Are Tax Increases On The Horizon? There May Not Be A Choice
April 18, 2020
It seems like only yesterday that the US government was last able to balance its budget. It was during the Clinton Administration and it happened four years in a row, from 1998 to 2001. In the nineteen years since Bill Clinton left office, US budget deficits of one trillion or more have not only become the norm, they have also become acceptable.
The yearly deficit for FY 2020 is now projected to be at least $3.5T. That number does not include phase four of the coronavirus stimulus package which is estimated to be at least another trillion dollars. The silver lining here, if you choose to call it that, is that the interest on the entire stimulus package will be almost zero. This means that projected interest expense for FY 2020 will remain mostly unaffected by the additional borrowing.
It is projected that in this fiscal year the US will spend roughly $500B on interest expense. The budget line of interest expense will continue to increase every year. Since there is little or no possibility that this debt will ever be paid off, your children will be paying for it, and your grandchildren as well. The only salvation that is available to these future generations is the possibility of refinancing our existing debt at the current lower interest rates. Other than that, the yearly interest expense that will need to be paid by our government will go on forever.
To make matters worse, the federal budget keeps increasing every year. Cost of living increases in entitlements, pay increases for our military and other government employees, and other budget items are responsible for the yearly increases in our annual budget. This being the case, it is necessary that government revenue increase just to keep up with the increases in spending. By the way, entitlement spending and government payroll account for over 70% of the entire federal budget. It therefore follows that the cost of living increases in the US budget are a significant amount of money.
The question that we are now forced to answer is, how do we as a country deal with this massive and increasing debt? Do we raise taxes, cut spending, or do we keep borrowing ourselves into financial oblivion? There was one other option, which was the choice taken by President Trump. He proposed to cut taxes on both individuals and corporations. It was his belief that doing so would stimulate economic growth, create jobs, and generate increased revenue to the government. He was correct on all three counts.
The problem that he encountered was that increasing revenue doesn’t help if you are unable or unwilling to cut spending. This was the President’s Achilles Heel. Even though government revenue has increased by just under 12% between FY 2017 and FY 2020, he was unable to cut spending. This reality was made very clear to him when he was informed that it was necessary to increase spending on the military. Soon after taking office, the Chairman of the Joint Chiefs explained to the President that the military was not prepared to defend the country. The seriousness of the situation hit home when the Chairman told the President that the military was in very short supply of ammunition. How can any president expect the military to defend the country without an adequate supply of ammunition?
I believe that the President took this to heart, as would almost any commander in chief. He began rebuilding the military, something which had to be done over a period of three years. From speeches and interviews given by the President, it seems that our military is now up to snuff and prepared to defend our country. Unfortunately, there was a price that had to be paid to accomplish this. This is where the reality set in. The President had to agree to a significant increase in the amount of domestic spending in order to get congressional approval for the needed increase in military spending. He reluctantly agreed to this in order to get the needed funding to rebuild the military. This attitude in Congress of “give me what I want, and I’ll give you what you want,” is exactly why we are $25T in debt.
The previous paragraph should highlight how difficult it is to balance the federal budget. It shows that even if we are able to increase revenues, it all goes for naught if our elected officials are unable to control government spending.
As if the problem of deficit spending wasn’t complicated enough already, there is another related factor that makes it even more so. When the government borrows money, it is spent, in large part, on entitlements. Much of that money is paid out to consumers in the form of entitlement payments. These consumers spend that money in the private sector, thus fueling economic growth. This means that the federal government, through its borrowing, is contributing to the country’s economic growth. What I would like to know is whether it is a net positive for the country to borrow money and spur economic growth or a net negative to continue to go deeper into debt. My guess is that, in the short term, it is net positive because it raises economic growth and creates jobs. Over a longer period of time, as the country continues to go deeper into debt, I believe this habit of constant deficit spending will eventually lead to our undoing.
