The current debate in the United States over their budget deficit and debt does not appear to be generating solutions that will solve their problem anytime soon. According to the Congressional Budget Office’s analysis of President Obama’s budget proposals, the deficit under the President’s proposals would at first fall, but after 2015 would begin to rise.
Indeed, the accompanying graph of revenues and expenditures based on the CBO data (Figure 1) illustrates that the budget proposals slows expenditure growth down initially but it then begins to rise at a higher rate after 2013. Meanwhile, the revenue provisions are an important driver in that they show revenue growth slowing substantially after 2014 largely as a result of the tax reductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 being extended permanently as well as the indexing of some income tax exemptions to inflation. From a deficit of 1.4 trillion dollars in 2011, the deficit would drop to 841 billion by 2015 and then rise to 1.2 trillion by 2021. The deficit to GDP ratio would fall from 9.5 percent in 2011 to 4.1 percent by 2015 but would then rise to 4.9 percent by 2021. In other words, this is not a viable solution to the United States deficit and debt problem.
Figure 1
There is apparently little political desire in the United States to face the basic fiscal problems of the federal government and the short-term political solution seems to be to enact a token attempt at deficit reduction but largely defer the problem to the future and accommodate that deferral by raising the debt ceiling of the government. No doubt, the optimistic nature of America means that the future should include challenges for their children. However, the United States more than most countries is in an excellent position to deal with its fiscal problem. Despite its current economic problems, it is still the largest and most dynamic economy in the world. However, with a history rooted in tax aversion stretching back to the Boston Tea Party, it has one of the lowest tax to GDP ratios in the OECD countries.
Quite frankly, the United States can solve its current deficit situation by bringing in a broad based federal sales tax on consumption and a federal gasoline tax. These would be taxes on consumption and would result in smaller distortions than taxes on income, which would remain unchanged. Moreover, in the case of gasoline taxes, it might also reduce consumption and dependence on imported oil and foster greater conservation. It is possible to construct a back of the envelope estimate of how much revenue such measures might bring in using a very simple static analysis that of course does not factor in general equilibrium effects of the tax changes.
Assume a broad Federal Sales Tax of 7 percent applied to the value of all consumption expenditures, which in the United States is about 70 percent of GDP. Also, assume an estimated average price of gasoline per gallon for the U.S. obtained from the Energy Information Administration of $3.84 per gallon and an estimated consumption of 138 billion gallons per year and that these values stay constant. Assume also that expenditures stay as forecast by the Congressional Budget Office and that GDP grows as they have forecast. The results are plotted in Figure 2 and show the gap between revenues and expenditures shrinking with a surplus by 2014 of 134 billion dollars and then surpluses all the way until 2021. As a share of GDP, these new tax revenues would raise the American tax to GDP ratio by about 5 percentage points which would bring it to about the OECD average.
Figure 2
This analysis is of course quite simple in that it is a simple spreadsheet analysis with no feedback or impact analysis on the effects of these changes on the economy. However, they illustrate that the United States indeed has the wealth and ability to resolve its fiscal problems with a set of tax and expenditure policies that are not outside the range of the global fiscal experience. Will this happen? Likely not. As mentioned before, American political culture is rooted in tax aversion and many Americans believe their federal government’s fiscal dilemma is only a spending problem and not also a revenue problem. However, balancing the budget on expenditure cuts alone would mean nearly a 40 percent drop in expenditures. Moreover, the American political debate right now is not about taking responsibility for their fiscal dilemma but about politically deferring the problem in the hopes that it might go away. Fixing any problem requires taking responsibility and when it comes to American federal public finances, they are not there yet.
Worthwhile Canadian Initiative 
“On a related note, if any WCIer has a spare moment could they write something up about what would happen if the US decided to risk the inflation hit and just printed up some more money to cover all or some of the deficit.”
I think this is exactly what they need to do to get out of their liquidity trap. The government needs to issue bonds to pay for stimulus spending and the Fed needs to buy them up as fast as it issues them. This will not cause inflation as long as output is below capacity. The bond market is just not an issue.
Once the economy is back up to capacity, of course, this has to end. The extra money that has been created will still be around, and it will cause inflation unless removed. Tax increases to cut the deficit would be the rational way to do this.
Not that I expect rationality to prevail. My guess is that the U.S. is in for a very long slump. I just hope we don’t follow them
Battle Plan ”A”
1: Repell the Bush’s tax exemption for the richest american and closing many loopholes
2: Printing some money is a good idea (up to say 5-6% inflation)
3: Carbon Tax
4: Some kind of sales tax
5: Cutting defense budget and start really controlling cost
6: Some controls on health Care cost (Hint: Kaiser)
7: Rationalize the trillion pages of law and regulations. At the same time, if you are lucky, maybe you will get rid of numerous agencies fights.
8: Hope for the best
9: You need the Marine Corps
Replace 4: some kind of sales tax by 4: Tax on financial transactions
and add 10: You loose your reelection
It’s an interesting thing for a country to have two armies. The US Marine Corps is larger and has more equipment and capabilities than most countries total armed forces.
It’s an interesting thing for a country to have two armies. The US Marine Corps is larger and has more equipment and capabilities than most countries total armed forces.
The craziest statistic is that the world’s largest air force is the US Air Force, and the world’s second largest air force is the US Navy. The US would still be quite secure if the Army and Air Force were folded into state National Guard units, entrusting our front line defenses to the Navy and Marine Corps (its 3 divisions on active duty– there’s also a division in the Marine Corps Reserve— are enormous, each twice the size of Army light infantry division). Any war too big for the Navy and Marines to tackle could be backstopped by National Guard call ups (and perhaps a National Guard draft).
And since every post must in some way relate to Canada (right?), the CF Reserve policy of basic training over a series of weekends really is a very smart way to train reservists, the National Guard would do well to adopt it.
http://www.chaaban.info/2006/11/06/basic-military-qualification-bmq/
Bit crazy if you can’t to National Guard basic on weekends. I knew lots of friends in University who served in the Militia (aka Land Force Reserve). They were of that age, liked it and the money was nice to supplement a student’s needs. I knew one guy who was doing COTC (our version of ROTC).
Anyway, every war the US gets into usually involves National Guard callups. The Army doesn’t have full exeditionary capability (every billet filled in every division or brigade at war strength) without them, by design.
Bit crazy if you can’t to National Guard basic on weekends. I knew lots of friends in University who served in the Militia (aka Land Force Reserve). They were of that age, liked it and the money was nice to supplement a student’s needs. I knew one guy who was doing COTC (our version of ROTC).
Anyway, every war the US gets into usually involves National Guard callups. The Army doesn’t have full exeditionary capability (every billet filled in every division or brigade at war strength) without them, by design.
“The U.S. has a real problem with rising medical costs. This wont be fixed with tax policy, but with health care reform.”-RSJ
What sort of (politically feasible) health reform would “fix” the problem of rising health costs?
This document lists and analyzes the options for reducing the USA deficit. The Pentagone did the exercise last year too but i do not think they publish the outcome.
Click to access cbo-reducing-the-budget.original.pdf
“What sort of (politically feasible) health reform would “fix” the problem of rising health costs?”
I tend to agree with your statement. Health care costs are rising and cannot be regulated against. The baby boomers are on the verge or retirement age. Costs will increase, its how we deal with them that matters