Peace and prosperity can be powerful tools for solving a country’s debt problems, as vividly demonstrated in the 1990s. Back then, federal debt held by the public peaked at 48 percent of GDP in 1994 but fell sharply to 31 percent by 2001—a decline caused, in large part, by the internet boom and the end of the Cold War.

While significant cuts in defense spending seem unlikely in the current global climate, the United States may find a new opportunity for accelerated economic growth—and the tax revenue that comes with it—through another technological revolution: artificial intelligence. The emerging Age of AI shows promise in boosting both economic growth and government tax revenue. Goldman Sachs estimates that the productivity gains from generative AI could potentially add 0.4 percentage points to US economic growth. This would be a substantial increase, considering that long-term forecasts currently project US growth potential at around 2 percent a year or slightly less.

Counting on growth to solve our debt problems would be a big lift, however. Back in 2015, the Center for a Responsible Federal Budget calculated that for the debt to return to its historical average by 2040 through growth alone, productivity would need to triple current projections. This means sustaining annual productivity growth of 2.5 to 4 percent. For context, the highest 25-year average since 1950 is only 1.9 percent. Adding to the gloom, debt as a share of GDP today is 97 percent versus 71 percent in 2015. So the lift has gotten a lot heavier, and we shouldn’t tax and spend as if the Singularity is nigh.

On the revenue side, mega tariffs aren’t the answer, especially if meant to replace the income tax, as Donald Trump has mused. (In an excellent blog post, economist Tim Taylor explains this disruptive tax code switcheroo would require 100 percent rates, slash imports, spark retaliation on US exports, and raise prices for all. So a good recipe for a depression, in other words.) 

A better idea: a broad-based consumption tax, such as the Bradford X-Tax. Another idea: enacting a carbon tax of the sort suggested by Kyle Pomerleau (AEI) and Shuting Pomerleau (Niskanen Center) in a new Bloomberg op-ed. A carbon tax could raise big bucks, encourage emission reductions, and serve as an efficient replacement for the Inflation Reduction Act’s clean energy tax credits. 

From the piece: “Although the [2017 Tax Cuts and Jobs Act] made important improvements to the US tax code, it would be a mistake and a missed opportunity to simply extend the law. Legislators should approach the TCJA extension exercise aiming to enact fiscally responsible, pro-growth tax reform.”

America isn’t lacking in good debt reduction ideas, both on the tax and spending side. As for the political will…

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