After the Debt Ceiling Drama

by Pejman Yousefzadeh on August 2, 2011

It is a relief to see that debt ceiling legislation has passed both chambers of Congress, and that there is no longer any chance that the United States will fail to make any of the 80 million payments that it has to make this month. But let there be no mistake; there is still much more to do in order to ensure that we get our fiscal and economic house in order. Moody’s currently backs our AAA rating, but has assigned us a negative outlook, which means that any slackening of any newfound fiscal discipline could still result in a downgrade. Other ratings agencies will likely take a similar line.

Policymakers would now be well advised to seriously tackle entitlement reform, and to reform the tax code as well, so that we get lower rates, a substantial cut in the corporate tax rate, a broader base, and the closing of loopholes, giving us a tax system that can collect enough revenue to address our parlous fiscal condition, while at the same time, encouraging economic growth. We need a tax system that, in the words of the late William Simon, looks as though someone designed it on purpose. We don’t have such a system now, which means that efforts to collect more revenue end up failing because of their distortionary effects on the economy. Our chances of paring down our national debt, and finally realizing a balanced budget are negatively and severely impacted by the design of our current tax scheme. Reforming it is a non-negotiable condition to restoring fiscal sanity in the United States.

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