Down the road to France

The United States has consistently outgrown its European allies, and there is little dispute among economists that the United State's big advantage is its relatively small government. But the latest budgetary manoeuvring’s have virtually guaranteed that a good bit of that advantage will disappear, at least if Democrats remain in power, says Kevin Hassett, director of economic-policy studies at the American Enterprise Institute.

The current laws, as written, have put the United States on the road to France. The primary culprit is government spending, explains Hassett:

According to the latest long-run outlook of the Congressional Budget Office, government spending may take up fully 50 percent of GDP by 2050.

Yet tax revenue will increase tremendously over the same time period; revenue relative to gross domestic product (GDP), currently a smidgen more than 18 percent, will climb to 23.7 percent by 2050.

Further, it will extrapolate out to a whopping 27.5 percent by 2075.

Why the big climb in revenue? There are three reasons, says Hassett:

Current law calls for the expiration of the Bush tax cuts in 2010.

The Alternative Minimum Tax, which isn't adjusted for inflation, sucks in more and more revenue over time.

As the economy grows in real terms, more individuals get thrust into the top tax bracket.

This is not "free money," says Hassett. The government is increasing its take because individuals are seeing big tax increases. If we want to keep raising the same amount of revenue relative to our output each year, we are going to have to pass big tax reductions relative to the baseline. If not, we can sit and watch while the current law gradually pushes the United States down the road to France

Source: Kevin Hassett, "Tax Policy Taking U.S. Down the Road to France: Kevin Hassett," Bloomberg News, April 9, 2007.

For text: http://www.bloomberg.com/apps/news?pid=20601039&sid=acRknNQPg89c&refer=home

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 17 April 2007