Jeffrey Sachs provides the detail to what just happened in the US:
In the agreement signed yesterday, the White House and Senate Republicans agreed to extend the Bush era tax cuts that were set to expire on January 1. Extending the expiring tax cuts costs 2.5 per cent of national income in reduced revenues in future years (a fact not yet mentioned to the American people, I kid you not). You might think that Congress would care about that loss of revenue in view of a budget deficit of around 7 per cent of GDP. You would be wrong. Congress is happy to vote for the tax cuts, leaving to a future date the spending decisions.
Our federal deficit is therefore stuck at around 7 per cent of GDP. Yet the two parties just ran the most populist campaigns this side of a banana republic, and I do a grave disservice to banana republics these days to say so. The Republicans wanted to extend the Bush-era tax cuts for 100 per cent of the population, especially for the rich, whom they call “job creators”. The Democrats wanted to extend the Bush-era tax cuts for 98 per cent of the population, whom they call the “worthy, hard-working middle class”.
Yesterday, these two incisive political forces made a mighty compromise. The Bush-era tax cuts will be extended permanently for 99 per cent of the population. This was a difficult compromise. The Republicans had to swallow a marginal tax rise of 4.6 percentage points for households with income above $450,000. The Democrats had to swallow hard to endear themselves to households between $250,000 and $450,000 in income, who got more of a break than Mr Obama had pledged during the campaign. To sweeten the deal further, many other tax breaks and temporary spending measures were extended for somewhere between one and five years.
Okay – so why are we surprised? Public finances are only ever seriously reformed when politicians run out of other people’s money. The US is nowhere near that unhappy position (or happy if you want fiscal reform sooner rather than later). Although Bryan Caplan thinks otherwise.
The right comparison is government debt relative to annual tax revenue [and not GDP]. By this correct measure, the U.S. is indeed in irresponsible territory. Take 2011: With government debt at 67.7% of GDP, and government revenue at 15.4% of GDP, the U.S. debt/income ratio was already about 440%.
Sachs wants to increase tax to GDP by about 7 percent (from 16 percent to 23 percent).
Sure, we have no social safety net. Sure, we have an underclass. Sure, we have crumbling infrastructure. Sure, we emit 17 tonnes of carbon dioxide per American. Sure, around two thirds of our kids don’t finish a bachelor’s degree. But hey, we have low taxes, and that’s what our revolution was about.
The US needs at least 23 per cent of GDP at the federal level to make the society function even at a minimum standard but collects only 16 per cent in revenues at the federal level. We should be spending around 2 per cent of GDP less on the military but 2 per cent of GDP more on other things, notably clean energy, infrastructure and education.
There is the problem – he wants to spend money on things the US federal government should stay clear away from – clean energy is a fiscal black hole, education is a state responsibility, as is most infrastructure.