I am frankly confused. I favor the President and find him credible. But I do not know if our crisis is surmountable because of the division, vitriol and lack of ability to get things done. I rarely quote things at length but the following strikes me as sensible.
f I suspended my instincts about how the crisis would ultimately be resolved, and make an assumption that our political system could rise to the occasion—an assumption of historic proportions—what would Washington have to do?
Most important, it would have to set a few simple goals, such as reaching a ratio of debt-to-GDP of, say, 60 percent within a decade, with interim targets along the way. By way of comparison, it is close to 70 percent now. Washington would have to establish a process that would kick in when the U.S. missed its targets, a process that would result in a combination of raising taxes and cutting spending across the board. That mechanism would have to be established in law and be subject to override only by, say, a recommendation of the president and a positive vote of two-thirds of the Senate.
To meet the targets, it would be necessary to establish new sources of revenue. Start with a national sales tax (refunded for low-income families), which, according to the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, could produce some $400 billion annually by the end of this decade ( $200 billion this year.) Add to that a gasoline tax, one that would have the additional benefits of cutting CO2 emissions and reducing imports and hence boosting national security. A $1 per gallon tax could produce over $3 billion per week, according to the Congressional Research Service (but it could start lower and eventually get beyond a dollar.) Both of these taxes are in effect in virtually all major developed nations. We would need health-care reform that holds down spending, particularly with respect to Medicare. Those with higher incomes should pay more for Medicare and Social Security as a result of a means-testing process.
We would also need a major revamp of the tax system to favor entrepreneurial activity, the major creator of jobs (and hence income, and hence more revenue and less subsidy payments from Uncle Sam.) This means special incentives for starting a business, such as easy write-offs for initial investments, and permanent tax credits for R&D.
These measures are not the entire universe of policy requirements, and some may prove infeasible. But they illustrate the arena in which we must play, and by comparison they show why the budget announced on Monday is a sham and why, in the end, it may take China and others to force us into doing what we cannot do ourselves.
Jeffrey E. Garten is the Juan Trippe professor of international trade and finance at the Yale School of Management, and served in economic and foreign policy positions in the Nixon, Ford, Carter and Clinton administrations.
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