What is the national debt?
In the last article, we explained the deficit – the amount the government spends in excess of what it receives in revenue. Year after year, the deficit adds to the debt. The government has run sizeable deficits since Ronald Reagan became president*, and the debt has piled up year after year.
* Some incorrectly state that president Clinton did not run a deficit for part of his presidency. Unfortunately, he did run a constant deficit in the hundreds of billions or more even though the official numbers showed a surplus. The government used accounting tricks such as off-budget spending to hide large amounts of spending; see this article for details.
How much is this debt at this time?
Borrowed Federal money adds up to around $16.4 trillion dollars. States collectively owe somewhere around $1.1 trillion, and local entities such as towns collectively owe around $1.7 trillion, for a total of $19.2 trillion. Add to this the structural deficits – federal, state and local governments are all delaying maintenance on roads, bridges, and other structures, and it ends up somewhere around $20 trillion.
Consider how much money this is. In a previous post, "Who pays"?, we examined who pays taxes and how much. In 2009 there were 141,458,638 tax returns filed. For 2012, let’s round that up to 150 million. If we divide this $20 trillion equally among all 150 million tax filers, it would be $133,333.33 for each – an almost mortgage-sized debt. Paying this off in 30 years, at only 2% interest, would require each and every taxpayer to pay $492.83 a month. This is more than many low earners’ take home pay, so it wouldn’t work.
Next let’s try shifting the debt repayment up to those who could more afford such a payment – those making $50,000 a year or more. There are only about 50 million such taxpayers, so now the debt per taxpayer would be $400,000 – a large mortgage-sized debt. Paying this off in 30 years at only 2% interest would require those making $50,000 or more to shell out $1,478.48 a month. A person making $50,000 would be losing about a third of their gross income, and closer to half of their current take-home pay. This wouldn’t work either – it’s too much of a burden. It would reduce people’s income so much that they’d decide either not to work at all, or to take lower income jobs that would leave them with just as much money after avoiding the debt repayment.
Finally, let’s try shifting the debt repayment up to higher level earners, who make $200,000 or more. There are only about 4 million taxpayers in that category, so the share of debt each would be a whopping $5 million each. Paying this off in 30 years at 2% interest would require $18,480.97 a month, or $221,772 a year. Since that’s more than the entire income of the low end of the group, even before taxes are deducted, it obviously wouldn’t work.
Now let’s look at debt repayment from a progressive view. What if we assessed a special, graduated tax in proportion to earnings in an attempt to avoid an impossible burden on anyone? To repay the debt over 30 years, at 2% interest, we would need to pay around $74 billion a month, or $887 billion a year. The US Debt Clock lists the current tax collections for people and corporations as a total of around $1.4 trillion, so this $887 billion would require an overall tax hike of almost two-thirds.
In theory, a two-thirds overall tax hike may sound possible, but it isn’t. Studies have been done on the ability of the United States to collect taxes on its citizens. As mentioned in a previous post, "What is Progressive Taxation?", it isn’t possible to increase taxation that much. The government has tried in the past to raise tax rates significantly, and it did not result in a significant increase in revenue. In fact, if taxes are raised enough, revenue begins to decline. This is from factors such as people hiding or shielding their income, or even removing their money from the economy entirely as “tax exiles”. In addition, significant increases in tax rates cause businesses to fail and close, which removes both the business’ and its employees’ incomes from the economy.
The deficits are still so high that the debt is growing rapidly. Let’s scale the debt down to our fictitious example of Joe, who makes $24,000 a year after taxes but is spending $34,000. The $20 trillion in debt built up is like Joe having $200,000 in debt – more than eight times what he brings home in a year! That would be bad enough by itself, but before Joe could even begin dealing with his debt problem, he would need to cut his spending significantly. The majority of the citizens of the United States are not showing any will to cut spending, so imagine that Joe simply refuses to spend less, and in fact, starts to spend more!
Worst of all, that $20 trillion and counting in debt is only the beginning of the story. The next post in the series deals with unfunded liabilities – what the government has promised to pay for, such as Medicare and Social Security, but does not have enough money set aside to pay the projected amounts.