Andy Kim had a hit record back in 1968 with the song “Baby, How’d We Ever Get This Way?” That was a great question then and an even greater one today, especially when it comes to the national debt.
I feel a little like Sgt. Joe Friday of “Dragnet” as I give you “the facts and just the facts” on the status of “all things debt”. This week both the Senate and the House passed the Trump proposed budget for next year and it will not be cutting any of the national debt in the plan, that’s for sure. In fact, according to the Congressional Budget Office, the proposed tax cuts combined with the CBO’s already-projected mounting deficit could ultimately drive the deficit upwards another $10 trillion in the next 10 years. Increasing the debt another $10 trillion seems just crazy!
Just for fun, I looked up online what the national debt was at this very moment in time. The U.S. Debt Clock runs all the time and as of 4 pm today it read over $20,428,000,000,000. That’s trillions my friend. Can you even imagine that number of dollars in any way? It is utterly mind blowing and the reasons for it are even more so than the actual amount of debt. What that really means is the national debt is greater than the nation’s GDP (which is just below $20 trillion).
If you are wondering what occurs when that happens just check out Greece where they had economic collapse, social unrest, failing services, and bankruptcy concerns.
Our Government Spends More and More Money
The last time we had a balanced budget was back when Bill Clinton was president. In fact, debt is virtually a tradition every year that we have a deficit, with only a rare few exceptions over the past 200+ years. So where is Andrew Jackson when we really need him?
The last and only time we have ever actually had no budget deficit was on January 8th, 1835 when the then-President Andrew Jackson announced that the deficit had been completely paid off! Jackson was a notorious devotee of controlled spending and spent his time as president continually controlling any spending by the congress.
The budget for 2018 plans for dramatically increased spending in key areas like defense and security, but also includes dramatic cuts to many important support programs that many depend on. Here’s a proposed list of programs being cut or eliminated under the Trump budget.
Will the Budget Deficit Ever Be Reduced or Eliminated?
With $1.5 trillion in proposed income tax cuts planned plus the additional spending, the budget doesn’t balance. The Trump administration theory here is that the proposed tax cuts they have in the works, if approved, will stimulate the economy and create so many new jobs that tax collections and GDP will increase and in the long term reduce our debt and grow the economy. But increasing the debt isn’t going to fly very high. There is already a serious debate going on about exactly how to reduce the budget deficit gap and you may not like what you are hearing. I don’t.
Eliminating Some Tax Deductions and Changing IRA Rules
Congressional “deficit hawks” want to find ways to offset the reduction of income taxes collected and pay the bills for planned spending in the upcoming year and beyond.
Eliminating state and local tax deductions from your tax return and reducing the amount you can stash away each year in your traditional IRA are just two of the proposals which will be battled on by congress. The president said this week that IRAs are sacred, then just a few hours later he said that they are on the table and will be a negotiating tool to get his tax cuts approved!
The GDP Would Have to Grow to 4.5%
A GDP of 4.5% would be almost double its current rate, and that hasn’t happened since 2007. Facts dispute its feasibility. According to both The Committee for a Responsible Federal Budget and Moody’s Analytics, enacting these policies would dramatically increase the annual budget deficits and national debt over the 2017–2026 periods, relative to the current policy baseline, which already includes a sizable debt increase.
There are Only 2 Ways to Reduce Any Debt
If you have even a rudimentary understanding about debt, you will know that the best way to reduce and eliminate it requires you to stop spending more than you receive as income. For the government, the main source of income is the collection of taxes, both income and payroll taxes. That collection number was $3.3 trillion in 2016 and spending was about $4 trillion.
We can’t just continue to spend and spend and spend and pile up debt without any dire consequences to the economy.
Why Does Government Spend Trillions and Trillions?
The simple answer to that question is: because it can. Every single penny of it and more!
Breaking down what we spend as a nation is well documented and a lot of it goes to what is known as “mandatory spending”. Those are things that by law money must be spent on and is an obligation each year.
During FY2016, the federal government spent $3.85 trillion. FY2015 spending was $3.69 trillion. Major categories of FY2016 spending included: Medicare and Medicaid, Social Security, discretionary spending used to run federal departments and agencies, the Defense Department and interest on the debt ($240B or 6%). Around two thirds of federal spending is for “mandatory” programs. Projections are that mandatory program spending and interest costs will rise even further relative to GNP over 2017–2026.
3 Skeptics Weigh In
Some skeptics are already ringing alarm bells, fearing that Republicans will sign on to what critics see as a dangerous plan composed by a president who calls himself the “King of Debt”.
