The United States has a budget problem because it has a taxation problem. Americans don’t pay enough tax. Unless they confront this unpleasant but inescapable reality, their country will be mired in a fiscal pit for a very long time.
Government revenues took up 25.1 per cent of the U.S. economy in 2011, the lowest share in the Organization for Economic Co-operation and Development (according to its data). By comparison, the Canadian share was 31 per cent, Britain 35.5 per cent and Germany 37 per cent.
A country can have a comparatively low tax take if it has a small government. But the U.S. has an enormous military budget and extensive social programs. These programs might not be as munificent as those in other advanced industrial countries, but they exist and they’re costly: social security, public health care for seniors and the poor, unemployment insurance, food stamps and so on. Health care takes 17.6 per cent of the country’s national income, by far the highest share in the OECD, without producing correspondingly better aggregate results.
These programs are politically popular, and for good reason. They help and protect tens of millions of Americans who, left to their own devices, would be suffering more than some of them are now.
Polls consistently underscore the political popularity of these programs. The wealthy don’t like them because they don’t need them. Right-wing zealots don’t like them because, for them, Ayn Rand’s mythologies live. But every time these programs are put in political jeopardy, they survive.
Republicans once supported these major social programs; now a sizable chunk of them don’t. They want vouchers for individuals instead of government programs. And they figure that, if they squeeze government revenues enough, the resulting fiscal crisis will become so acute that they can maim or kill these programs.
Which is where the “no tax increase” mantra comes from, intellectually speaking. And where the drama over the “fiscal cliff” arose: the Republicans’ insistence under George W. Bush to cut tax rates and to keep them there, even for millionaires.
In the end, roughly a third of House Republicans agreed to increase taxes on individuals earning more than $400,000, which allowed the modest package to pass. But the fact that a large majority of Republicans were willing to support continuing tax cuts for the very wealthiest showed how deep into dogma they have dug themselves.
“Dysfunction” as a way of describing political America has become a cliché. What Americans just witnessed in the weeks between the election and the New Year’s Day deal was pathetic. The U.S. system is designed to make decisions difficult, but not this difficult. It now appears that the harder the decisions, the more dysfunctional the system.
Nothing suggests this spectacle won’t resume when the new Congress assembles this month, since nothing of fundamental importance has been done to move the country toward a stronger fiscal position. And nothing can be done unless Americans are willing to tax themselves more to pay for what, by all accounts, they continue to want from their governments.
It was argued by Republicans in the election that Americans could have their cake and eat it, too. Taxes could remain at Bush-era levels, and even be reduced further, while military spending could be increased, if unspecified spending cuts and reductions in tax deductions followed. This mishmash was an intellectual fraud that nonetheless attracted the votes of nearly half the electorate.
Democrats, for their part, were unwilling to confront the billowing costs of the social programs that have been growing at faster rates than economic growth plus inflation. Nor are they willing, like the Republicans, to tell Americans that more of them will have to pay more tax.
The huffing and puffing to avoid the country’s falling over the “fiscal cliff” into recession has produced a short-term deal that postponed more difficult decisions. What we just saw was prelude rather than finale. Self-absorbed wrangling, interspersed with bouts of paralysis, beckons.
No serious spending reductions were included in this deal, and taxes were only raised on the wealthiest citizens, who’ll spend considerable money figuring out how to minimize the impact.