Barack Obama’s plan to end tax breaks for America’s rich has been endorsed by the Organization for Economic Co-operation and Development, the Paris-based group of independent economists, in a report on the US published Tuesday.
The 34-country group recommends ending the tax breaks for the wealthy introduced by George W Bush and which are strongly supported by Republicans. The issue could come to a head at the end of the year if Obama wins a second term.
The OECD, which produces reports every two years, says that the US recovery is gaining momentum but remains fragile, with the country facing problems such as record long-term unemployment, income inequality and lack of investment in education and innovation.
The report is more bullish on the economy than Federal Reserve chairman Ben Bernanke, who recently downgraded his forecasts for the US economy.
But it points out that poverty is worse in the US than in Europe. “Income inequality and relative poverty are among the highest in the OECD,” the report says.
Only Chile, Mexico and Turkey among the 34 member OECD countries rank higher in terms of income inequality.
The Obama administration welcomed the report, saying it was already implementing some of the proposals and backed others. It provides useful ammunition for the Obama administration in the run-up to the 2012 election which looks like being dominated by debate over the economy.
There is less in the report that would be welcomed by Republicans.
Karen Kornbluh, the US ambassador to the OECD, told a press conference in Washington to launch the report, that the organisation is recommending exactly what Barack Obama is doing in terms of investing in education to improve the skills of the workforce.
One OECD recommendation the Obama administration is not acting on and is likely to continue to shy away from in an election year is a proposal to increase gas prices to help reduce the use of fossil fuels.
Richard Boucher, deputy secretary-general of the OECD and a former US state department diplomat, who was also at the press conference, stood by the gas price recommendation. “I realise it is not always popular, particularly in an election year, but we call it as we see it.”
Boucher expressed concern about the persistence of income inequality in the US. The chances of staying poor in the US are higher than in Europe, he said. “If your parents are poor, the chances are you are going to stay poor,” he said.
The OECD argues that tackling inequality could help the wider economy, a point on which economists are divided. “We know that some of these steps to reduce inequality also help boost economic growth,” Boucher said.
The OECD report said that growth in the US will remain moderate this year but concludes that America’s economic recovery has “gained momentum”.
Consumer and business spending have risen and unemployment, though still high at 8.2%, has fallen nearly two percentage points from its peak in 2009.
“Even with these substantial improvements, however, the recovery is far from complete,” the OECD warns. The US housing market has picked up but the large overhang of unsold homes and “the ongoing tide of foreclosures will continue to put downward pressure on house prices,” according to the report.
Europe’s economic crisis and the looming political fight over the expiration on 31 December expiration of Bush-era tax cuts and imposition of automatic spending cuts – also remain serious threats, the report warns.
It called on Congress to seek to trim government spending gradually rather than make drastic cuts at the end of this year, the so-called ‘fiscal cliff’ when $1.2tn in automatic spending cuts are due to kick in.
The slow pace of recovery in construction, normally an important source of growth following recessions, is also a worry, said the OECD. In addition, “uncertainty about the sustainability of the recovery has restrained business investment and slow growth in some trading partners has held back exports.”
The report warns that long-term unemployment has become a serious issue for the US. About 5.3 million Americans, 40% of unemployed people, have been out of work for 27 weeks or more. More training programmes are needed to get the long-term unemployed back to work, says the OECD.
The OECD expects unemployment to have fallen to 7.6% by 2013 7.6%, the low end of the Fed’s latest estimates of 7.5-8%.
It recommends that the Obama administration’s proposals for job training “should be implemented without delay”. It noted the US was only one of three countries in the OECD that spends less on disadvantaged students than on students from a better-off.
The report also suggests that higher-income Americans should pay more in taxes to help boost the US economy. The report singles out tax breaks on “debt-financed corporate investment and housing.” Buffett has pointed out that lower tax rates for investments have allowed him to pay less tax as a percentage than the majority of his staff, including his secretary, Debbie Bosanek.
Earlier this year the White House proposed a “measures to ensure everyone making over a million dollars a year pays a minimum effective tax rate of at least 30%.”
The report concludes: “The unequal tax treatment of income from different asset classes increases inequality in some cases and distorts the allocation of capital.
“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.”
The OECD recommends that tax breaks for the rich be phased out. “Although the middle class have seen their taxes remain roughly constant, or slightly increase, average income taxes have significantly declined for the most wealthy, especially the 1% top earners,” the report said.