US Government Debt Different - Finance Department - University of ...

114 The Tax Revenue Capacity of the U.S. Economygovernment rapidly accumulated debt following the crash of 2008.At year-end 2007, the value of U.S. government debt held by thepublic was equal to 36.3 percent of U.S. GDP. 1 By year-end 2011,that figure had risen to 67.7 percent of GDP, and, in March 2012,the Congressional Budget Office (2012) estimated that, in their “alternativefiscal scenario” intended to offer an optimistic but nonethelessmore realistic projection than official baselines, U.S. debt held bythe public would rise from 73.3 percent of GDP at year-end 2012to 93.2 percent of GDP by year-end 2022. This accumulation ofU.S. public debt reflects the impact of the recession that followedthe crash of 2008, including the accompanying tax cuts and spendingincreases. Deficits are projected to average 5.3 percent of GDPover the 2012-2022 decade; and these figures generally understatetotal obligations, since debt held by the public is only a portion (69.7percent as of 2012) of total U.S. government indebtedness.This very rapid accumulation of U.S. government debt is troublingto many observers, who worry about the political and economic repercussionsof shifting burdens to future generations of taxpayers,the macroeconomic consequences of large amounts of debt, the efficiencycost of raising taxes to meet future interest and principalpayments, and simply whether the U.S. economy is capable of generatingsufficient tax revenues to satisfy debt obligations along with financingannual expenditures. The purpose of this paper is to evaluatethe ability of the U.S. economy to meet current and future governmentfunding needs, and the implications for tax policy of actuallyundertaking to do so.Some comfort can be found in the experiences of other G-7 countries,all of which collect significantly greater tax revenues as a fractionof GDP than does the United States. To the extent that thesecountries offer reasonable guides to the type of policy the UnitedStates might adopt, it follows that there is ample ability of the UnitedStates to finance projected interest and principle payments on itsdebt. This is not to say that addressing U.S. fiscal imbalances couldbe easily accomplished. Other G-7 countries that raise significant tax1 These estimates and others are drawn from data provided by the CongressionalBudget Office, www.cbo.gov, and in which years are U.S. government fiscal years.March 2012 projections are reported in Congressional Budget Office (2012).