GOP, Dems in "Death Embrace": U.S. Budget "About to Go Off a Cliff," Cal Prof Says

Raise taxes or cut spending?  Washington must take action on both fronts to curb U.S. debt or run the risk of a dollar crisis, according to a report by the Committee on the Fiscal Future of the United States, a panel of bipartisan experts.

"The Republican and Democrats are in a death embrace and about to go off a cliff," says Alan Auerbach economist at University of California at Berkeley.  Not a member of the panel, Auerbach has studied the government debt for 15 years.  He tells Tech Ticker the near-term "challenge is to take credible action on the deficit without damaging the economic recovery.

But even after the recession recedes, debt levels will continue to rise to "unsustainable" levels, he says, estimating the GDP-to-debt ratio will be greater than 100% by 2026.

A few politicians are trying to act but without much support. Senator Judd Gregg and Senate Budget Committee Chairman Kent Conrad are struggling to create a bipartisan fiscal commission to tackle the problem.  There's likely not enough support to pass the measure, which gets a full Senate vote next week.

While politicians argue about the causes, Auerbach agrees with the panel; we must make hard decisions that include spending cuts and tax increases.  Neither of which are politically acceptable.

He proposes adding a value added tax (VAT) that is so common in Europe.  Auerbach says this kind of consumption tax that is indirect and not just paid at the final point of sale has benefits over our current sales tax system.  Auerbach says a VAT could cover about half of the current budget gap, with enough left over to repeal state sales taxes and cut income taxes for less affluent Americans.

How do you think we should solve the debt crisis?