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.
The solution is simple enough on the tax side, at least on paper, Mr. Hufbauer suggested. The country must expand the tax base on individuals and businesses, eliminate many tax breaks, introduce a national value-added tax, raise fuel taxes and impose "user fees" on a whole range of things, including parks, highways, airports, smoking and drinking.
On the corporate side, Mr. Hufbauer pointed out that U.S. tax rates are high by international standards, but special corporate entities created by Congress dramatically shrinks the corporate tax base. While business taxes average 22 per cent of GDP in the OECD, the ratio is just 13 per cent in the U.S.
The Republicans have put themselves in a box. Carefully crafted tax increases offer a relatively easy way out that could mitigate the economic damage caused by draconian spending cuts and reverse income inequality between rich and poor. But the tax option has become a political stumbling block in the Republican-controlled House of Representatives (as are deep spending cuts in the Democratic-held Senate).
"It goes back about 20 years. The Republicans have signed on to this 'no-taxes, ever' pledge since Bush, the father, was president, and now this is being tested," explained Chuck Marr, director of tax policy at the Center on Budget and Policy Priorities in Washington and a former economic adviser to Bill Clinton and former Democratic Senate majority leader Tom Daschle.
Bipartisan efforts to break the impasse, both inside and outside Congress, have reached the same conclusion – that higher taxes must be a major part of the solution, he pointed out. A commission headed by Democrat Alice Rivlin and Republican Pete Dominici, for example, came up with a plan that would shrink the debt through a balance of spending cuts and higher tax revenue. Among the highlights: a simpler tax system, a broader base, a phase-out of most tax breaks and a national 6.5-per-cent debt reduction sales tax.
"Tax increases are the only way to ensure that high-income households pay a fair share of the deficit burden," Mr. Marr said. "Without higher taxes as part of the fiscal-reform package, middle- and low-income households, which tend to feel spending cuts most acutely, will end up bearing almost all of the burden."
At the top of Mr. Marr's tax break hit list is the $100-billion (U.S.)-a-year mortgage interest deduction, which allows Americans to dock interest payments on homes, yachts, lines of credit and vacation properties. Like Mr. Hufbauer, he would introduce a VAT, raise tobacco and cigarette taxes, tax greenhouse gases and scrap the $700-billion Bush-era tax breaks, which are heavily skewed to wealthier Americans.
Bill Frenzel, a former Republican congressman and now a scholar at the Brookings Institution in Washington, agrees no budget fix is possible without tax hikes. But there also must be a smaller government, including offsetting concessions on the big entitlements, such as Medicare and Social Security, he said.
Americans, he said, will never accept the kind of tax levels that exist in most other countries.
"The U.S. has always been a low-tax country," he explained. "And we like it that way."