A couple of coworkers were talking about taxes, deficits and the national debt this week.
One of them looked my direction and said, “I’ll bet Dave can figure out how to pay off the
It’s actually not as hard as it sounds.
The biggest problem is that we’ve convinced ourselves that the national debt is impossible to pay. I believed this back in the mid-1990s, when it was around $4 trillion. Today, it’s right around $10 trillion.
Let’s put that in perspective by personalizing it. The United States has about 304 million citizens. Divide it evenly, and my share and yours is $33,500 or so.
That’s a lot of money. Back in the mid-1990s, when I calculated my share to be closer to $20,000 (our population was lower then), I bought the lie that it was unpayable. I was 20 or 21 at the time. When my credit card balance swelled to $1,000 one month, I thought that was a pretty big deal. I’d never paid off a large debt before.
Now, for most of us, $33,500 is a non-trivial amount of money. A family of four’s share would be $134,000, and where I live, $134,000 will buy a house large enough for a family of four. For the average household, the national debt is like a second mortgage.
I just spend the last five years or so of my life proving that you can pay that kind of personal debt off much more quickly than mortgage lenders want you to know, even if you don’t make huge sums of money.
But we can’t just raise everyone’s taxes by $7,000 a year across the board and pay the debt off in five years. There would be open revolt, especially in this economy.
The other extreme would be to just shut the government down for a time and pay nothing but debt, but that isn’t realistic either.
But financing the debt over 30 years at 6% interest, the yearly payments are around $2,400 per person. That’s a long time, but this problem really accelerated over the last 28 years, so it wouldn’t be the end of the world to pay it back in a similar timeframe. And that’s still a lot of money, but not insurmountable.
That $2,400 is an average. My son is one of the 304 million, but he doesn’t pay any taxes (he’s seven months old). Bill Gates and Warren Buffet pay a lot more taxes than me. So it would make sense that any payoff of the national debt would work progressively, the same as the rest of the tax code.
Exactly where to get the money is a matter of debate, but the book The Government Racket by Martin L. Gross is a nice collection of government waste. If we cut all or most of the $375 billion of waste he pointed out in the 2000 edition of his book, it would get us going. At this point, interest on the debt outstrips $375 billion, but it’s a start.
Realistically, a bit of a tax increase would also have to happen. I think raising the top income tax bracket to 39.6 percent would be beneficial. I’ll cover where I got that number later.
Based on history, I believe that setting the top bracket to 39.6 percent would increase revenue by about $100 billion a year, year over year. History also suggests raising it above that level would be detrimental. If my math is right and my estimate is right, the debt can be eliminated in less than 25 years.
Why we need to pay it, somehow
Cheney is fond of saying that Reagan proved deficits don’t matter. That’s true if you’re Dick Cheney. Cheney will be dead before it really starts to matter. The problem with his attitude is that most of the rest of us 304 million will still be around to pick up the pieces.
When asked in 1992 how the national debt affected him personally, Bush I infamously didn’t have an answer. But I have an answer.
When I plug $33,500 into an amortization calculator, I find that a year’s worth of interest on the debt, if you’re making regular payments (we aren’t), is almost $2,000. So that’s $2,000 in taxes I’m paying every year and nobody’s getting any service in return for it. As mad as I get when “Tubes” Stevens appropriates my tax dollars to build the Bridge to Nowhere, at least some people are getting paid to build the useless thing, so somebody is benefitting, even if I don’t agree with the project. But in the case of debt, the only people getting any benefit are the people who agree to loan that money to the government.
For most of my life, many people argued that the debt wasn’t a problem because, by and large, we owed the money to ourselves. Maybe that was true in 1985 and maybe it wasn’t, but we know that in 2008 it isn’t. Today, foreign countries own much of that debt. In some cases, the debt is owned by countries that are friendly and for the most part share our values, such as the United Kingdom and Germany. In other cases, it’s owned by countries that are less friendly, or at the very least do not share our values, such as China and Saudi Arabia.
It goes without saying that if we become dependent on a steady stream of investment dollars coming in from China or Saudi Arabia, they will exert more and more control over what we do and how we live. We don’t like it when France tells us what we should or shouldn’t be doing, so shouldn’t it bother us a little that Maoist China, the country that has never apologized for what happened at Tiananmen Square, might eventually be in the position to not just tell us what to do, but to force us?
And while I may not like paying $2,000 in interest every year to my neighbor, I like the idea of enriching Maoist China to the tune of $2,000 a year a lot less. Unfortunately, we’re beyond the point of being able to choose who loans us money.
