Let's eat! Who's paying?

Here's a great way to get a free meal: Go to a high-priced restaurant with a group of friends and when it comes time to pay, say "Sorry, I left my wallet at home." Or here's another one. When your friends all abandon you, borrow money from a more distant acquaintance, pay for a restaurant meal yourself and then just tell the person you borrowed from that the money's all gone and you can't pay it back.

If you get a yucky feeling when you hear those suggestions, you are one of the people who makes our economy work.

It's those silly little unwritten social quibbles - sometimes related to abstract concepts such as honour or justice - that make some societies function better than others.

Just as a healthy pluralistic democracy is not simply a matter of holding elections, a healthy economy is not just free markets: It's the subtleties that make things work well.

When I hear people talk about taxes these days, I sometimes get the feeling that we are all sitting around a giant table with full tummies, making stilted conversation while we wait for someone else to pull out his wallet. And it feels yucky.

Who is supposed to pay taxes?

California Gov. Arnold Schwarzenegger has asked Washington to guarantee $15 billion US in new state borrowing. But, you say, California's economy is bigger than those of most countries. Why would they need federal backing? Well, it's because they are already borrowed to the hilt. Californians haven't paid their way in years. Using direct democracy, California residents voted taxes down and spending up during the good years. Now things aren't so good economically.

There is nothing wrong with a healthy fear of excess taxation, but the time to think about whether you can afford the restaurant meal is when you are ordering.

No wonder the governor is considering revisiting the Terminator science fiction franchise - fighting super robots, even virtually, would be a nice break from gubernatorial stress.

At the federal level, U.S. President Barack Obama is also spending more than Americans are paying in taxes: The U.S. national debt is something over $11 trillion and growing fast. All those bailouts and stimulus payments have to come from somewhere. Unfunded liabilities of various kinds - from pensions to health care to loan guarantees - dwarf the debt figure. But taxes remain a dirty word.

There is nothing wrong with a healthy fear of excess taxation, but the time to think about whether you can afford the restaurant meal is when you are ordering.

The idea that everyone could eat for free may have started in the Reagan era with the Laffer Curve. The Laffer Curve was a nice little graph that showed that as tax rates rose to 100 per cent, tax revenue would fall to zero. That's not really a surprise. Who would work to earn money if the government took every penny you earned?

The theory may have been perfectly sound, in that nice, clean, oversimplified way that theories are sound. The problem was in interpretation. Anti-tax enthusiasts grasped at the Laffer Curve, interpreting it to say something miraculous: If you cut taxes, tax revenue will rise.

Meanwhile, the U.S. national debt continued to grow. The reason was simple: The government was spending more than people were paying in taxes. They just borrowed the rest.

There are ways to get rid of debt without paying it off. One way is to out-grow your debt, an uncertain prospect in the current climate. Another is to let your currency inflate, so you repay your loans in money that is worth less. That can have lots of unpleasant consequences, including scaring off all your friends and acquaintances who lent you the money.

When it comes right down to it, there is only one way out debt, short of bankruptcy: Countries must either cut their spending or ask their citizens to pay more in taxes.

But no one can say it.

There are economists who now say the U.S. government is going the way of the subprime borrower, the way of New York city in 1975, the way of Argentina, stacking up debt without realizing the consequences. Perhaps only a crisis will be able to turn them away from the cliff's edge.

It was fascinating to watch Opposition leader Michael Ignatieff back away after speaking the poisonous truth. Only a few years ago his party gave this country a wise and precious gift that is only paying off now: They balanced our budget, made it so that we were actually paying as much in taxes as we spent, allowing our national debt to shrink. The Canadian government also made us pay more for our pensions so they won't run out of money.

But this time Ignatieff realized he had uttered forbidden words, hinting that we might have to pay the bill at the end of the meal. Too much of a rational man, Ignatieff is not yet enough of a politician. On the other side of the House, Prime Minister Stephen Harper's government learned their lesson in their own years of opposition. They know that voters don't want to hear the truth. Before the election they told us there would be no recession and no deficit. Now they tell us that only Ignatieff will raise taxes. That's how you get elected.

That's democracy. The California disease is spreading.

So here we are around the table, ordering course after course - company bailouts, pension bailouts, stimulus, better health care. When the waiter arrives with the bill, we glance around nervously. Eyes shift to the child at the end of the table playing with a toy on the spattered white tablecloth. Finally, a fat man puts a hand on his stomach and points at the child: "Put it on his tab."

Don Pittis has reported on business for Radio Hong Kong, the BBC and the CBC. He is senior producer of CBC News Business.