Friday, April 17, 2009

“it is hard to visualize a meaningful reduction in the size of the federal government’s budget deficit without a substantial increase in revenues,”

TO BE NOTED: From the WSJ:

"
Warning: Tax Hikes Ahead – Eventually

So says Roger Kubarych of the New York office of Unicredit. “it is hard to visualize a meaningful reduction in the size of the federal government’s budget deficit without a substantial increase in revenues,” he writes in a note today. ‘Otherwise, upward pressures on US interest rates will become harder and harder to resist.

His argument:

  • Budget deficits projected in White House and congressional budgets are huge. “Above $1.8 trillion in the current fiscal year, 13% of GDP, followed by gradual reductions that would still leave the estimated deficit above $650 billion (just over 4% of GDP) by 2012. From then on, deficits would expand indefinitely.
  • Chart

  • Borrowing from abroad cannot continue to increase forever. “Past experience suggests that the US government has increasingly depended on foreign private and official purchases of Treasury securities to finance its deficits. But access to foreign funding is not unlimited, and domestic savings are insufficient to take their place.”
  • A deficit reduction effort is likely after the recession ends. “It is highly likely President Obama will face the unenviable task of proposing new taxes, perhaps even including European-style value-added taxation. This week, the president took the first step toward grappling with that challenge by announcing a Task Force on tax reform to be led by presidential counselor Paul Volcker. The Volcker group has until December to figure out what to recommend.”

“While part of the mandate is to close loopholes in the existing system, there is little doubt that the Volcker group will look at such issues as the Social Security payroll tax, which is now the only federal tax paid by some 40% of workers, and pros and cons of introducing a European-style value-added tax or a nationwide sales tax, both to raise revenues and to encourage a shift over time from consumption to savings.”

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