Get Ready: More Taxes/Less Tax Breaks are Coming!

Beyond the debt ceiling debate, U.S. needs higher taxes and reduced benefits!

The Obama administration and Congress will eventually have to agree to some watered-down measures that will enable the debt ceiling to be increased to ensure that the country’s creditors continue to be paid on time but that will only be a short-term political deal. The medium-term fiscal plans brought forward by Republicans (ready to slash spending but unwilling to consider tax increases) and by the White House (heavy reliance on sustained economic growth to reduce future deficits) currently fall well short of fiscal sustainability… [The bottom line is that] increases in taxes, combined with fundamental program redesign and a reduction in benefits, will eventually be required. [Let us explain.] Words: 744

So say Glen Hodgson and Kip Beckman (www.conferenceboard.ca) in edited comments from a Financial Post article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. The authors go on to say:

Even if sustained growth is fully restored, Washington will be taking in the equivalent of15% of gross domestic product as revenue, but spending 20% of GDP. If the budget is ever to be rebalanced, the U.S. federal government will have to tackle structural factors because the fundamental problem facing the U.S. federal government is bringing taxes and spending into balance over the long run.

The United States is currently spending about 5% of GDP on defence and homeland security, compared with around 3% before 9/11. Social Security — long the “third rail” of U.S. politics — has a huge unfunded liability, and aging demographics will have a major impact on other social spending entitlements if unchecked yet large cuts to defence and social spending are unlikely to be enough. [As a result of their dire financial situation, the U.S.] will eventually be required to do three things, namely: 

1. Increases income taxes – but there is a limit to how much tax revenue can be raised by hammering rich people.
2. Reform their tax legislation… [such as] the elimination of popular but costly incentives such as deductibility of mortgage interest payments. Even these measures, however, will probably still fall short [and, as such,] eventually, we expect the United States will have to do what Canada and other rich countries have done —
3. Implement a value-added sales tax [(VAT) or goods and services tax (GST)].

Republicans, and even some Democrats, may well threaten to fight to the last breath before ever agreeing to it, but the merits of a sales tax are unmistakeable: it provides stable revenues, it affects almost all of the population, and it has the least impact on business investment. As Canada found out in the 1990s, a value-added tax is a prolific generator of revenue, which the United States desperately needs.

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The United States may already be in the midst of a “lost decade” due to the 2008 financial crisis, and the debt ceiling debate — suspenseful though it is — could be but a prelude to something much more dramatic. If international and domestic bondholders ever decide to stop buying new U.S. government bonds to fund their chronic fiscal deficits, the politicians won’t have much choice. The hard laws of economics will eventually force even the United States to face fiscal reality.

Canadians have a lot riding on the outcome of the current debate, due to our deeply integrated economies. [On one hand,] as the U.S. goes through a difficult period fiscally and economically, Canadian businesses must re-double their efforts to adapt, innovate, diversify their sales, and internationalize their business model if they are to remain globally competitive.

[On the other hand,] Canada must also remain fiscally responsible to help offset the potential shocks ahead, so that a lost decade for the United States does not become a lost decade for Canada as well.

*http://www.conferenceboard.ca/press/speech_oped/11-07-27/Beyond_debt_ceiling_U_S_needs_own_GST.aspx?pf=true (Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada. Kip Beckman is principal economist at the Conference Board of Canada.)

Related Article:

1. What Would U.S. Default Mean for Canada – and the Global Economy?  https://www.munknee.com/2011/07/what-would-a-u-s-default-mean-for-canada-and-the-global-economy/

Editor’s Note:

1. The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
2. Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above