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Fight for soul of America's destiny

To understand the origins of the stand-off between Republicans and Democrats over the US debt crisis, it is necessary to revisit an event that took place in Boston Harbour nearly 238 years ago. On December 16, 1773, a group of Massachusetts colonists boarded ships belonging to the East India Company and threw the entire cargo into the sea. There, in tax rebellion, began the American Revolution.

This iconic event in US history, the one from which the modern Tea Party takes its name, helped establish a national aversion to taxation that has remained at the heart of the American psyche. For a people defined by the idea of rugged individualism, self-reliance and the frontier spirit, the presumption of low taxes -- and correspondingly small government -- is an article of faith as sacred as motherhood and apple pie.

Few would contest the manifold economic success that these principles have delivered. They are the very foundation of the American economic model, and helped to make the US the richest and most powerful nation the world has ever seen.

But here's the problem. In recent times, both government and its spending commitments have been getting a lot bigger; taxation, on the other hand, has failed to keep pace. On the contrary, under George W Bush, the US reduced its tax burden even as its spending escalated. Since President Barack Obama came to power, spending has run further out of control, with no compensating tax increases.

America as a whole remains a low-tax economy in comparison with most other "rich" nations. Yet its government spending is approaching the heroic levels seen in Europe.

For the time being, the gap is filled by borrowing from foreigners, a plainly unsustainable and humbling path -- made all the more worrying by the fact that there are huge spending pressures still to come from the needs and demands of an ageing population. Something has to give. Either America must spend less, or tax more.

But before analysing the significance of this choice, we need to lay a couple of misconceptions about the nature of the crisis to rest. The airwaves have been ringing with apocalyptic warnings about the 'Financial Armageddon' likely to be unleashed on the world economy should congress fail to break the impasse over the debt ceiling by the August 2 deadline.

Are any of these warnings valid? Well, if America were to default, it would indeed be a seismic upheaval of shattering dimensions. In reality, it's not going to happen. What's being played out here is not, at this stage at least, an existential event, but a political charade.

There have been signs of distress in financial markets in recent days, but in the main, investors have displayed a remarkable lack of concern.

They are right to be sanguine. The bottom line is Obama is not about to go down as the first US president in history to default.

America is not insolvent. It's simply that it cannot agree on the correct balance between spending and tax. The crisis is political, not economic -- which makes it unlike the situation in the eurozone, where it is both.

The immediate problem of the deficit could easily be solved with a single measure, the imposition of a European-style, federal sales tax, akin to VAT. Yet hell will freeze over before such an abomination is agreed.

The parties have produced several rival plans for fiscal consolidation, but there's little merit in getting into the minutiae: to the outside world, they all look as flawed and implausible as each other.

And the detail of the argument is, in any case, almost irrelevant compared with the titanic battle for the heart and soul of America's future that underlies it. Does the US economy stay loyal to its low-tax, libertarian traditions, or does it retreat into serene, low-growth, European-style old age by reinforcing its social welfare programmes and charging citizens the taxes necessary to pay for them? Not since the Civil War has the nation been so polarised.

For the US to forsake the principles that have underpinned its economic success for more than two centuries would be a disaster not just for the country, but for the world. European experience teaches that rising taxes almost invariably entrench higher spending. Once the welfare establishes a culture of entitlement, it's very difficult to remove.

Paradoxically, although moving to a European-style tax base would provide all the revenues the country needs, it would inevitably mark the start of America's long retreat from military and economic hegemony, leaving the way clear for younger, alien political cultures with no love of liberty to occupy the ensuing vacuum.

Economic might is as much to do with confidence and perception as reality. The spectacle of a nation so lacking in credible political leadership that it cannot resolve its differences, threatens to default on its debts, and would rather print money than face up to its underlying economic challenges, is already perilously close to breaking the spell. America needs to wake up -- before it's too late. (© Daily Telegraph, London)

Irish Independent