As I'm sure everyone is aware the United States government's budget deficit has been growing and is now at $1.6 Trillion. The office of Management and budget claims that the deficit will decrease to $1 Trillion by 2020, and that's on the optimistic side. This amount of debt is unsustainable, huge amounts of money will go towards paying interest. according to CNN.com,
One dollar in seven will wind up paying interest on the debt, which will scare away overseas capital. "Foreign investors could dump our debt, causing a fiscal crisis and a disastrous rise in interest rates," says Brian Riedl, an economist at the conservative Heritage Foundation.
The main problem is that money was spent faster than it was made. This is what caused a lot of individuals to go it to bankruptcy. They spent more money on credit cards or mortgages than they made in income. The government has done the same thing, over the past two administrations it has increased spending while lowering taxes. Recently it has had to spent even more money to bail out those same people who made the same mistake of over spending. So who will bail out the government?
According to the CNN article if the government continues to spend this much money it will need to raise taxes, "erasing the deficit would require a 44% increase in income tax revenues to cover that $1 trillion deficit." That amount of a tax raise would be impossible to make work. Instead the article says that a Value-Added Tax (VAT) will have to be imposed. A VAT is a tax that is collected during the stages of a products manufacture. Part of the cost would then be passed along to the consumer in the final price of the product. This is a more efficient way for the government to raise money because companies just write them checks directly. It would require an estimated 7% price increase on all products we consume to cut the deficit.
This idea is not a popular one in America, because low income families pay a higher percentage of their income towards it, and because it copies the socialist governments of Europe. In fact this idea is very popular and widely used in Europe. It has allowed for government spending to grow so much.
While this idea is unpopular and would result in a huge fight in the government, the author of the article thinks it is going to be the only viable option. The only other two options are a huge growth in the economy, or a drastic cut in government spending.
What are your thoughts on the deficit and on a Value-Added Tax? How would this kind of tax effect the market? What about dead-weight loss?
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I feel like this idea merits consideration. I think that it is going to be harder and harder to tax citizens directly through income tax, since more and more people are finding themselves without a steady or adequate income. The Value-Added Tax may cause some items to be out of reach for low-income families, but it would help funnel more money into paying off our debts. I worry what it would do to the overall economy though. If there are higher prices then there is a lower demand and overall consumption would decrease except in those inelastic good such as food that are an absolute necessity. On the other hand many European governments are doing a much better job at balancing their debts than we are and maybe further probing analysis of this issue could reveal how this new tax might be a successful tactic in rebuilding our economy and international credibility.
ReplyDeleteE, A
This tax seems like a good idea from the government standpoint. I think this tax will hurt the economy more than it would benefit it. Many families and homes that are struggling right now to make a living will probably go through even harder times. I think the U.S debt problem needs to be solved over a long period of time and not just try to be fixed in a few short years. I think that taxes should be increase slightly and government spending should be cut slightly. This seems like it would have a minimal effect on the economy as well as households at any given time. (A)
ReplyDeleteThe more tax there is, the more deadweight loss there is for consumers and producers--which is why, in a perfect system, there would be no tax. I agree that there is no "perfect" system, but I do wonder whether raising taxes, and therefore prices, is really going to help us. As mentioned in the blog, lower income families are already hurting from the current economic crunch. Trying to squeeze more money from people who are having trouble as it is would be shooting ourselves in the foot. That said, though I wish I could propose a perfectly reasonable alternative that would help us economically but not raise taxes, I can't think of anything large scale enough to save ourselves. It is an unfortunate position we've placed ourselves in.
ReplyDeleteI just don't know anymore... I feel like because our previous fiscal policies failed that I am unsure about what will and won't be effective in lowering the national debt.
ReplyDeleteI went on study abroad to Scotland, which has VAT. One of the reasons its so viable is because most of the public doesn't notice it. As to people suffering under VAT, a lot of the high taxes go towards social programs which help those struggling families, so nobody starves. If all of the money from VAT goes off to our debt, then there is a problem. I honestly do believe that the US has been living on borrowed time, that the government, like the majority of its people, has spent well beyond its means on things that were not well considered. I think
ReplyDeletea tax hike is inevitable, along with cutting back (though not too far). Lots of people have already re-prioritized their spending to pay off their personal debt, have given up things to do so. I just wish our government would get the same message.
I feel like this tax would be good for one thing alone, get rid of the deficit. We've worked ourselves into a whole, lets pay it off and get if over with. I dont want this as an excuse for the government to spend just that much more because oh suddenly we've got the revenue, instead this is last ditch quick fix that will allow our government to work a little more normally, and with alot less overhead in interest that could quickly add up to new programs to help the poor. If we cant get rid of this now, we'll ( everyone participating in this blog) be paying much much more for it later...
ReplyDeleteIf the government have to increase the tax, there will be more problems come up with this "progress", I'm not sure this is a progress or not. The deficit will bring more serious disastrous crisis, I think it really should be carefully considered...to the lower income class, that's such a heavy burden to pay more taxes.
ReplyDeleteAlthough I think it would hit the poor pretty hard, I think it is generally necessary because a country can't have that high of debt and continue to run that way. People need to be willing to either pay more for the services the government provides, or do some belt tightening. I think people need to expect to do both, especially if we wish to remain a major trading player. However, if this VAT tax were to be implemented, then there should be a program for the poor to compensate for this added tax.
ReplyDeleteWhatever is done is going to have costs to some group. I think this tax could be very effective in relieving the debt because it has been done in Europe, but it ought to be structured so that the goods being taxed are primarily used by the upper class. There should be substitutes available for those with less money. This tax would also discourage excessive consumerism, which isn't that great during a recession but is something we will eventually have to come to terms with if we want to achieve sustainability.
ReplyDeleteI feel that this is somewhat a good idea, because of the fact that it is hard to tax people based on their income when people are having trouble finding jobs. Although the value-added tax would be a large inconvience for those who don't have an adequate amount of money, it would be a large assistance on our nations debt.
ReplyDeleteI have no idea whether this will work or not, but i do know we need to do something. How large does our nations debt need to grow before people stop giving us money? How long till they start forcing us to pay them back? If we dont address our nations debt the answer to these questions is soon.
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