Dealing with Increasing Deficits and Debt to Avoid a Fiscal Crisis

Abstract

The budget and the economic outlook for 2020–2030 reported by the Congressional Budget Office sheds light on the prospects of a fiscal deficit and debt that are already high and still increasing and which could pose significant risks for the nation in terms of financial vulnerability and the ability to respond to future crises. As we can see from the most recent historical facts, the near-term drivers of deficits and debt are making the long-term fiscal scenario unsustainable. For that reason, this paper proposes an increase of the corporate tax rate from 21% to 25, focusing on those short-term events with the objective to stabilize deficits and debt over the next ten years. After evaluating the set of positive and negative elements of the proposal, the conclusion is that a higher corporate tax rate would lower the fiscal deficit by $500 billion over 10 years, which is equivalent to one percentage point of the debt-to-GDP ratio. The initiative would also allow policymakers to manage deficits below the $1 trillion mark over the same period. Finally, the initiative proposed would cut the debt ratio by 5% of GDP by 2050. These positive elements should be adjusted by the economic costs faced by corporation, amid a higher tax rate. However, given the current situation regarding the Covid-19 pandemic, it would not be appropriate to increase taxes this year this year. In the best-case scenario, such an initiative should wait until 2021 or until the economy recovers from the recessive stage of the business cycle, to be proposed and discussed in Congress.