Study Suggests Rise In Tax Needed To Tackle US Fiscal Deficit

by Mike Godfrey, Tax-New.com, Washington

15 January 2004

A study released by an independent think-tank on Tuesday has suggested that some form of tax increase is inevitable in order to help the United States government dig itself out of an ever-deepening fiscal hole in the next decade.

The study by the Brookings Institution, and entitled 'Restoring Fiscal Sanity: How to Balance the Budget', examines two economic policy models that could be employed by the government to reduce the deficit, estimated to reach half a trillion dollars by the end of this fiscal year.

The first model, dubbed the ‘small government’ scenario, envisages the tackling of the deficit by large scale spending reductions, whilst the second scenario uses the assumption of a future fiscal policy based largely on revenue increases. However, analysts at the Brookings Institution prefer to recommend their own ‘Better Government’ plan, which advocates a blend of both models to cut back the deficit.

“One fact is indisputable: the federal government is spending about $500 billion a year more than it is raising in taxes,” the report points out. “On reasonable assumptions, the gap will widen to nearly $700 billion a year by 2014 and accelerate rapidly thereafter, as the baby boom generation begins to retire.”

"Whoever is elected president...will face a huge fiscal hole that cannot realistically be filled by spending cuts or revenue increases alone," the authors of the report argued.

"A very substantial amount of both will be needed," they concluded.

The Brookings study has attracted criticism from free market think-tank, the Cato Institute however, whose Director of Fiscal Policy, Chris Edwards, notes that the “report went astray by including tax increases in their Smaller Government plan.”

Edwards contends that Congress can balance the budget using Cato’s own ‘Smaller Government’ plan.

“Congress should first enact the $309 billion in spending cuts detailed in Cato’s 'Handbook for Congress'. That cut would be equal to $488 billion in 2014 using the Brookings methodology. Add to that the $74 billion in entitlement cuts proposed by Brookings to get $562 billion in total spending cuts — more than enough to balance the budget,” observes Edwards.

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