If the government were to lower spending on entitlements, what would the consequences be? Would those who depend on that money to live be able to survive? What would happen when the government reaches a point where it is unable to borrow money? If the government was forced to raise taxes, would economic growth suffer, and job losses occur? Would there also be less government revenue? If it becomes necessary to lower government spending, do we risk national security by cutting defense or do we cut from social programs? These are all questions that have not been answered—let alone even discussed. At some point, decisions will have to be made in all these areas.
The problem posed by cutting taxes is that even though it may result in an increase in overall government revenue, that increase will not be enough to balance the federal budget. As stated above, government spending will continue to increase regardless of whether or not we raise or cut taxes. Our elected officials seem to have no stomach for cutting entitlements, which account for almost 70% of the total federal budget. All 535 of congressmen and senators want to be reelected, so cutting entitlements, the largest area of the budget, is not in their best interest. Not only is it not in their best interest, in many cases it would hurt the most vulnerable segment of our population who depend on this money to survive. It would also lower economic growth and cost jobs. In my view it’s a non-starter.
The United States has a consumer-driven economy. Raising taxes on individuals takes money out of the hands of consumers. When this happens consumers have less money to spend on goods and services and so the demand is reduced. When the demand for those goods and services is reduced, the need for people to provide those goods and services is also reduced, resulting in fewer jobs. For these reasons, raising taxes on individuals could do more harm than good.
One of the other options open to our elected officials is to lower the federal budget deficit by cutting spending. There are several problems that will be encountered, when and if, Congress decides to try and balance the federal budget. First of all, in order to have the largest impact on reducing the deficit, the area of entitlements will have to be cut. That said, making those cuts will create other problems that, in the opinion of some, could be almost as bad.
One problem that comes to mind is that many of the citizens that receive these payments depend on this money to survive. Making cuts to these entitlement programs would make their lives much more difficult. The other problem that I see with spending is that most of the money being spent by these entitlement recipients contributes to economic growth. If this consumer spending—which is effectively being financed by the federal government—were to end, it would result in a large reduction in consumer spending and have a negative effect on the economic growth of the country and on jobs.
If there is an area where taxes could be raised it would be at the corporate level. Many people who supported the TCJA, including myself, were of the opinion that the President may have lowered corporate tax rates a bit too much. Corporations currently pay roughly $250B per year in income taxes. This amount of revenue was generated based on the 21% corporate tax rate set in the TCJA. I would not be in favor of raising the corporate tax rate back to 35%, which is where it was during the Obama Administration. I would be in favor of raising the corporate rate up to 28% which would increase government revenue by roughly $85B to $100B per year. I believe that an increase of this size would not cause businesses to leave the country or the economy to falter.
This would obviously not be enough to have a major effect on the deficit, but it would result in at least a small decrease in our yearly deficit. The problem as I see it is that Nancy Pelosi and the Democrat Party as a whole would squander every last dime of that savings on their left-wing vision for America. Before I would be in favor of lowering corporate taxes, I would suggest that the Republican leaders of the House and the Senate reach an agreement to use this money exclusively to lower the yearly budget deficits. That won’t be easy.
The other alternative is to continue borrowing as we are currently doing. I guess one could say that this works out in the short term. It basically kicks the can down the road for the next generation of elected officials who will most likely also not have the stones to deal with the issue of deficit spending. This is one of the main problems we face. We elect people whose primary job is not to do what’s best for the country, but to get reelected.
It was previously my belief that our national debt would eclipse $50T in less than 15 years. In FY 2020 it appears that our yearly deficit will be $4.5T, including the coronavirus relief package. If this were to happen it would mean that the US government would have borrowed more money to fund the government than it collected in taxes. That is not good. I would call it a dangerous precedent.
The longer we continue to fund our government with trillion-dollar or multi-trillion-dollar deficits, the larger the problem will become and the more pain the country will have to endure to fix it. Unless this practice of living beyond our means ends, the very existence of the US will be at risk.