“It seems the administration is using economic growth like magic beans: the cheap solution to all our problems,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan group that advocates fiscal restraint. “But there is no golden goose at the top of the tax-cut beanstalk, just mountains of debt.”
Ms. MacGuineas’s group estimates that President Trump’s plan could reduce federal tax revenue by $3 trillion to $7 trillion over the next decade. The economy would need to grow at a rate of 4.5%—more than double its projected rate, an unlikely prospect—to make the plan self-financing. Also quoted in the New York Times on April 26 2017, Steve Bell, a former Republican staff director of the Senate Budget Committee said “This is fool’s gold that you’ll cut taxes, everybody will work harder, more money will come and you’ll erase the fiscal impact. It never happens.” Joseph J. Thorndike, director of the Tax History Project at Tax Analysts, said the Trump plan appeared to have strong parallels with Reagan’s 1981 cuts. Mr. Thorndike recalled that “the Reagan administration soon realized the problem of the red ink it was facing and started looking for new sources of revenue.”
Trump’s Tax Plan Could Make the National Debt Explode
Showering even more money on the rich though tax cuts does not inspire the middle class to work harder; it simply increases economic inequality.
Republican economists who have served on the Council of Economic Advisers for different presidents have insisted that the “tax cuts pay for themselves” argument just doesn’t work. When Reagan cut taxes after he was elected, the result was less tax revenue, not more. Although the economy grows in response to tax reductions, it is unlikely to grow so much that lost tax revenue is completely recovered.
Those Who Forget History are Doomed to Repeat It
The year after Reagan signed his tax cuts, the ERTA bill, the administration decided it had gone too far. Revenue was collapsing, so, in 1982, Reagan signed the Tax Equity and Fiscal Responsibility Act. TEFRA constituted the largest tax increase in American history at that time. TEFRA increased the tax received but not the tax rates. This was done by removing some of the tax breaks businesses received in the ERTA, such as the increase in the amount of accelerated depreciation that a company could deduct.
Why did he do it? He wasn’t a blind ideologue. After the adoption of the 1981 tax cuts, government analyses showed that the four-year average impact on federal revenues would have a negative effect on the GDP. After TEFRA, the four-year average was positive although a large part of that was the result of economic growth following interest rate cuts. Even with the growth largely attributable to the lower cost of money, deficits went up.
Deficits exceeded $100 billion for the first time 1982. The deficits stayed above that number until 1998, when an increase in tax rates on the wealthiest Americans under President Bill Clinton stimulated one of the greatest periods of economic growth in history. Higher tax rates increased federal revenue, and the government was able to reduce the amount of publicly held outstanding debt.
With Historical Evidence, How can Republicans Push a Tax Cut?
Saying tax cuts will accomplish what has never happened in history—with a decline in rates paying for them—is just not true.
Some are already saying that government officials are cheating by calculating the impact of the tax cuts by assuming a massive boom in the economy, a concept known as dynamic scoring. In other words, their analysis would prove the argument by assuming the argument is true. Those who push for these more aggressive economic assumptions for dynamic scoring fail to prove tax cuts pay for themselves. The error, once again, is assuming the economy is a simple thing that runs solely on tax cuts.
There are Only 2 Reasons for Tax Cuts
First, tax rates are so high that they are demonstrably impeding economic growth. Given the Republican citation of Reagan’s handling of the economy as a reason for tax cuts, when rates were higher back then, the first justification is false not only through the analyses of economists but even through the arguments of the politicians.
Second, rich people want them. Rich people want to pay less in taxes. Is eliminating the estate tax going to help your personal finances? If so, stop reading here and go celebrate your enormous wealth. You don’t have a thing to worry about.
Republicans should just admit that satisfying this desire to pay less tax is their goal and they shouldn’t pretend the country will not be on a path where deficits will again explode.
In the end, if the Trump administration’s increase in spending and the tax cuts fail to grow the economy significantly to “record” levels as they predict, the results will mean eventual tax increases and a huge reduction of federal services and programs. It could even trigger a complete collapse of programs like Social Security, Medicare, and Medicaid. Again, if your family pays estate taxes, you have nothing to worry about.
How do you feel about the budget plan and tax cuts being proposed? Are you in favor of risking the future of things like Social Security, Medicare, and Medicaid to stimulate an economy when it has been proven over and over that this strategy just doesn’t work? Do magic beans really work? We may just find out the hard way.