The 2008 Depression is lowering tax revenues due to investment losses, declining earned income, and falling property values. To raise taxes at this point, even to maintain revenue, will create even less investment if levied on business, thus hurting prospects for job creation; and if levied against individuals, will lower discretionary spending and further the crash in consumer spending.
Governments can cut spending, as is happening in most U.S. states, but the effects of that are also depressing - government spending is, after all, somebody's income. Governments at present are actually increasing their spending in a big way via the bailout mania both by 'investing,' and by covering the losses these 'investments' will inevitably bring. Additionally, there are plans in the works for a new, New Deal.
Governments tend to have pretty good credit ratings, so they can borrow quite a bit to cover the shortfall of tax revenues, but there are limits. There comes a point when lenders begin to doubt whether the funds will be repaid and that source is precluded. Currently the USA has a direct federal debt liability of about $40,000 for each and every person in the country. Evidently the USA's creditors (mostly trade partners) think that is a viable sum. How much higher will they let that go, especially as incomes start falling? We don't care to hazard a guess, but probably not too much higher. So while this option is open to the USA Federal Government for the time being, it is a temporary phenomenon.
There is a darker 'solution' to where a government could get money to spend - the printing press. This would, of course, cause a ruinous decline in purchasing power - furthering deepening the depression.
Raise taxes to cover spending - deepens the depression. Cut spending to match the fall in taxes - deepens the depression. Max out the Federal Debt 'credit card' - keeps the bills paid for the time being, but what to do when it's maxed out? 'Print' money - one way ticket to Zimbabwe. This is looking like a no-win situation.
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