As we all know American economy is in real mess. The expense of the government is more than the revenue it earns. The US debt currently runs to around $15 trillion compared to its Gross Domestic Product (GDP) of $16 trillion. When compared with other developed countries US is in moderate position. Japan’s debt to its GDP is 225% and even other European countries have more debt percentage than US. The problem is worldwide phenomena and not predominantly relating to US.
The government has fixed a ceiling for debt amount and it is now allowed to cross it. If it wants to cross the ceiling limit, it has to be approved by both houses and the president. The current American debt problem was mainly due to the problem in getting the approval from the house, which is controlled by majority Republicans against the democrat president. The Standard and Poor have clearly mentioned in its report that the lack of political will and co-operation is the main reason for downgrading the US rating and not due to its capability.
Though the problem may not be as bad as other developed countries such as Japan, Spain and Italy, American debt is growing fast and is not sustainable in the long run. America has to find a way to bring down its debts. Already government is spending around $400 billion on interest payments for the loan. There has been a lot of noise and reporting from media regarding the debt faced by the developed countries, which has made the investors panic and the result the equity markets around the world crashed. Investors started to put their money in gold and other safer investments like Swiss Franc.
Anyone from other developed countries such as France, Italy and Spain would wonder how could American economy face the same debt problem as their own countries with no or very less state benefits compared to them. The answer to this question is just simple, the other side of the equation, tax is very less in US compared to any other developed country in the world.
America is one of the richest country in world having highest per capita income and quite good standard of living. Does it mean that all Americans are earning the highest income in the world and living with best standard of living. Sadly, the answer is big no. There is very huge difference in the income of people and among the developed countries, US has got the highest disparity of income among its population.
One could wonder why there is huge disparity of income in US. The rich and super rich are not taxed properly according to their income. Any president or politician is scared to tax this group due to big political influence and the way America was built and developed. The free enterprise and low taxation for the entrepreneurs and innovators are thought the main reason for the development and growth of America. This belief may be the main reason that any president coming fears to increase the tax so that America’s basic instinct for innovation and entrepreneurism would be killed.
Does it mean that countries with high taxation like Germany and France don’t have enough innovations and commercially successful new enterprises. It is a false thought running among the American people and politicians. They can structure it in a way that people with higher income are taxed without affecting the entrepreneurism.
For bringing the debt lower, the government has options both on the revenue side such as increasing the various taxes and also has a way to reduce the spending. Already US has got the lowest welfare schemes among the developed country, so reducing the spending should be quite tricky.
Reduce the spending of US federal government
Army
US have got the largest army and its defense budget is more than all the countries in world together. Acting as the guardian for the world requires huge defense spending. The current administration has much restrained from unnecessary ventures compared to previous administration. The government should try to reduce further the unnecessary spending like bringing down the force stationed in peaceful countries.
Administration
If one compares the salary of the politicians and government employed with ordinary Americans there is a huge difference. Both federal and state governments have large scope to reduce the expenses. In the name of homeland security big portion of the budget is spent. Government has to seriously examine on the expenses and try to reduce wherever possible.
There is thinking among the particular section of Americans that Medicare introduced by the present administration has increased the spending and been one of reasons for the debt crisis. This is a separate topic to be analyzed to know its validity.
Increasing the government revenue is the other side of the option to reduce the debt, increasing the revenue is strategic in case of reducing the American debt. As said earlier, America is the least spending welfare state. So this is contrary to European debt crisis, where the irrational spending of the government created debt crisis.
America lacks adequate income or revenue for it’s spending. How to increase the revenue of American government? Increase the tax, but people are against it, republicans are against it. Is it possible to increase the tax without hurting the people and get the politicians co-operation. One could analyze the various available ways to increase the tax and find a solution to this problem.
Increase the tax on fuel
America has got the lowest retail fuel price among the developed countries. Increase the tax by 3% every year for 5 years. This will give 15% tax increase after five years on fuel. In real terms, this may not increase the retail price since even on the news of retail fuel price increase the international oil price will go down. The ultimate losers will only be oil producing countries. By this way, two big concerns of American economy will be dealt with. One, revenue for the government and the other, the biggest scarce resource oil consumption would be controlled and may reduce the import bill. Alternative energy utilized vehicles and small vehicles with low consumption of fuel will become necessity for the auto companies. There will be initial protest against the government by the people and politicians, but with debt crisis explained properly, this move could be accepted.
Increase the tax on rich
Any person above the national income average should be taxed 10% more. This could bring the revenue for the government as well brings the equality of income among the population. 10% increase is not a big deal for people who are earning much higher than the national average. The actual percentage of increase and impact on the tax increase on government revenue is a field to be further researched.
Introduce Federal sales tax
Many countries with two tier governments have two type of sales tax. America has got only state sales tax and there is big scope for the federal government to increase revenue by introducing the federal sales tax. This will make the Americans to buy less. Politicians and economists may argue this will reduce the production and will lower the GDP. But there should be clear understanding, most of the manufactured goods people use are imported. So by taxing these goods, the imports will be reduced and the foreign country’s exports will go down. It is only the foreign country’s GDP that is affected by lower exports. There should be a way found, by which the locally produced goods are not taxed by this sales tax without discriminating the world trade agreement. These types of policies are practiced in many countries and are not affected by the world trade agreement. Two benefits for the American government, one, higher revenue and another lower import bill and thereby reduce the trade deficit.
Strong Policies and Framework
Lay out strong policies and framework for the financial institutions and business organizations to work efficiently and effectively without falling into debt and bankruptcy. The housing policy in US is a good example for a weak practice and policy followed by US laws. This has created the housing industry along with the banking industry to collapse. This has pulled the whole US economy and the world economy into the previous 2008 recession.
There are always many more ways for the government to increase the tax. But it should be clear that the people and nation’s growth are not affected by these new taxes. The government should be diligent in introducing the new tax. Some of the avenues of increasing the tax were discussed. Other than these fiscal policies, government can take some actions in immigration policies and foreign policies to reduce the spending and increase the American income. Foreign immigrants working in US are sending huge money from here to their own country and this is equal to importing goods and services.
These are some of the remedial measures that could be taken by the American government for coming out from its debt crisis. It is not limited to these discussed ideas, there are many more thoughts and ideas which could bring back US from its present debt crisis. As said in the starting, with it’s advanced companies and innovative people it is not a big issue to find the money and come out of its debt crisis, but as said by Standard & Poor, it is the political co-operation and will power that is important at this hour.
One would question, with economists already predicting America entering the recession again how would the government be in position to tax the people. Actually what happened when former American President reduced the tax, it just temporarily revived the economy and America did not grow in long run, as it should have with low tax and low interest and ultimately it ended only with recession. Again, after the present administration took over pumped in lot of liquidity and reduced the interest rate to lowest in history and again this failed to reduce the unemployment and revive the economy.
Whatever America does, the end result is faced in other exporting countries particularly China. When US keep the interest rate low, the Americans borrow more and buy products that are mostly manufactured in China, Germany and other exporting nations. How can America benefit with low tax and low interest. It is only going to pile its loan and make its currency a waste paper by printing and circulating lot of dollars. Sensible thinking and action is wanted by the American government and its people to come out from the current debt crisis. The government needs to create a policy for sustained growth.
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