POLITICS

Tax increases: A necessary evil with U.S. on path to Euro-style disaster?

06/05/2012 05:04 EDT | Updated 08/05/2012 05:12 EDT
WASHINGTON - "Tax increases" — two little words that are perhaps the filthiest in U.S. politics.

Nonetheless, cracks have begun to appear recently in the famously united Republican front against raising taxes to bring down the monstrous, US$15.7 trillion national debt, a plan of attack that could gain some steam thanks to an ominous new congressional report about the country's fiscal future.

Two prominent Republicans — former Florida Gov. Jeb Bush and South Carolina Sen. Lindsey Graham — have suggested in recent days that the time has come to ponder tax increases to offset the devastating impact of spending cuts.

Bush, brother of former president George W. Bush, told a congressional panel last week that he would support deficit-reduction efforts that would include US$1 in tax increases for every $10 in spending cuts.

"If you could bring to me a majority of people to say that we're going to have $10 in spending cuts for $1 of revenue enhancement — put me in, Coach," he told the budget committee of the U.S. House of Representatives.

But he acknowledged a sad understanding of the American electorate by adding: "This will prove I'm not running for anything."

Graham, on the other hand, is up for re-election in 2014. And he's been sounding the alarm about profound cuts to the military set to take effect in early January, and has openly pointed to "revenue increases" — a phrase widely used in the U.S. as a euphemism for tax hikes — as a way to reduce the US$600 billion price tag on those cuts.

Sen. Harry Reid of Nevada, the U.S. Senate majority leader, is holding firm on the defence cuts unless there's a broader, bipartisan agreement on deficit reduction that would include plans to bring in more revenue.

A grim report released Tuesday by the non-partisan Congressional Budget Office added fuel to the fiery debate on tax increases as it warned the U.S. was on track for the type of profound fiscal crisis that is currently crippling Europe.

The U.S. debt will balloon to nearly twice the size of the American economy by 2037, the report found.

The culprit? Increased entitlement spending driven by the retirement of the massive generation known as baby boomers, working hand-in-hand with insufficient revenues — a combination that will bring the American economy to the brink of disaster, the report warned.

"The explosive path of federal debt under the alternative fiscal scenario — which maintains what might be deemed current policies — underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course," the CBO report said.

Under the office's most likely scenario, U.S. lawmakers will extend current tax rates and neglect to tackle entitlement spending. That means debt held by the public would reach 109 per cent of the economy by 2026, and soar to almost 200 per cent of the country's gross domestic product by 2037.

Economists have been warning for months that if publicly held debt approaches 100 per cent of GDP, it will spur a made-in-America, European-style crisis that would see interest rates rise and force governments to slash spending and lay off millions of workers.

"There will either be a political solution coming out of Congress, or there will be a market solution," Lynn Reaser, a policy specialist at the National Association for Business Economists, said in an interview Tuesday.

"If it's a market solution, interest rates will rise sharply — and that will finally coax investors into buying the debt — or there will be a lower dollar, or both, which is pretty much the scenario that's played out in Europe," she said.

"Which will come first? In the current environment, there's been relatively no market pressure, the dollar is strong compared to the European situation, where there's a clear and present danger. And so it seems like our crisis is far off on the horizon, but it's not — it's coming right at us."

Tuesday's CBO report provided immediate fodder for Republicans to slur the economic policies of U.S. President Barack Obama.

"On the heels of last week's dismal jobs report, today's CBO report on the deteriorating fiscal situation underscores the obvious: The president's policies are not working," Paul Ryan, chairman of the House budget committee, said in a statement.

"Repeating Europe's mistakes, the president's policies call for job-crushing tax increases and harsh disruptions for beneficiaries of government programs as the debt spirals out of control."

Steny Hoyer, the No. 2 House Democrat, had a different spin.

"CBO's report is a warning that we must get our fiscal house in order," he said.

"However, Republican leaders' insistence on finding savings only from cuts to essential services for the most vulnerable Americans will not get us any closer to the real, comprehensive deficit reduction solution we need."

The debt has indeed increased by about 46 per cent under Obama, but almost half of that uptick can be pinned on two George W. Bush policies — tax cuts and deficit-funded wars in Afghanistan and Iraq, according to the Center on Budget and Policy Priorities.

The Obama administration wants to let the Bush-era tax cuts expire at the end of the year for the wealthiest Americans. The Republicans insist doing so could spur another recession.

A so-called fiscal cliff looms at the end of the year unless Congress agrees upon a major debt reduction package, one the White House insists must include a combination of spending cuts and tax increases.

Not only will the Bush tax cuts expire, so too will a temporary cut in the Social Security payroll tax and expanded jobless benefits. And about US$1 trillion in automatic spending cuts will kick in — including the Pentagon cuts — as the government approaches its legal limit on federal borrowing.

Some Republicans are signalling they're no longer vehemently opposed to the idea of tax increases, shrugging off the strong-arm tactics of anti-tax crusader Grover Norquist, a powerful conservative figure who has cajoled most Republicans into signing his "no new taxes" pledge.

"I don't believe you outsource your principles and convictions to (other) people," Bush said last week, adding he'd long refused entreaties to sign Norquist's pledge, a smackdown that angered the head of Americans For Tax Reform.

Graham recently told the New York Times: "I've crossed the Rubicon on that."

So have some of his colleagues in the House of Representatives. Congressmen Mick Mulvaney, Joe Wilson and Jeff Duncan have also said they're willing to talk revenue increases.