The United States national debt is an often talked-about but seldom agreed-upon issue in today’s political climate. With the national debt now standing at a staggering $19.9 trillion dollars, or 106% of U.S. annual Gross Domestic Product, it seems to many Americans that it is unlikely that the U.S. will ever begin paying down our debt. However, there are a myriad of ways which politicians and economic policymakers have at their disposal to begin this daunting task. Despite the many options available, it is of vital importance that policymakers choose their instruments carefully as differing levels of political backlash and unintended consequences of these policies means that there are right and wrong choices.
Many Americans do not believe that the national debt poses any credible threats to the United States’ economic performance in the short or long term, but a blog post by Craig Eyermann on MyGovCost.org explains the potential problems that a large and growing national debt can pose to any country. First, he notes that large levels of government borrowing takes money away from investment in productive capital over the long term as the portion of individuals’ savings used to buy government securities would not be available to finance private investment. Further, he argues that under our current situation in the U.S., spending on interest payments should rise over time which will force the federal government to increase taxes, reduce spending for benefits and services, or potentially a combination of the two in order to achieve their deficit or debt goals. Finally, he argues that a large national debt restricts policymakers’ ability to use tax and spending policies to respond to unexpected economic downturns. This means that the American people will feel the effects of future recessions even more than they have in the past.
Still other Americans recognize the negative effects of a large national debt, but argue that the best solution for this problem is to allow the natural growth of the American economy to mitigate the debt problem. Their argument, summarized in this article from Forbes, is that as incomes across the country grow, the government will be able to take in more tax revenue annually without having to raise taxes, keeping citizens happy and leading to smaller budget deficits and eventually an ability to begin paying down the national debt with this increased tax revenue. This argument certainly makes sense, but this article by Michael Lewis points out major flaws in this line of thinking.
First, he notes that GDP growth is projected to be lower for the foreseeable future than it has been in past years, pointing out with data from the Congressional Budget Office that “Annual growth averaged 3.2% to 3.3% from 1974 to 2001, 2.7% from 2002 to 2007, and 1.4% from 2008 to 2015. While the economy is recovering, the CBO projects average annual growth from 2016 to 2025 at 2.0%, well below the average prior to 2008.” This data poses a serious problem for those who support the idea of allowing natural economic growth to cut down the national debt as the federal government does not stand to take in enough extra revenue via taxes in coming years to pay down any significant portion of the national debt. Second, he points out that according to the CBO, interest costs on the national debt are projected to triple from $223 billion in 2015 to $772 billion in 2025. This means that the vast majority, if not all of the extra tax revenue which the government will bring in over that time as a result of economic growth will be used only to pay off interest, not pay down the debt itself.
So what options does the United States have for paying down the national debt? In short, it boils down to two options; increasing tax rates or increasing the tax base by closing existing tax loopholes. While raising taxes seems at first glance to be the least complicated of all of these options, it is almost surely not a viable option. Both the House of Representatives and the Senate are currently majority Republican, with the House standing at 56 percent Republican and the Senate at 54 percent Republican. This means that there is little hope of passing any bill which would lead to increased taxes with one of the key positions of the Republican Party being the opposition of increased taxes. Further, even many Democrats would potentially take issue with such a bill as many Democrats and Republicans alike throughout the U.S. vehemently opposing increased taxes. Increasing the tax base is a better policy by my estimation, as it does not pose the same threat of strong political backlash that increasing taxes would. The problem with increasing the tax base comes when we consider just how to go about doing this. There are many areas where tax loopholes exist and could be closed, but when deciding which loopholes to close, policymakers must consider which group or groups of individuals stand to lose from these policies.
Returning to Michael Lewis’ article, which was mentioned earlier, we find some potential loopholes which the federal government could close to expand the tax base. The first of these is to limit tax deductions from charitable giving to account only for deductions up to two percent of an individual’s annual gross income. I do not favor this policy, as it disincentivizes those who have the means to help others from doing so. This does not negatively affect those who are now subject to fewer tax deductions as they will simply donate less to charity, essentially passing this negative effect on to those individuals who stood to gain from these charitable donations. Another potential way to expand the tax base is to further limit the amount which individuals may contribute to their retirement accounts each year. This is also not an incredibly compelling way to expand the tax base, as the federal government would essentially be taking money out of people’s retirement accounts which would certainly lead to an incredible amount of political backlash, as well as increasing the average social security benefits that retired persons would now demand each year. I propose that the federal government eliminate deductions for state and local taxes as a way to broaden the tax base. While such a policy would surely not go without some criticism from the right-wing, it allows the federal government to expand its’ tax base without hurting any specific group of individuals. Additionally, Lewis notes that it is projected that such a policy would bring in an estimated $1.088 trillion, significantly higher than the combined increases from the other two policies discussed above, which would bring in only $295.5 in total.