If we eliminate the debt, we eliminate that leverage from other countries that don’t share our values. And then we can spend that money on things that do benefit everyone–name your favorite program here–or we can give every citizen the money to do what they please with it, or split the difference somehow. I’m not a big government kind of guy, but even the idea of replacing the debt with a slew of new government programs is a lot more appealing to me than paying interest.
Eliminating the debt also frees us from the temptation to just print money. With the other problems going on right now, that idea gets floated around quite a bit even now. But Germany found out the hard way what happens when you try to print your way out of debt. In the 1930s, Germany just printed money with reckless abandon, and inflation ran rampant. It got to the point where it was cheaper to burn paper money in the fireplace than it was to use that money to buy firewood. A charismatic young leader came along with a scapegoat and a plan to get out of the situation. That man’s name was Adolf Hitler. You probably know what happened next.
But the debt is unethical on another level as well. Deficits don’t matter to Cheney because his life is almost over. But the decisions he made from 2000-2008 will live on, and even if we start making payments on the debt now, the people born in 2008 and 2009 will be making payments on our debt, even though they didn’t vote for or against the people who made those decisions. (You can’t vote if you’re not born yet, even in Illinois.) That’s called taxation without representation. As I recall, we fought a war over that too.
I don’t believe that just paying off the debt without understanding how it happened is constructive, because then we’ll just do it again. So how did we get here?
Generally speaking, the theory that has been blamed for the ballooning budget deficits since
1980 is the idea of supply-side economics. This theory is generally attributed to economist
Arthur Laffer. Laffer said if the government sets taxes to 0%, it will receive nearly
zero revenue. And, paradoxically, if the government sets taxes to 100%, it will receive
nearly zero revenue, because everyone would hide all their money.
Laffer’s theory is that there is some optimal tax rate that balances potential revenue with
the incentive to hide money from the taxman. The problem is that Laffer didn’t know what
Although most people associate Laffer and supply-side economics with Ronald Reagan, the
right-wing media is fond of pointing out that John F. Kennedy generally agreed with these
ideas. “It is a paradoxical truth that tax rates are too high today and tax revenues are too
low,” they echo with delight.
In 1980, the problem was that Laffer’s theory was largely untested. But over the last 28
years, it has been tested. Here’s how people generally remember it: Reagan cut taxes. Bush I
famously raised them after promising not to. Clinton raised them some more. Bush II cut them
But that’s not exactly how
it happened. Although Bush I is generally remembered as raising taxes, the top income
tax bracket was 50% for most of the Reagan years, whereas under Bush I it was around 31-33%.
Clinton raised taxes, but the top bracket under Clinton was 39.6 percent, which was still below Reagan. Bush II dropped them to 35%, lower than Clinton but still higher than his father.
Reagan was right, in that revenue
from income taxes rose from $244 billion in 1980 to $401 billion in 1988. The problem is
that in the Reagan years, spending rose faster than revenue, causing what were then
considered huge deficits ($237 billion at Reagan’s peak).
But tax revenue rose from $476 billion in 1992 to $1.004 trillion in 2000 under Clinton–he more than doubled it. Revenue dropped for three years straight under Bush II and only exceeded Clinton’s 2000 levels after 2006.
Liberals like to point at the records of Bush I and Bush II as indications that supply-side
economics doesn’t work. But that’s not how I read the numbers. It looks to me like Reagan,
Bush I, Clinton, Bush II, and JFK not only proved that the theory works, but together they also gave us an indication of where the highest tax rate should be.
We don’t know if Clinton’s 39.6% rate is perfect, but one can argue it gave better results
than either his predecessor or his successor. Revenue increased by $66 billion in four years
under Bush I, vs. $114 billion in Clinton’s first four years. Revenue increased by $159
billion in seven years under Bush II, vs. $403 billion in Clinton’s first seven years.
So why did tax revenue increase over Reagan’s levels during Bush I’s presidency? Simple:
Taxes under Reagan were too high. But the Bushes’ levels of growth, while better than Reagan’s, weren’t as high as Clinton’s, which suggests their rates are slightly too low.
Anyone who knew me during the Clinton years will know I’ve never been a fan of Bill Clinton,
and I still think he was highly overrated. But from the standpoint of optimal tax rates, the
numbers say he was closer to being correct than any other modern president.
Clinton also is the only modern president to have a balanced budget, although Richard Nixon
came close. Clinton did it twice. Bush II’s first budget was had an almost Nixon-like $32.4
billion deficit, suggesting that if he’d left taxes alone he might have had a balanced
budget in 2001. Had growth continued at roughly $100 billion year over year like it did under Clinton in 1995-2000, even the years of 2003 and 2004 could have been balanced-budget years, instead of being record-busting $500 billion deficit years.