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Headshot of Jeffrey Simpson. (Brigitte Bouvier/Brigitte Bouvier/For The Globe and Mail)
Headshot of Jeffrey Simpson. (Brigitte Bouvier/Brigitte Bouvier/For The Globe and Mail)

Jeffrey Simpson

America’s flight from fiscal reality Add to ...

The flight from reality of so many Americans into the nether worlds of ideology is discouraging when it’s not frightening.

Last week, we witnessed the blending of libertarian economics with social conservatism that is the contemporary Republican Party. This week, the restless coalition that is the Democratic Party has been on display.

Each party, for different reasons, has convinced itself (and will try to convince the country) that America’s doleful fiscal situation – one that will sap the country’s economic might and international influence and distort its domestic economy for years to come – can be remedied without meaningful tax increases. This change goes beyond not just rescinding tax cuts for those earning more than $200,000, as the Democrats propose, but tax increases across a wide swath of American society.

The flight from reality is easy to diagnose. Neither party wants to axe the sacred military budget. Neither wants to raise taxes. By definition, therefore, the restoration of fiscal health has to come exclusively from spending cuts to domestic programs.

These cuts, savage as the Tea Party and Paul Ryans of the Republican Party propose, are not what Americans tell pollsters they want – notwithstanding what the fire-breathers in the Republican world believe. Democrats are reluctant to cut almost anywhere, and Republicans want to cut almost everywhere. Neither are remotely realistic in their ambitions.

U.S. taxes aren’t what they seem on paper – rather steep in some areas and redistributive in others. When you glance below the surface, however, the tax code is shot full of complications and loopholes, tilted to the rich and the very rich, producing less revenue than any other OECD country (except Mexico and Chile) as a share of the total economy and, critically, relying less on consumption taxes than other countries. Were the Americans to impose a 5-per-cent national sales tax on themselves (the Canadian rate, and the lowest among countries with national sales taxes), the country’s fiscal crisis would be on the way to resolution.

Such a tax is unthinkable in a climate where Americans feel themselves overtaxed, despite the evidence that, in 2009 (according to the OECD), Americans paid the third-lowest share of their national income in tax within that organization.

Republicans whine about high corporate taxes and, on paper, these taxes are high – a top rate of 39 per cent. Yet, so many exemptions, credits and other loopholes – many resulting from ubiquitous corporate lobbying on Capitol Hill – pockmark the corporate tax code that U.S. business pays one of the lowest effective tax rates in the advanced industrial world.

Lobbying, too, is among the reasons why the tax code favours the rich. (See the small rate of personal income tax paid by millionaire presidential candidate Mitt Romney.) Republican tax proposals in this election would offer even more tax advantages to the rich.

Paul Ryan, the Republicans’ vice-presidential candidate, proposed a draconian budget-cutting plan that would have given those earning more than $1-million a tax cut of $265,000, according to the liberal Center on Budget and Policy Priorities.

It’s one of the enduring mysteries of American politics why so many people with some dependence on government and modest personal incomes fervently support a Republican Party whose policies would be so inimical to their personal welfare – but then Karl Marx had it wrong from the start when he said economic self-interest axiomatically leads to political choices. Maybe he was right, though, in analyzing the phenomenon of “false consciousness.”

There are compromise positions to grapple with the country’s fiscal situation. Two bipartisan commissions combined tax increases and spending cuts. Mr. Ryan, however, bolted from one of those commissions because it dared to mention tax increases. His party’s official position is to reject any new taxes.

President Barack Obama never got behind either of the compromises, because he sensed that the Republicans weren’t interested in compromises. Nor were many of his own party’s members.

Today, Republican candidates for the Senate and the House are campaigning on not making any compromises if they’re elected. Even if Mr. Obama is re-elected, the gridlock and ideological entrenchment that define contemporary American politics will continue, and one key to solving the country’s fiscal dilemma – tax increases – will remain as remote as ever.

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