Other examples include the alternative minimum tax , sin taxes on alcohol and tobacco products , corporate tax, estate tax, Federal Insurance Contributions Act FICA , and property taxes.
Although tax hikes are common practice, most nations face large and growing debts. It is likely that the higher debt levels are largely due to the failure to cut spending. When cash flows increase and spending continues to rise, the increased revenues make little difference to the overall debt level. Sweden was near financial ruin by By the late s, however, the country had a balanced budget through a combination of spending cuts and tax increases. President Dwight D.
Eisenhower managed to reduce government debt in and Spending cuts and tax increases played roles in both efforts. A pro-business, pro-trade approach is another way nations can reduce their debt burdens. Getting rich nations to forgive your national debts or hand you cash is a strategy that has been employed more than a few times. Many nations in Africa have been the beneficiaries of debt forgiveness. For example, in the late s, Ghana's debt burden was significantly reduced by debt forgiveness.
In , the country is once again deeply in debt. Greece, which had been given billions of dollars in bailout funds in , was not much better after the initial rounds of cash infusions. Defaulting on national debt , which can include going bankrupt and or restructuring payments to creditors is a common and often successful strategy for debt reduction. North Korea, Russia, and Argentina have all employed this strategy.
The drawback is that it becomes harder and more expensive for countries to borrow in the future after a default. To quote Mark Twain, "There are three kinds of lies: lies , damned lies, and statistics. Debt reduction and government policy are incredibly polarizing political topics. Critics of every position take issues with nearly all budget and debt reduction claims, arguing about flawed data, improper methodologies, smoke and mirrors accounting, and countless other issues.
For example, while some authors claim that U. Similar conflicting arguments and data to support them can be found for nearly every aspect of any discussion about federal debt reduction. The record levels of U. While there are a variety of methods countries have employed at various times and with various degrees of success, there is no magic formula for reducing debt that works equally well for every nation in every instance.
Just as spending cuts and tax hikes have demonstrated success, default has worked for more than a few nations at least if the yardstick of success is debt reduction rather than good relations with the global banking community.
Overall, perhaps the best strategy is one by Polonius from Shakespeare's Hamlet and espoused by Benjamin Franklin when he said: "Neither a borrower nor a lender be.
Federal Reserve Bank of St. Federal Reserve Board. Institute for Government. Mohamed A. Accessed Feb. United Nations: Africa Renewal. Department of the Treasury: Fiscal Data.
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Your Practice. Popular Courses. Table of Contents Expand. Issuing Debt With Bonds. Interest Rate Manipulation. Instituting Spending Cuts. Raising Taxes. Lowering Debt Successes. National Debt Bailout. Defaulting on National Debt. Key Takeaways Rather than raise taxes, governments often issue debt in the form of bonds to raise money.
During times of financial malaise, governments can buy back the very bonds that were issued, which was the policy called Quantitative Easing in the U. There are examples throughout history where spending cuts and tax hikes together have helped lower the deficit. Bailouts and debt defaults can also help a government solve a debt problem, but these approaches have notable drawbacks as well.
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