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

James R. Hines Jrtries, and consequently U.S. tax collections have represented a relativelysmall fraction of national income. This pattern can be viewedin two ways. From one perspective, there appears to be significantunused tax capacity in the United States, so the tax increases necessaryto finance significant U.S. government debts are well within thecapacity of the U.S. economy. From another perspective, the UnitedStates in recent decades has demonstrated that it is unwilling to demandof its residents large tax payments. This tension, between thecapacity of the economy and the realities of political decision making,leaves the course of future policy far from certain.125Some aspects of future tax policy have predictable features. It is unlikelythat business and personal income taxes will be used to generatesignificant additional future tax revenues, since current economicforces, if anything, put downward pressure on these taxes. Since theUnited States has relied to a greater extent on income taxation thanhave other high-income countries, reducing reliance on income taxesentails a significant restructuring of revenue sources. The additionalresources necessary to pay the country’s debts are likely to come insteadfrom social insurance and expenditure taxes. Consequently,greater U.S. tax collections in the future will almost surely entaila tax system that is less progressive than is the current U.S. system.This reality generates considerable political anguish, which may be agood part of the reason why the country has for so long put off dealingwith its fiscal imbalances.