Once and For All, Is It Spending…Or Taxes?

America’s debt clock is ticking – the nation’s debt is at around $33.7 trillion and its deficit, in the latest fiscal year, has effectively…

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In case you didn’t know, you can find America’s debt clock, ticking away, deep in the folds of the internet, tracking the nation’s rising deficit in real time here.

And because this article is not about making you click, let’s go ahead and explain up front that the nation’s debt is at around $33.7 trillion and its deficit, in the latest fiscal year, has effectively doubled to punch above $1.7 trillion.

While everyone seems to agree that this is a problem, there’s very little consensus about what to do to fix it. Power Corridor has examined the issue this year here and here but, to review in brief: U.S. lawmakers have been squabbling over the nation’s budget all year, threatening to shut down the government and prompting a major ratings agency to downgrade America’s credit rating to reflect what it calls the nation’s “expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance.”

This, along with rising interest rates, means ballooning debt will force the U.S. Department of the Treasury to pay more to borrow money.

As the nation runs up an ever-larger deficit, that also means the expense of funding it will only compound. As a result, fiscal watchdogs are loudly sounding the alarm, warning that over the next three decades, the cost of interest on America’s debt is likely to become its greatest financial burden.

How much is all this debt costing us right now? Late last week, Treasury reported that net interest on the nation’s debt leapt to a record high of $659 billion in fiscal 2023 from $475 billion in the prior year.

The nonpartisan U.S. Congressional Budget Office expects the federal debt to amount to 177 percent of the nation’s gross domestic product by 2053.

That means America is not just on an unsustainable path, but an arguably disastrous one, says Kent Conrad, a senior fellow at the Washington-based Bipartisan Policy Center, who spoke to members of Congress last week, noting that the nation’s rising deficits and debt burden have now become a “national security concern.”

With lawmakers at ferocious odds over whether to raise taxes – or cut spending – and Republicans in the U.S. House of Representatives still rowing over who will be speaker, there is a good chance that Congress will struggle mightily to pass a series of spending bills needed to avoid a government shutdown next month.

As recently as the 1990s, America had a balanced budget. So how did the country get here? According to experts, what changed since the Clinton administration was not a massive increase in spending, but massive decreases in taxes mostly benefitting America’s most affluent.

“If not for the Bush tax cuts and their extensions – as well as the Trump tax cuts – revenues would be on track to keep pace with spending indefinitely,” says Bobby Kogan, a federal budget policy expert and senior director at the Center for American Progress, an independent, nonpartisan policy institute in Washington.  

In fact, he told Power Corridor, if there had not been such enormous tax cuts, the U.S. debt ratio – that is, debt as a percentage of the economy – would be shrinking. “Instead, these tax cuts have added $10 trillion to the debt since their enactment and are responsible for 57 percent of the increase in the debt ratio since 2001,” he wrote in a recent paper.

Speaking this week to Power Corridor, he said the situation is set to get much worse if nothing is done. “The bigger point is that, from 2023 to 2053, debt as a percentage of the U.S. economy will reach 100 percent,” he says. “And that’s not partisan – that’s just math and there’s no way around it.”

That is to say, there’s no way around it if the U.S. refuses to raise taxes to levels that would allow it to fully fund itself again. Until then, it will literally be borrowing money – at increasingly high interest rates – to keep the Bush-Trump tax cuts intact.

At present, the U.S. has the sixth-lowest taxes among the world’s richest nations, with Mexico ranking the lowest, Kogan says.

“We used to have a tax system where revenues would grow along with the U.S. economy, but we don’t have that anymore,” he noted. “It is sort of unfathomable that we now have some of the strongest labor markets in U.S. history – the highest percentage of people working and paying taxes – but it’s not resulting in commensurate growth to [tax] revenue.”

While many in Congress insist this is because the U.S. is overspending, America’s spending is actually going down relative to earlier projections, while tax revenues are going down “significantly more,” causing the shortfall, Kogan says.

Cutting spending won’t fix it either, he says, unless Americans are willing to get rid of Medicare and Social Security – which they aren’t – though it’s clear some lawmakers would like to see those programs on the chopping block.

Still, if America did cut Medicare and Social Security, would that even be enough to satisfy the appetite of tax-cutters? Some lawmakers would like to see zero taxes and no spending at all. The question is, is there a limiting principle? Kogan does not think so.

“If you do a cuts-only approach, then we would probably still see calls for more tax cuts,” he says. “If you want to fix this, you should start with the cause: We got here in the first place because of tax cuts for the rich. It is societally unfair to give huge tax cuts that disproportionately favor the rich and then try to fund them by taking away programs from the people least able to lose them.”

At the end of the day, it’s not so much a disagreement about taxes and spending, Kogan reckons. “We have a basic disagreement on what a moral and just society looks like.”