Really, we’re not broke.
The notion that the United States is “broke” is a popular talking point for conservative lawmakers. They use the claim to justify cuts in government services for middle-class Americans and those with whom they have ideological quarrels. Speaker of the House of Representatives, John Boehner (R-OH), for example, likes to say that the United States is “broke, going on bankrupt,” which is why he says we absolutely have to slash government services such as poison control centers, meat inspections, law enforcement funding, afterschool programs, and disease research.
But we’re not broke. Not at all. If we were, it would mean that we were out of money, unable to pay our bills, or meet our financial obligations. We are none of those things. A recent article by David J. Lynch of Bloomberg News points out that, actually, the United States continues to meet every one of its financial obligations with no trouble at all. The federal government is able to borrow funds at historically low interest rates. And those historically low rates apply to both short-term borrowing and long-term borrowing, indicating that lenders not only don’t believe the United States is broke right now, but also don’t see bankruptcy anywhere on the horizon.
And one reason why the federal government is still able to borrow at such fantastic rates is because, far from being out of money, the U.S. economy boasts the absolute most money in the world. True, we are currently dedicating a very low share of that money to pay our federal bills. Instead, we have chosen right now to use borrowed money to cover much of those costs.
We could, however, make a different choice. The United States is an extremely low-tax country compared to the other economically advanced countries in the Organisation for Economic Cooperation and Development. Over the past five years, the United States ranked 29th out of 33 member countries of the Organisation for Economic Cooperation and Development in total tax revenue as a share of our economy, with only South Korea, Turkey, Mexico, and Chile collecting less than us. In fact, U.S. tax revenues were a full 8 percentage points of gross domestic product below the average OECD developed or developing country. (see Figure 1)
But we don’t need to raise as much revenue as the average OECD country in order to pay all our bills without borrowing. We could balance the budget, with plenty of room to spare, by raising only as much revenue as Canada does. Over the past five years, Canada ranked 22nd in total tax revenue collected, placing them in the bottom third of OECD countries.
Combining Canada-level revenue with the spending levels in the president’s fiscal year 2012 budget plan would produce an immediate budget surplus that would grow from about 0.6 percent of GDP in 2012 to 1.6 percent of GDP by 2021.* At that rate, debt as a share of GDP would fall from 63 percent currently to under 40 percent 10 years from now. In fact, we could even get to a balanced budget by 2015 with revenue levels about 1 percentage point lower than Canada’s. (see Figure 2)
It’s worth noting that having a somewhat higher overall level of tax revenue hasn’t done Canada any harm either. From 2000 through 2007 median family income in Canada rose by 8.6 percent, after accounting for inflation. Meanwhile, back here in the even-lower tax United States, median family income was essentially flat during that period, and then, of course, it plummeted during the Great Recession.
The United States is not broke. On the contrary, we have enormous economic resources at our disposal. We could, if we chose to, fully pay for every service, program, and benefit that the federal government provides without borrowing a single penny. We could do so and still be a relatively low-tax country—simply by raising the same amount of revenue, or even a bit less, as our northern neighbor does.
It is true that the U.S. federal budget is currently out of balance, and that over the long term, unsustainable deficits and growing debt present serious concerns. And we’re not suggesting that these problems should be solved entirely be increasing taxes. But it is also true that right now we are not broke. The government is meeting all of its obligations, and there is no indication that that will change any time soon.
Instead, we are making a deliberate choice to borrow to pay for those obligations rather than to tax ourselves. And though conservatives begin to hyperventilate whenever revenue is even discussed, cutting services for middle-class families, the disadvantaged, and their political target du jour isn’t a great option either.
Michael Ettlinger is Vice President for Economic Policy at the Center for American Progress. Michael Linden is Director for Tax and Budget Policy at the Center.
*The appropriate way to compare revenue levels between countries is by looking at total revenue collected at all levels of government. This is because many countries do not have distinctions between local, state, and federal in the same way that we do. In the United States, state and local tax revenues make up about 10 percent of GDP. To balance the federal budget with the same overall revenue levels as Canada, we are assuming that state and local revenues remain the same, and that the increase is entirely at the federal level.
Managing Director, Economic Policy
Vice President, Economic Policy