduce future risk, followed by restrictions on loan-to-value ratios. Imposing limits on the size of individual mortgages purchased (jumbo loans) and general regulatory oversight are deemed to be less valuable.

Under the Dodd-Frank Legislation, banks originating mortgage loans will be required to retain 5% of the risk unless those loans are Qualified Residential Mortgages (QRMs). Slightly more than one-half (51%) of NABE respondents believe that a mortgage should have a loan-to-value ratio of no more than 80% to qualify as a QRM, while another 20% think that the loan-to-value ratio should be 70% or less.

 

Fannie Mae and Freddie Mac Should Be:

 

 

(Percentage Distribution of NABE respondents)

 

 

 

 

Policy Survey Committee

Chad Moutray, President, Pinchfield Consulting & Analytics, LLC (Chair)

Robert Fry, Senior Economist, DuPont

Lynn Reaser, Chief Economist, Fermanian Business & Economic Institute, Point Loma Nazarene University (and former NABE President)

Cliff Rossi, Executive-in-Residence, Center for Financial Policy, Robert H. Smith School of Business, University of Maryland

Emily Sanchez, Director of Surveys and Statistics, American Chemistry Council

Robert Yerex, Chief Economist, Kronos Incorporated

Survey responses were tabulated by Point Loma Nazarene University.

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