NCPA - National Center for Policy Analysis


December 1, 2004

A significant tax increase is necessary to deal with the U.S. budget deficit, says Bruce Bartlett. Sooner or later financial markets will put pressure on Congress to act.

The root of the problem is the current U.S. account deficit, which includes the trade balance for goods and services, plus receipts on U.S. investments broad minus payments to foreigners on their investments here. There is also a large negative figure for unilateral transfers abroad, such as those for military programs and foreign aid, says Bartlett.

  • In 2003 the United States exported $713 billion worth of goods and imported $1,261 billion, for a deficit of $548 billion; this was partially offset by a significant surplus in the export of services of $74 billion.
  • U.S. companies also received more in income on their foreign operations than we paid out to foreigners on their operations here, giving us a surplus of $33 billion in this area.
  • After subtracting $67 billion for unilateral transfers, we ended up with a current account deficit of $531 billion.

Basically, this $531 billion figure has to be financed by foreigners who are willing to invest in the United States directly or buy dollar-denominated assets such as stocks and bonds. In 2003, foreigners bought $829 billion worth of the latter, while Americans increased their ownership of foreign financial assets by $283 billion. The difference, $546 billion, approximately equals the current account deficit, says Bruce Bartlett.

Source: Bruce Bartlett, "A Tax Increase is in the Forecast," National Center for Policy Analysis, December 1, 2004.


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