The U.S. Budget: “No, we can’t”

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 Beneath the surface noise of the fiscal drama that has kept Washington on edge for months lies a serious societal choice. The model in vogue in the United States since the Reagan era—low taxes and feeble welfare support—is fast unraveling in a society undergoing major change. With a tax rate some 33 percent below the OECD average and one of the highest debt-to-GDP ratios anywhere, the U.S. government’s coffers are virtually empty—leaving it ill-equipped to meet swelling demand for public programs to address such issues as rising poverty, declining geographic mobility, and a rapidly aging population.

The country has two basic alternatives:

  • Either the Americans stand pat in rejecting the inevitable—a hefty increase in taxation—thus accepting, in essence, greater inequality and the demise of the American Dream;
  • Or, as is more likely, they eventually agree to abandon their previous credo, in which case a secular increase in payroll and income tax will be on the agenda.

But either way, the United States of tomorrow will be a very different beast from the pre-crisis United States.

The U.S. fiscal controversy is far from over. More to the point, it has unquestionably weakened the country’s ability to reverse its debt trajectory any time soon.