U.S. debt crisis requires spending and tax reforms

In a communiqué released today by The School of Public Policy, Stephen Richardson outlines the key policy changes the U.S. will need to implement if it is to avoid a debt crisis and dire economic implications.

Richardson argues that “despite the fact that the political debate in the U.S. continues to rage as to whether a fiscal consolidation should be approached from the perspective of reducing expenditures or raising taxes, analysis strongly suggests that the U.S. will have to do both.”

Among the measures he recommends is the creation of a U.S. national Value-Added Tax levied at a rate of 10 per cent. A consumption tax such as this would not impose additional burdens on savings and investment, as is the case with increases to income, corporate or personal taxes. Richardson estimates that this value-added tax would “raise about $500 billion per year.”

The author also recommends an elimination of new mortgage finance activity by Fannie Mae and Freddy Mac, with a shift to a pure insurance-based model for government support for mortgage finance; the phasing out or reduction of mortgage interest deductibility; and a reduction of corporate tax rates to encourage investment.

Because of the severity of the U.S. financial position (total net government debt of about 75 per cent of GDP), Richardson argues these measures would need to be combined with a sharp reduction in government spending to costly entitlement programs such as Social Security and Medicare.

The communiqué can be found by going to www.policyschool.ca , then clicking “latest papers”.

Provided by University of Calgary