Dealing with the Debt

 

Because Kevin McCarthy finally ignored the extremists in his party, we narrowly (and temporarily) averted another government shutdown, which Trump was pushing and the far-right wingnuts in the GOP were hoping for—Trump for purely selfish reasons, the arsonists in the House for poorly reasoned ideological reasons. But the deal McCarthy struck with the Democrats bought us only 45 days. Sometime in mid-November we will undoubtedly be subjected to the threat of a shutdown once more. McCarthy knew that most Americans would blame the Republicans for a shutdown, rightly so, and so he did what he had to, and it cost him his job, but the budget mess is really a bipartisan act of irresponsibility. Even though the GOP is more at fault for our budgetary troubles, both parties are responsible for the massive debt we are accumulating.

Before I make some sensible (but not painless) suggestions on how to get the debt under control, let me first make a point about the national debt that most Americans don’t understand. Yes, $33 trillion is a lot of money, but it must be viewed in context. As a percentage of GDP, U.S. debt stands at an estimated 127 percent. This debt ratio is high by historical standards. Before the Bush tax cuts of 2001, for instance, the debt ratio was 33.27 percent of GDP and dropping. In 2001, the ratio jumped to 52.44 percent and has been steadily increasing ever since. The Trump tax cuts only accelerated the trend. And the pandemic caused a massive jump in the debt ratio, from 99.06 percent in 2019 to 126.23 percent in 2020. It dropped to 120.37 percent in 2021 but has been climbing the past two years.

By contrast, let’s look at some other countries. In 2021, Japan’s debt ratio was 217.61 percent, and the U.K.’s was 186.48. France’s ratio was just behind ours at 116.55 percent. Germany’s was only 68.62 percent, Canada’s was 64.04 percent, and Switzerland’s was a paltry 20.3 percent. So, a large debt ratio doesn’t necessarily mean the country is going to go bankrupt. We don’t hear about much handwringing in Japan. Maybe they understand something we don’t.  Also, the interest payments on U.S. debt are still a lot smaller as a percentage of GDP than my family’s mortgage payments were as a percentage of our family income (before we paid the loan off). And the difference between national debt and a family’s mortgage is that the mortgage has to be paid off, but national debt doesn’t. It just gets rolled over.

Economist and NY Times columnist Paul Krugman points out that U.S. debt was about 100 percent of GDP after World War II. So, how did we pay it off? “We didn’t,” writes Krugman. “John F. Kennedy entered the White House with federal debt roughly the same as it was on V-J Day. Why, then, wasn’t the 1960 election dominated by questions of how to pay off the national debt? Because while the dollar value of debt hadn’t gone down, economic growth and modest inflation meant that the ratio of debt to G.D.P. had fallen by half.” He makes the same point about England’s debt after the Napoleonic Wars. The British debt was about 184 percent of GDP. How did Britain pay off this debt? Well, it didn’t. The debt shrank relative to GDP as the British economy grew. So those who are up in arms about the debt right now (but didn’t seem to care about it at all when Trump was president) are being disingenuous, to put it kindly.

Still, the course we are on now is not one we ought to continue. We need to reduce the annual deficit for our long-term economic welfare. Notice I didn’t say anything about balancing the budget. That isn’t going to happen, nor is it necessary. Uninformed people, like my Representative, John Curtis, who compare the national budget to a family budget are comparing apples and kumquats. These are two entirely different sorts of budgets. And those same people usually argue for slashing spending without raising taxes, which would create all sorts of problems.

The Republicans have basically painted themselves into a corner on cutting Medicare and Social Security, which would hurt some of their most loyal supporters, and they are unwilling to cut military spending, which leaves them trying to squeeze blood out of a rock, threatening to make massive cuts to nondefense discretionary spending. But the nondefense discretionary portion of the budget amounts to only 14.5 percent of the total budget. Even if you cut this amount in half, in 2022 it would decrease spending by only $455 billion. And the effects would be devastating.

Slashing discretionary government spending, even if you include defense spending, would produce ruinous ripple effects across the economy. Many government workers would be laid off, and businesses that depend on those workers’ purchases or on direct government purchases would suffer. This could throw the economy into recession, which would create a downward spiral, affecting all corners of the economy, including a reduction in tax revenue. Aid to the most vulnerable would have to increase, unless you just want to see innocent people suffer.

So, you can’t really put a dent in the deficit without cutting Medicare and Social Security. The problem with this is that the Baby Boom generation—my generation—is reaching age 65 at the rate of 10,000 individuals per day. Yes, per day. So cutting mandatory spending—which includes not only Medicare and Social Security, but also Medicaid, income security programs, student loans, and $520 billion of things like veterans benefits and federal civilian and military retirement benefits—is going to be very difficult, if not impossible in the next decade or more.

In short, getting the budget under control cannot involve only spending cuts. This Republican fantasy doesn’t pass the simple arithmetic test. But the Republicans are still stuck in the swamp of Reagan supply-side lunacy. For 40-odd years, they have been determined to shrink government and cut taxes. All that this has accomplished is to balloon the debt and create obscene inequality, where the wealthy make off like bandits while the middle class shrinks and the poor suffer. In other words, we need to seriously increase revenues. One small way to do this is to fund the IRS to go after wealthy tax cheats (like Donald Trump). But, of course, the GOP is trying to defund the IRS and protect wealthy criminals.

