Is a debt crisis coming to your neighborhood?
An excellent article here on a possible US debt crisis coming to your neighborhood in the future. The chart above is a projection of interest payments on the national debt over the next decade. They’re projected to grow to such an extent that they’ll constitute a large percentage of all annual spending. This chart was put together by the congressional budget office and I don’t have access to their interest rate assumptions, but it should be noted that current interest rates are at historic lows and any return to a more normal level would most certainly drive interest payments much higher. Of course if the US looked like it might be at the risk of default, creditors would treat us like a subprime borrower and interest rates would be even higher. The CBO is notoriously rosy in projections like this and as bad as the picture looks, it will likely be even worst.
This is the main reason why the administration has convened a bi-partisan deficit reduction commission and even before that commission has brought forward its recommendation, Obama’s economic advisor, Paul Volker, has been floating a trial balloon about the imposition of a value added tax or national sales tax.
As a CPA, I’ve always thought that a consumption based tax would be far more efficient to administer even though it would eliminate much of the work for legal and accounting professions as well as that of the IRS. This tax would effectively tax the underground economy whose economic activity doesn’t show up in the normal channels and hence raise raise more money than the existing income tax system.
My problem is having both a broad based consumption tax and an income tax in place at the same time as that just simply squeezes the taxpayer absent a commitment from the government to actually reign in spending. Unless the proceeds from the VAT are specifically ear marked for debt reduction, all its implementation will do is allow the government to continue spending.