10 June 2009

US budget deficit and debt: unthinkable solutions?

VAT to plug the deficit?

Facing unprecedented budget deficits and mountains of debt plus a health care reform, the US administration has already tested the water about introducing a VAT (Value Added Tax) that is common in most countries across the world.

are ranging from a 10% to a 25% rate depending of the scope, the latter permitting a balanced budget, financing of Medicare and Medicaid, exempting most of the population from income tax and slashing the top rate down to 25%. Paul Volker seems to have endorsed Yale law professor Michael J. Graetz of a VAT of 10% to 14% to finance the health reform and exempt 90% of the population from income tax.

The Obama administration is also testing the water to tax greenhouse-gas emissions could raise trillions of dollars. Alternatives are discussing new taxes on sugary soda, alcohol and employer-provided health insurance. The last proposal could raise a lot of money - nearly $1 trillion over the next five years, according to White House budget documents.

Since Detroit and the American way of life have been dented with the fall of the US auto industry and green discussions about carbon emissions are becoming more entrenched, let's have a look at an increase of taxation on gasoline which today is way below European levels: at the actual $2.6 per gallon, the price of gasoline in the US is +/- 50% the level of Europe and the American motorists consume 142.4 billion gallons a year… if the US administration takes an additional 25 c / gallon (i.e. a 10% increase on current prices), it would raise $35.6 billion a year, and be still way below European prices.

I am sure of only one thing: taxation will increase in the US (as well as in Europe) to pay the bill and arrears.

I despite government intervention as much as over-taxation (i.e. in my opinion paying to the State more than 20-25% of what you earn, including health care), but some situations require war style answers. And this is less bad than over-inflation (even if any new tax will increase prices when introduced). Let’s clean the house and start on new foundations, leaving entrepreneurship strive and keeping governments and large corporations (that often act inefficiently like administrations when not managed by entrepreneurs – it is time to study again the agency theory…) out of the way: only the former is really creating wealth (intellectually, financially and socially) and makes humanity move on..