Is the United States Flirting with Insolvency?

On Sunday's talk shows, Lawrence Summers and Timothy Geithner, the President's top economic advisers, sensibly refused to rule out tax increases not limited to persons with incomes above $250,000. Yesterday, the President's press secretary stated without equivocation that the President would not agree to any increase in taxes paid by persons with incomes below that level.


The United States has a huge and soaring national debt, as a result of the Bush Administration's annual budget deficits, the collapse of federal tax revenues in the current depression, and heavy borrowing to pay for the stimulus package, for the bank and auto bailouts, and for other expenses of fighting the depression, including mortgage relief and "cash for clunkers." Taxes cannot be raised in the short term without retarding recovery from the depression. But if they are not raised even after the recovery is well under way, the government will have to cut spending, inflate the currency in order to shrink the national debt, greatly increase its dependence on foreign lenders--and at much higher interest rates--or raise taxes. (Tax revenues will rise when the economy recovers, but not enough to offset the increase in national debt as a result of the current depression and the efforts to dig out of it.)

Spending cuts are blocked by interest groups. Inflation, and increased dependence on foreign lenders at rising interest rates, are unattractive options. That leaves tax increases. Marginal tax rates on high earners are already pretty high by international standards, and cannot be raised by enough to generate the additional money the government needs without creating significant economic distortions. In addition, singling out a particular class of taxpayers for higher taxes will be highly resented and strongly resisted.

Now is not the time for a general tax increase; it would significantly retard recovery from the depression. Now is also not the time for costly new expenditure programs, like adding tens of millions of people to the health-insurance roles at a cost to the government of hundreds of billions of dollars. (The projected annual cost of $100 billion is an underestimate, because it ignores the fact that people with health insurance demand and receive greater medical services than those without such insurance.) At first it was argued that health-care reform would more than pay for itself by the savings in health-care costs that it would generate. No one argues that any more. Now the argument is that at least the savings will pay for the cost of the program--and fewer people are arguing that with a straight face.

If the health-care plan is enacted, the government's fiscal dilemma will probably be even graver than it is now. The need for a general tax increase will be all the more urgent--and it has just been taken off the table.

Or has it? The President is a lawyer. Lawyers are masters of equivocation. Perhaps what has been taken off the table is just increases in income tax rates until the economy recovers from the current depression. Perhaps the door has been left ajar for other forms of tax increase, such as a federal value-added tax; cutting deductions (which do not affect the nominal tax rate); and increasing federal income tax rates in a year or two, when (one hopes) the Gross Domestic Product will have returned to its trend line.

I hope there is this running room; the alternatives seem either less feasible politically (such as cutting spending) or more harmful to the nation--as Summers and Geithner must know.

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Richard A. Posner

Richard Posner is an author and federal appeals court judge. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. More

Richard A. Posner worked for several years in Washington during the Kennedy and Johnson Administrations. He worked for Justice William J. Brennan, Jr, the Solicitor General of the U.S., Thurgood Marshall, and as general counsel of President Johnson's Task Force on Communications Policy. Posner entered law teaching in 1968 at Stanford and became professor of law at the University of Chicago Law School in 1969. He was appointed Judge of the U.S. Court of Appeals for the Seventh Circuit in 1981 and served as Chief Judge from 1993 to 2000. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. His academic work has covered a broad range, with particular emphasis on the application of economics to law. His most recent books are How Judges Think (2008), Law and Literature (3d ed. 2009), A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009). He has received the Thomas C. Schelling Award for scholarly contributions that have had an impact on public policy from the John F. Kennedy School of Government at Harvard University, and the Henry J. Friendly Medal from the American Law Institute.

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