Defusing the Debt Bomb

Article excerpt

Byline: Fareed Zakaria

It can be done. Here's how.

Everyone seems to be pessimistic about America these days. In poll after poll, Americans worry about their future. Pundits, myself included, write despairingly about the monumental challenges we face. Academics plan seminars on America's decline.

So, perhaps more to cheer myself up than anything else, I decided to ask what it would take to fix the U.S. There is one problem that overshadows all else. Washington is taking on debt burdens that are huge and, as the baby boomers retire, look truly frightening. The Peterson Institute estimates that the U.S. government's programs for Social Security and health care are al-ready $43 trillion in the hole. To cover this, the government would have to eliminate virtually all other spending and/or jack up tax rates into the 70 percent range. Foreigners would almost certainly demand higher interest rates if they lent money to the United States. And if we raised interest rates, the economy would stagnate--making the debt burden even more onerous.

So, this problem looks unavoidable, but also insoluble. Remember, though, that America has a $14 trillion economy that was, until recently, growing quite fast. We can find ways to address even this challenge. Here are three simple proposals that would defuse the debt bomb, with money to spare:

First, adopt a value-added tax. More than 100 countries have some kind of a national sales tax. If America were to enact one tomorrow, at something like the average for industrial countries (18apercent), and drop income-tax rates to compensate somewhat, we could bring in hundreds of billions of dollars every year. To get a sense of the revenue potential, imagine if the United States were to adopt a VAT at the high end of the range--25 percent, similar to that of many Scandinavian countries whose economies have still grown as fast as America's over the last three decades. Such a tax, Leonard Burman calculates in the University of Virginia Tax Review, would bring in enough money to balance the federal budget, pay for health-care expansion, eliminate the income tax for all those earning less than $100,000 (90apercent of households), and cut the top tax rate to 25apercent. The tax would also restrain Americans from over--consuming and reward them for saving, the single most important long-term shift we need to encourage. …