How to beat the national debt


It's a commonplace that debt, even the national debt, is not a problem in and of itself. Nor is any specific or particular amount of debt a problem or not a problem. A €340 billion debt for the US's $14 trillion economy is a different beast from the €340 billion debt of Greece's very much smaller economy. What can be a problem is the amount of debt in relation to something else: that something else being the capacity to service it.

Our usual method of describing this is to mutter about the debt to GDP ratio. As reasonable rules of thumb, below 30% it's irrelevant, once it starts going over 60% we see future growth being constrained, above 100% something really must be done and over 150%, unless you're something very strange like Japan, you're bust.

So, in all our talk about how we're going to deal with the national debt yes, there's room for cutting spending so as to avoid adding to the debt and thus make everything more difficult. But there's also room to increase the size of the economy so as to reduce the ratio. No, not by simply borrowing more and splurging in some hope that the Keynesian Fairy will sprinkle growth dust. But a change in hte tax system.

Here's the growth, the extra growth, that could come from a simple change in the way we raise taxes:


Clean income tax is flat rate no allowances, standard flat is with an allowance, transition relief means don't do it all at once.

No, we're not raising any different amounts, we're raising the same amount of tax in a different way. This doesn't mean cutting anything, this is purely the extra growth we'd get by changing the method, not amount, of taxation. As you can see, simply changing the method of taxation could give us a lovely little bolus of growth, one that reduces the national debt as a percentage of GDP and thus reduces the overall problem we face.

We can still do all the other things, or not, as the mood takes us, but this is a free lunch, that rarity in economics. And free lunches, given their rarity, really should be eaten.

Why, yes, we at the ASI have been advocating a standard flat tax for a number of years. For, you know, it works.