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

136 Can the United States Achieve Fiscal Sustainability? Will We?The general relationship between federal tax levels and the futurenational debt can be seen in Figure 2, which plots debt levels in2035 and 2050 against different levels of federal tax revenues. Ineach case, I assume that government spending policy is the same asin the CBO’s alternative fiscal scenario. I also assume that tax policyis the same as in the alternative fiscal scenario through 2022; that is,the tax level on the X-axis does not take effect until 2023. Even so, itis clear that the national debt could be kept at moderate levels giventax revenues that are only average by international standards. This isnot to say that increasing our taxes to these levels is necessarily goodpolicy. My point is simply that the American economy generates sufficientresources such that, with average tax levels, the United Statescould manage its current debt levels even given expected growth inentitlement spending. 28Figure 2: Impact of Tax Level on National DebtAssumes: real GDP growth of 2.2 percent beginning in 2023; effective real interest rate of 2.7 percent beginningin 2027.Source: CBO, CBO’s 2011 Long-Term Budget Outlook, June 2011; CBO, The Budget and Economic Outlook:Fiscal Years 2012 to 2022, January 2012; analysis by the author.Figure 2 incorporates the basic macroeconomic assumptions of theCBO’s 2011 long-term forecast: a real interest rate of 2.7 percent and28 Note that this analysis does not incorporate any potential macroeconomic effectsof higher tax levels; this is consistent with usual CBO practice. Higher tax ratescould reduce economic growth by changing the incentives facing individuals. Thatsaid, tax revenues could be increased significantly by eliminating tax expenditures,which function like government spending programs implemented through the taxcode. Eliminating tax expenditures should reduce economic distortions and shouldnot adversely affect incentives to generate income.