The reason we are having this discussion is because for years our elected officials were unable to approve budgets that mandated that America live within its means. This is why the country is now approaching $28T in debt and interest expense on that debt is in excess of $500B per year. If the country continues to borrow at the current level, not counting the borrowing related to the coronavirus stimulus, we will eventually reach a point where we will be unable to continue borrowing. When that point is reached, we will be forced to live within the limits of an austerity budget. This austerity budget will seriously hurt the people that these entitlement programs were created to help. This is what happens when our elected officials make decisions based on politics and not on what’s best for the country. It is also what happens when governments fail to live within their means. Don’t take my word for it, just ask the former Soviet Union what happens when countries don’t live within their means.
The conclusion that I have been able to draw from all this is that without having to endure a substantial amount of pain, there is no real solution available to the country. As usual, the lower- and middle-class earners will bear a major portion of the pain. Don’t let yourself be taken in by the left-wing narrative of taxing the rich. Regardless of what they tell you, there are just not enough rich people (one-percenters) to cover the $28T we currently owe, let alone the fifty trillion we will owe in fifteen years or less. It has previously been determined that the so-called one-percenters pay 40% of all individual income taxes collected by the federal government. This 40% is equal to roughly $700B per year. If that number was doubled the government would collect an additional $700B per year. That is obviously not even a drop in the bucket.
In a previous post, I wrote that for years the US has been taken advantage of by our friends and enemies alike and even by our own elected officials. This country is being bled. We have engaged in unwinnable wars for almost 70 years. Social Security and Medicare are going broke and some of our entitlement programs actually pay people not to work. There are those on public assistance who are disabled and unable to work. It is the duty of the government and society as a whole to take care of these people. There are, however, many others who are receiving public assistance and who are capable of becoming gainfully employed and refuse to do so.
Another example of America being bled is the ongoing problem of illegal immigration. These people enter our country uninvited, take jobs away from Americans, and help themselves to benefits that should be reserved for American citizens. Drug cartels are smuggling heroin, cocaine, methamphetamine, and fentanyl into our country and poisoning our youth. Between those dying from overdoses and the Americans who are murdered by these people we are losing over 70,000 people a year.
Our trading partners, sometimes with the help of our elected officials, have also been taking advantage of this country. In some cases it was our elected officials who sold us out and became personally enriched at the expense of their country. In other cases, they made lousy deals because they were just not very good business people.
The good news, however, is that President Trump has negotiated new trade deals in several countries that have leveled the playing field for American business. Whether or not you are a supporter of the President, these new trade deals will have a positive impact on many Americans individually, and on America as a whole. Hopefully, when this health crisis ends the country will begin to reap the benefits of these new and improved trade deals.
There are not a lot of viable options when it comes to dealing with our national debt. There are negative consequences that result with each and every option. In my opinion the two most serious consequences are lower economic growth and the job losses that go with that. How severe those consequences will be is difficult to forecast. It’s next to impossible to foresee the future that far down the road. For example, two months ago no one could have foreseen what would happen to the US economy, but here we are. We are now in a period of high unemployment, industry shutdowns, and reduced consumer spending. The US was at the top of the heap just a few short weeks ago, and look where we are now. No one saw this coming. Other than to say that the US is currently $28T in debt and that we will be roughly $50T in debt in less than 15 years, I’m not going to be more specific than that. We are in uncharted territory. Neither the United States nor any other country has ever been $28T in debt. Who knows what will happen when the level of our debt reaches $50T? My guess is that it won’t be pretty.
For the time being our yearly budget deficits are rising, our national debt is becoming unmanageable, and the future of America is in question. It is certainly a possibility that if the deficit spending problem that we have is not solved, the US may cease to exist as a viable country.
For the last three decades, my generation, the baby boomers, has been the caretakers of this American Republic. We have failed miserably. When Bill Clinton left office in 2001 the national debt of the US was approximately $5.8T. As I said above, it is now approaching $28T. This is the result of gross mismanagement on the part of our elected officials and unelected bureaucrats. As the temporary caretakers of the American Republic, we have divided her, ravaged her, and defiled her. America does not have unlimited resources. If we continue living beyond our means we will bankrupt her. What a wonderful legacy to leave to those who will succeed us.