On April 1st 2012, my book,” Dagbok från USA”, came out in Sweden. It will also soon be published in English (as an e-book for Kindle and for other readers) with the title: “Diary from the United States – Notes on a society in crisis“. As an appetizer for English speaking readers, I will the coming weeks publish some excerpts from the book.

Deciding on higher taxes in Congress seems to be virtually impossible

Today, there are few issues that can heat up the political debate in the U.S. quite like the national debt. More precisely, it seems very controversial – and it has become a partisan divide – to decide what political steps should be taken to gain control of the large deficit in the federal budget, and consequently of the national dept. This graph (click for bigger picture), compiled by the Center on Budget and Policy Priorities (in turn based on figures prepared by the Congressional Budget Office, CBO), provides a perspective on what we are talking about. Assuming that the graph is correct (a safe assumption given the CBO’s good reputation), the U.S. budget deficit is, it seems, a solvable problem provided the political will to solve it.

The diagram shows that the estimated size of the deficit in 2011 is just under $1,500 billion. It’s certainly a high amount as a percentage of GDP, just under 10%, but one can note that roughly a quarter of the deficit in 2011 is related to the stimulus packages (“Recovery measures”) which the politicians decided on during the financial crisis and which will automatically be scaled down in coming years. Of course, the deficit will decrease proportionately. “Economic downturn” is an estimate of the effect of the financial crisis on the federal budget, and we can assume that mainly it’s due to lower tax revenues than in a more normal business cycle. Additionally, we can see in the graph that the wars in Iraq and Afghanistan are contributing to the deficit but in a relatively small way.

Most thought provoking is the great impact “Bush-era tax cuts” have had – and will have the coming years – on the budget deficit. If the extraordinary tax cuts enacted under the George W. Bush administration, which primarily benefit high-income people, were phased out, the annual deficit would – as can be seen in the graph – decline in absolute term, and of course in relation to GDP. The problem with the budget deficit, and the too rapidly growing national debt, would be eliminated.

Unfortunately, this is easier said than done. Most American politicians reflexively say no to a tax increase. This applies primarily to Republicans but Democrats also find it hard to talk about tax increases. Deciding on higher taxes in Congress seems to be virtually impossible. I would argue that this political paralysis is detrimental to the country. Observant visitors to the U.S. from other parts of the Western world can see that there are serious flaws in American society which, one way or another, are linked to this fear of taxes.

One cannot say, to give another perspective, that the U.S. is a high-tax country. This diagram (click for bigger picture) shows total tax revenue as a percentage of GDP for a number of OECD countries in 2008.

Someone might say that this picture of the tax revenue level is a bit unfair to the United States. It’s not as simple as saying that the U.S. takes out low taxes, and thus there is less room for social safety nets and other redistributive public initiatives. The U.S. redistributes resources much more via tax deductions than is done in other Western countries, especially compared to the European welfare states. For example, in most European countries, health care is taxpayer funded. In the U.S., employers are given tax credits if they subsidize employees’ health insurance. In Europe, we pay a large part of child care through taxes. In the U.S., you get a tax deduction for each child, etc. The OECD has shown that the net effect, i.e. when one adds up the economic effects of tax-funded support for social purposes (like pensions, health care, social safety nets, etc.) and tax deductions, the difference between the U.S. “welfare” model and the European model is considerably smaller. The image of America as the modern laissez faire place on earth is not correct. Social spending in the U.S. is in fact higher than for the average OECD country, which is probably an unexpected finding.

The American penchant to give special groups the benefit of tax deductions can also be seen as an expression of fear of taxes. The price the U.S. pays for this is that the tax system becomes complicated and less transparent, and – as many economists have shown – a major drag on economic growth.

Literature:

Ruffing, K. & Horney, J., 2011, “Economic Down Turn and Bush Policies Continue to Drive Large Projected Deficit”, Center on Budget and Policy Priorities, Special Series: Economic Recovery Watch, May 10, 2011;

Reinhardt, UE, 2011, “The Case for Higher Taxes”, Economix, The New York Times, May 27, 2011;

“Is the European welfare state really more expensive? Indicators on social spending, 1980-2012 and a manual to the OECD Social Expenditure database (SOCX)”, OECD, October 2011, OECD Social, Employment and Migration Working Papers No. 124;

First published (in Swedish): June 18, 2011