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How to Avoid Bankrupting the Nation

By       Message Dustin Ensinger     Permalink
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Last week, the White House Office of Management and Budget adjusted its previous 10-year budget projection of $7 trillion upwards by $2 trillion based on new economic forecasts, meaning that the government will spend $9 trillion more than it takes in over the next decade.

Eventually, the federal budget deficit and the national debt could bankrupt the nation. The exploding deficit could eventually result in the nation paying a much higher interest rate to borrow, losing its triple-A credit rating, which would make it much more difficult to borrow. Foreign creditors, who finance the majority of America's new debt, could stop buying as much debt, or worse, stop buying American debt altogether.

At that point, the nation is in deep trouble. With creditors bailing out on the dollar, taxes would rise exponentially and social service would be cut drastically.

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"Taxes would rise to levels that would make a Scandinavian revolt. And the government would not be able to provide anything but the most basic public services. We would no longer be a great power (or even a mediocre one), and the social safety net would evaporate," tax policy expert and Syracuse University professor Len Burman wrote in a recent op-ed cheerfully titled "Catastrophic Budget Failure."

The nation is obviously on a wholly unsustainable course - living increasingly in debt and off the good graces of foreign creditors, all the while forfeiting a bit of economic sovereignty every time the Bureau of Public Debt holds an auction of U.S. Treasuries.

These creditors America is now beholden to are gaining an enormous amount of sway in U.S. economic policies, according to then Sen. Hillary Clinton, telling CNBC in 2006 that she sees "a slow erosion of our economic sovereignty," as the nation becomes more and more reliant on foreign financing.

The only recourse is to search for new revenue streams before the nation is held entirely to the whims of its creditors or those same creditors abandon the dollar causing its collapse.

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One of the ways in which the nation could close the gap between the money it spends and the money it takes in is through a value-added tax. Not only would a VAT raise the needed revenues for the country, it would also help balance America's enormous trade deficit and reinvigorate the nation's beleaguered manufacturing base.

Currently over 150 nations utilize the VAT. The VAT works like an export subsidy for foreign exporters and an import tariff at the same time, which places the U.S. in a comparatively most uncompetitive situation due to the fact that we do not utilize the VAT or any countervailing measures.

In 2006, VAT nations collected rebates totaling $218.2 billion while the U.S. was forced to pay $122.4 billion in taxes due to the VAT. Each year the VAT imposes a $290 billion burden on exported U.S. goods and another $85 billion on services. This encourages outsourcing as American companies move offshore in order to circumvent the VAT and reap the same benefits as the companies producing in those nations.

In 2005, the tax was applied to 94 percent of U.S. imports and exports. In EU countries alone in 2001, the Average VAT rate applied was 19.4 percent, coupled with a tariff average of 4.4 percent levies a total tax of 23.8 percent on American goods and services.

The VAT was initially intended to help rebuild Europe after WW II by providing the continent with an advantage in trade. Today Europe is thriving - the European Union had a greater GDP than the United States in 2007. But instead of the VAT disappearing, it is expanding. Now, over 150 countries worldwide utilize the trade distorting practice.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan, told The Washington Post. "It's common to the rest of the world, and we don't have it."

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Dustin Ensinger graduated from The Ohio State University with a Bachelor of Arts in Journalism and Political Science. He is a contributing journalist for EconomyInCrisis.org.

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