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In the Nation's Interest

America Is On the Road to Crisis

According to every responsible authority, Democrat and Republican, conservative and liberal, bipartisan and nonpartisan, the United States is at considerable and growing risk of financial erosion, or even eventual crisis. Our public debt is growing faster than is our collective income, out of which we must service that debt. Moreover, the growth of our public debt is accelerating.

The response embodied in the budget plan just passed in Congress is not a comprehensive program to reverse the growth of the debt. It is, rather, a plan to cut taxes in anticipation of a consequent increase of economic growth that advocates say might offset the tax cut’s direct and immediate revenue cost. Studies of past tax cuts have shown that only a modest portion of the lost revenue has been repaid through faster growth. The current plan in Congress assumes future income and spends that assumed income in full today.

Even if that hope should be fulfilled, the federal budget would remain on a path to an exploding debt, and the chances of going back and readdressing tax policy to help in averting that crisis would be slim. But if this proposed tax cut gambit should fail, our nation’s current inexorable slide toward a debt explosion would be accelerated. Our nation tried this course in 1981, when our public debt was about 25 percent of the size of our GDP. Twelve years later, people can argue about causality, it was about 50 percent.

By 2001, through politically courageous legislative efforts, the debt was down to about 33 percent of our GDP, the nation was running budget surpluses and paying down the debt, and the economy was growing briskly by today’s standards. We experimented again with ostensibly growth-inducing tax cuts. Deficits immediately returned, and now we plan to experiment a third time, with the debt at more than 75 percent of the GDP.

Every expert would acknowledge that the higher the debt burden, the riskier the experiment. This is not a partisan issue. Neither party has stepped forward to increase revenue or reduce spending. Today’s dissembling over the annual budget plan, already more than six months after the due date required by law and with no one holding our lawmakers accountable, is just the latest episode of nonfeasance. This choice is irresponsible and simply and emphatically wrong.

Our elected policymakers must instead set a comprehensive course toward fiscal responsibility and control of our public debt. To be sure, our arcane tax system cries out for reform. That is especially true of the corporate tax. Our marginal corporate tax rate is among the highest in the world, but it collects among the lowest revenue yields in the world. The well advised corporation will collect its tax credits and deductions here at home, but will employ the law to recognize its income overseas.

This sacrifices U.S. jobs and benefits no one, especially not the federal treasury. While larger businesses often benefit from preferential tax provisions, smaller firms, which are key to job growth and innovation, frequently pay even higher shares of their profits. This can slow the entire economy. Meanwhile, tax preferences steer economic resources to investments that are favored by the tax law, rather than others that have a higher return to society earned in the marketplace. Running up the already excessive budget deficit and debt is not the answer to any economic problem.

This is the key point: Tax cuts cannot accelerate economic growth in the long run if their immediate increase in the budget deficit reduces national savings, raises interest rates, and thereby chokes off the investment that is the fundamental prerequisite of that growth. Compounding that economic loss is the effect of budget deficits in crowding out public investments in infrastructure, research and education that lay the groundwork for private sector growth. Of course, any hope for U.S. growth would be blown away by financial market, and especially foreign, panic over U.S. fiscal irresponsibility.

We need to reform the tax structure to make it more hospitable to growth. We need to reduce the corporate tax rate to an internationally competitive level, but pay for it by eliminating tax preferences. Business tax reform on these terms favors overall employment and economic growth, not any particular income group. The individual income tax system also should be simplified, with a broader tax base paying for lower tax rates.

But an ostensibly pro-growth tax structure will not override anti-growth fiscal irresponsibility. This is the time to face up to our looming fiscal crisis, not to make it worse. Our elected leaders must lead, not fiddle. Those policymakers must acknowledge the magnitude of the problem and create a complete plan, of which true tax reform should be one part, to solve it.


This column was originally featured in The Hill.