HIGHER TAXES LEAD TO SLOWER GROWTH
July 14, 2010
Many people are worried about the United States' federal budget deficit and accumulating debt burden. In 2009 the federal budget deficit reached a record $1.4 trillion, and public debt (U.S. Treasury securities held by institutions and individuals outside the federal government) is currently more than $8 trillion and growing. The result of continued deficits is that the federal debt continues to grow, says William B. Conerly, a senior fellow with the National Center for Policy Analysis.
Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University have studied financial crises around the world, and find that when the debt to gross domestic product (GDP) ratio reaches 90 percent, "median growth rates fall 1 percent, and average growth falls considerably more." With the United States' debt to GDP ratio closing in on 90 percent, America may well anticipate slower growth.
Congress and the White House may decide to trim some spending to help lower the debt to GDP ratio, but most expenditures are for entitlements. Here's a rough sketch of the 2015 planned expenditures:
- Interest will total approximately $571 billion.
- Other costs not part of entitlement programs or interest will be about $1.8 trillion.
- Social Security, Medicare and Medicaid will total about $2 trillion.
- Total outlays in 2015 will be approximately $4.4 trillion.
Entitlement services make up nearly half of Congress' planned spending. Cutting costs in this area would lower the debt to GDP ratio considerably, but Congress is not likely "take away" entitlement services from people who are used to receiving them. Therefore, taxes must rise in order to avoid a debt crisis, explains Conerly.
The bottom line is that we should expect weaker economic growth in the coming decade or two. The United States will look more like Europe, where higher marginal tax rates encourage people to work fewer hours and take longer vacations. We just will not be able to afford luxurious vacations. We will also spend more effort gaming the tax code, looking for tax shelters and dreaming up creative ways to avoid taxes, says Conerly.
Source: William B. Conerly, "The Likely Effect of the Federal Budget Deficit," National Center for Policy Analysis, Brief Analysis No. 713, July 14, 2010.
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