The Tax Hike Canard
The Right Way Down the Fiscal Cliff
Article Summary and Author Biography
If the United States avoids increasing government spending as a share of GDP, it could actually lower tax rates since, given the U.S. tax structure, revenue generated by income taxes rises faster than GDP. What the country really needs now is to broaden its tax base.
MARTIN FELDSTEIN is George F. Baker Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research. He was Chair of the Council of Economic Advisers from 1982 to 1984. This article is adapted from his remarks at the December 3 SIEPR Prize Ceremony at Stanford University.
News & Events
Gideon Rose speaks with Martin Feldstein and Alan Binder about the fiscal cliff and deals to avert it.
Obama's Fiscal Year 2013 budget. (Larry Downing / Courtesy Reuters)
Five years ago, the United States' budget deficit equaled 1.5 percent of GDP and its national debt stood at 36 percent of GDP. This year, the deficit will exceed $1 trillion, or seven percent of U.S. GDP. Over the same period, the debt ratio has doubled to 73 percent of GDP.
Although the United States' economic weakness has contributed to the booming deficit and debt ratios, it is only a small part of the whole story. According to projections by the U.S. Congressional Budget Office, without significant reforms, the deficit would still add up to more than five percent of GDP a decade from now, even if the economy were operating at full capacity. Increased interest on the national debt is not to blame, either, since falling interest rates have made the government's net interest bill lower today as a share of GDP than it was in 2007. Moreover, the share of GDP that goes to another common scapegoat, defense, has risen less than one percent since 2007 (from 3.6 percent to 4.4 percent) and is projected to drop over the next decade...
