Policy Memo

To: Henry M. Paulson, Jr., Secretary of the Treasury

From: Mr. Ben Bodi, Business Interest Lobbyist

Date: April 5, 2007

Subject: A business interest lobbyist's recommendation for reducing the U.S. budget deficit

With a current budget deficit of $246 billion dollars, the U.S. government should adopt extensive fiscal measures that will reduce this deficit and simultaneously promote long-run economic growth. To ensure long-run real GDP growth and a reduction in the budget deficit, the United States Congress and Senate should make permanent President Bush's tax cuts, promote reform of entitlement programs, and foster favorable business policies.

Reforming Social Security. The U.S. can reduce government spending by reforming Social Security by taking steps towards its privatization, raising the age at which people become eligible for government-financed retirement benefits, and improving the way Social Security benefits are indexed for inflation. Such measures, including the use of individual, private market investments would help guarantee the program's long-term viability with as little impact on taxes and benefits as possible. These individually managed accounts would allow individuals to invest at their own discretion and earn much higher returns. Unless reform is implemented now, by 2018 Social Security will begin paying out more in benefits than it collects in taxes, putting the program in jeopardy for future generations.

Changes in government revenue. When taxes are raised on all income groups, many people find ways to evade these tax hikes. Hence, tax increases only lead to marginal changes in government revenues. Tax increases are also deleterious to many businesses for they hinder company expansion and growth. This results in large projected tax revenues from businesses not being realized. Tax cuts on the other hand, specifically President Bush's, led to the Congressional Budget Office reporting a surge of "unanticipated tax receipts" that will sharply push down this year's deficit. This increase in tax revenues has far outstripped inflation, and the economy is close to full employment. Without increasing payroll and income taxes, the U.S. has seen a growth in tax revenues from a boom in corporate tax receipts. These tax cuts caused businesses to buy more equipment, hire more workers and increase profits. Overall this contributed to stronger overall economic growth -- causing the employees and companies to pay more in income, sales and other taxes over time.

Reforming the tax system. To further promote future economic prosperity, it is imperative for the U.S. to reform and reduce taxes on businesses. A majority of recent economic and job growth in the U.S. is a result of increased demand and expansion by the business sector. Suggestions include reducing the capital gains tax, reducing the tax on dividend income, removing competitive tax disadvantages experienced by U.S. multinational corporations, and enacting enhanced tax-deferred savings vehicles. Other suggestions for reform include repealing the tax-withholding requirement on all government payments, and advanced simplification of the Internal Revenue Code. The major reform to undertake includes broadening and simplifying the tax base by turning almost all itemized deductions into 15 percent credits against taxes.

Increasing national saving. The current