But let’s look at a little history. Currently, our top marginal tax rate—meaning the rate high earners pay on any income that falls in the top tax bracket—is 37 percent. By historical standards, this is very low. At the end of World War II, for instance, the top rate was 94 percent. This rate was in effect for 1944 and 1945. In 1946, the top rate dropped to 86.45 percent. It dropped again slightly for the next three years, then jumped to 91 percent for one year. In 1952, the rate increased to 92 percent; then in 1954 it dropped back to 91 percent, where it stayed for ten years. In 1964, it dropped to 77 percent. For 13 of the next 16 years, it was 70 percent. Then Ronald Reagan was elected. In 1982, because of the GOP’s misplaced belief in supply-side economics, Congress dropped the top rate to 50 percent, where it stayed until 1987, when it dropped again to 38.5 percent. In 1988, the rate dropped to a modern low, 28 percent. Three years later, it increased to 31 percent, and two years after that it increased to 39.6 percent. The Bush tax cuts dropped the top rate to 35 percent. These cuts expired in 2014, so the rate went back up to 39.6 percent. The Trump tax cuts dropped the top rate to 37 percent, where it has stayed. As mentioned above, this rate, along with cuts in the capital gains tax rate, allowed the wealthy to accumulate obscene amounts of money.

To put this in some sort of international context, let’s compare U.S. taxes to those of other developed countries. The Organisation for Economic Co-operation and Development (OECD) is a group of 38 member nations that describes itself as a forum committed to democracy and market economy. These countries are considered “developed” nations. The OECD publishes statistics about each member country, including total tax revenue (federal, state, and local) as a percentage of GDP. The numbers are instructive.

The United States, for example, is very low on this list, with only Chile, Costa Rica, Ireland, Mexico, and Turkey collecting a lower percentage of GDP in taxes. The U.S. rate is 26.58 percent (2021 being the most recent year for which statistics are available). The average rate for all 38 OECD countries is 34.11 percent, 7.53 percent higher than the U.S. If you look at just those countries that are considered America’s peer nations (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, South Korea, Spain, Sweden, Switzerland, and the U.K), their tax receipts weigh in at an average of 37.63 percent of GDP, 11.05 percent higher than the U.S.

In other words, by any international standard, the U.S. is severely undertaxed, despite what you will hear from right-wing politicians, who are still living Reagan’s supply-side fantasy. If we were to tax at the OECD average rate, our federal, state, and local governments would have had an additional $1.76 trillion to spend in 2021. If we were to tax at the rate of our peer nations, we would have had an additional $2.58 trillion in 2021. Either figure would be enough to create a budget surplus and have plenty left over to invest in infrastructure, pay public school teachers decent wages, do more to combat global warming, and much, much more. Perhaps it would also encourage us to adopt universal health care, which would actually save us money in the long run, since we pay double for health care what most other developed countries pay—and they provide health care for all their citizens, something the GOP will not allow America to do because it’s “too expensive” and it’s “socialism.”

Increasing taxes, mainly on the wealthy, would need to be implemented gradually, and it would perhaps cause a decrease in the demand for certain products and services, primarily those purchased by the wealthy, but this economic impact would certainly be offset by investments in the lower and middle classes, where the multiplier effect would stretch the economic impact of those extra tax revenues.

Another source of revenue is corporate taxes, and again the U.S. lags the field here. On average, OECD countries collect corporate taxes to the tune of 9.8 percent of GDP. The United States collects only 6 percent. Again, this includes federal, state, and local taxes. In 2022, the federal government collected only $425 billion in corporate income taxes. When divided into total corporate profits for the year of $3.523 trillion, that gives us an effective tax rate of 12 percent. When divided into GDP, it amounts to only 1.8 percent. Corporations used to be chartered by government to serve public purposes. Over the years, they have turned into instruments for funneling wealth into the hands of the already wealthy. When you consider that the wealthiest 10 percent of Americans owned 89 percent of all U.S. stocks in 2021 and the bottom 90 percent held about 11 percent, you can see how corporate profits primarily benefit the already wealthy, which increases the concentration of wealth year by year. Increasing corporate taxation would help level the playing field as well as help pay down our national debt.

But, as I indicated above, getting the budget under control has to be a two-pronged effort. We do need to rein in some government spending, and we do need to reform both Medicare and Social Security. The first thing we should do is means text both programs. By this I mean making sure that the benefits go only to those who really need them. Warren Buffet and Bill Gates, for instance, should not be on Medicare or be receiving monthly Social Security checks. Where the cutoff would be is a matter for politicians to haggle over, but there are many in this country who simply don’t need a social safety net. The second thing we should do is remove the cap on income that is taxed for Social Security and Medicare. Currently, that amount is $160,200. Any income earned above that figure is not taxed. If we would tax all income, our Social Security and Medicare funds would not be in trouble. And since most income earned by the wealthy does not come in the form of a paycheck, we should also levy a tax on capital gains that would help support these two programs for our senior citizens, too many of whom have not been paid well enough to have saved sufficient funds for retirement.

For too long, Republicans have been dishonest about the effects of tax cuts and the insistence that we can slash government spending without causing severe economic turmoil. On the other hand, Democrats have also been unrealistic in their insistence on refusing to reform Social Security and Medicare and too dogmatic about not trimming discretionary spending. And both parties need to face the music on defense spending. We have the best military in the world, but it is also bloated and inefficient in many ways. We spend more on defense than the next ten countries combined (or 13, depending on which statistics you use). To automatically increase military spending every year, even in times of peace, is unwise and unnecessary.

In short, the debt is not a problem we can’t fix. Some of my solutions are not painless, but they are also not unreasonable. We just have to demand more of our elected leaders and stop listening to disinformation.