The U.S. government's rising debt load cannot be sustained over the long haul and reducing it will require a combination of spending cuts and tax hikes, experts recently told members of a House Ways and Means subcommittee.
Last year, the federal government deficit reached $1.4 trillion, the highest since World War II, and more red ink is projected, Syracuse University professor Leonard Burman told the Ways and Means Select Revenue Measures Subcommittee. Rising spending on Social Security and Medicare is part of the problem, but spending cuts alone won't suffice, said Burman.
"As unpalatable as it may be, you're going to have to raise taxes, and not just on the rich," Burman said. While a slumping economy has reduced federal tax revenue, experts said growth alone won't generate enough cash to plug the gap between federal revenue and spending.
Burman suggested lawmakers enact tax reforms to broaden the tax base, making it more fair, simpler and more conducive to economic growth. He said a value-added tax shouldn't be ruled out either.
Failure to act could push up interest rates on U.S. debt, increasing debt service costs and possibly stifling growth or even triggering a recession, Burman added in his prepared remarks. He warned that the booming market for U.S. Treasury debt "might be a classic bubble," and if it bursts Congress would have to cut spending to the bone and raise taxes to levels never before seen in the United States. He told lawmakers that "avoiding that fate should be your highest priority."
Bob Greenstein, executive director of the Center on Budget and Policy Priorities told the panel that closing the fiscal gap over the next four decades would require a 22 percent cut in spending, a 28 percent hike in taxes, or some combination of the two. Greenstein recommended that Congress consider a combination of spending cuts and tax hikes to reduce the deficit to 3 percent of gross domestic product within five years, saying that would go a long way toward reassuring U.S. creditors and putting the budget on a more sustainable course.
Extending Bush-era tax cuts approved in 2001 and 2003 would add billions to the federal debt, while allowing them to expire would help shrink the fiscal gap, Greenstein said. On the spending side, he called for the U.S. to rein in health-care spending, while acknowledging that will be difficult as aging baby boomers put additional strain on federal health programs.
Arguing against these actions, Douglas Holtz-Eakin, a former economic adviser to President George W. Bush and to Sen. John McCain (R-Ariz.) during McCain's 2008 presidential campaign, said tax hikes should be avoided on grounds they would depress economic growth. Over the long term, he said, the U.S. budget problem is chiefly due to spending and can be solved by curbing federal outlays.
Holtz-Eakin, now president of the American Action Forum, urged Congress to move swiftly to cut spending and overhaul the tax code. He also advised cuts to the U.S. corporate tax rate, saying the current level is too high and makes U.S. firms less competitive than those in countries that have less punishing taxes on businesses.
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Analysis Concludes That Increasing Taxes On Wealthy Not Enough President Obama has repeatedly promised not to raise taxes on households earning less than $250,000 per year. Analysis by The Tax Policy Center has estimated how much income tax rates would have to increase –– assuming the rest of the Obama budget were enacted –– to get the deficit down to an average of 2 percent of GDP from 2015 to 2019. They concluded that rates would have to increase by almost half: the 10-percent bracket would increase to almost 15 percent and the top bracket would increase to 52 percent –– a level not seen since enactment of the Tax Reform Act of 1986.
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