Tax has become a dirty word in the U.S. debt crisis debate.
But almost unanimously, experts agree that raising taxes – perhaps significantly – is key to the country’s long-term salvation.
Unlike Greece, which is broke, the United States is rich and has the fiscal capacity to tax its way out of its debt mess. Policy makers may be reluctant to do so while the economy is weak. But longer-term, there's room for tax rates to go up: Contrary to what most Americans believe, the United States is one of the least-taxed countries in the developed world. They pay much lower taxes than any other G7 country. Among wealthy OECD countries, only Chile and Mexico tax their people and companies less.
Foreign investors are still willing to lend the country money at low rates, even as the debt ceiling deadline nears, because they feel confident they’ll be paid back. What they don’t see is the deep-seated opposition of many Americans to tax increases, even at the risk of jeopardizing the country’s economic well-being.
“Historically and internationally, the U.S. can’t be categorized as anything other than a low-tax country,” remarked Gordon Betcherman, an economist and professor at the University of Ottawa’s school of international development and global studies.
“Either Americans don’t realize their economy is taxed less than other major economies, or they just have a different standard of what an appropriate tax level is,” said Prof. Betcherman, who spent a decade at the World Bank in Washington.
Most of the rest of the developed world – Canada included – has managed to bear higher tax burdens for decades, without grinding their economies into the ground. Economists say even an economically weakened U.S. could cope with a heavier tax load.
The total tax burden on Americans, as a percentage of gross domestic product, stood at 24 per cent in 2009 – lower than it was in 1965 and still falling. That compares to 31.1 per cent in Canada, 34.3 per cent in Britain, 42 per cent in France, 37 per cent in Germany and 43.5 per cent in Italy. The Japanese, Australians and South Koreans all pay significantly more.
The United States is the only major country without a national value-added tax and its sales taxes are lowest in the OECD. Likewise, U.S. fuel and sin taxes are at the bottom among rich countries. And generous tax breaks mean many businesses and individuals pay few taxes, placing a heavy burden on a relatively narrow tax base.
“The U.S. has the fiscal capacity to raise taxes, unlike southern Europe, where they can’t afford to pay more,” remarked Ian Lee, a Carleton University business professor. And, he said, that explains why foreign investors are still willing to lend the country money at low rates, even as the debt ceiling deadline nears.
The bottom line? There is now a huge disconnect between the government Americans say they want, and the government they’re willing to pay for, argued Gary Hufbauer, a senior fellow at Peterson Institute for International Economics in Washington and a former top tax official at the Treasury department.
“Our expectations in terms of entitlement and defence programs far exceeds the willingness of people to pay for them,” he said.
For decades now, the U.S. has increased spending, but hasn’t ratcheted up taxes to pay for bigger government – the military, health care, pensions and the like. The country has been generating tax revenue equal to roughly 18 per cent of its economy for a generation, but spending has climbed steadily to nearly 25 per cent of GDP, from roughly 16 per cent in 1965. The results are huge deficits, and more than $14-trillion (U.S.) of debt.
