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The U.S. National Debt is currently at approximately $28 trillion. While this number certainly sounds astronomical, it is important to measure the national debt as a percentage of GDP and observe other times in U.S. history where the national debt increased significantly in times of crisis.

As Figure 1 shows, the national debt is currently at 103% of GDP.[footnoteRef:2] There is precedent for the national debt increasing as a percent of GDP during national emergencies. World War II is the most comparable to what the U.S. is currently facing during the pandemic with the national debt topping more than 100% of GDP in 1946. While projected debt to GDP is rising, there is no reason to believe that we cannot sustain the growing debt contrary to the argument made by those opposing it. [2: https://www.cbo.gov/publication/56516]

Figure 1

According to a January 2021 Wall Street Journal article, historically low interest rates are helping to control the national debt because even though the U.S. saw “a $4 trillion increase in debt last year, a 25% increase, interest payments on that debt declined by 8%.”[footnoteRef:3] The article goes on to describe how investors moved towards U.S. Treasury securities because of their stability and “the government’s borrowing cost for newly issued 30-year debt is below 2%” because of this shift. The U.S. government can continue to adjust interest rates while the economy recovers and run high deficit spending to make sure the pandemic is under control before further action is taken. GDP growth in Q4 2020 remained strong at 4.1% as positive news for vaccine distributions provided a strong outlook for the economy in 2021.[footnoteRef:4] [3: https://www.wsj.com/articles/the-debt-question-facing-janet-yellen-how-much-is-too-much-11610993908] [4: https://www.economy.com/economicview/analysis/383324]

Congress can also control the U.S. national debt and deficit through tax policy and spending cuts. The last time the federal government balanced the budget was in 1998 and leading up to this “the economy was completing the seventh consecutive year of growth, during which 13 million jobs were added and inflation averaged less than 3 percent.”[footnoteRef:5] Coming out of this more than yearlong pandemic, the economy will have enough pent-up demand to keep the nation on a similar path of economic growth which will help lower the deficit. In 1998, according to the Brookings article, economic growth alone was not sufficient to control budget deficits. It was a combination of not only economic growth but also spending cuts and tax reform that ultimately led to the balanced budget. The debate over tax policy and spending will consume congress in the coming months but history provides a roadmap for how to make sound policy decisions. [5: https://www.brookings.edu/articles/a-surplus-if-we-can-keep-it-how-the-federal-budget-surplus-happened/]

Pros of Increasing Taxes

Payments on the national debt are critical regardless of interest rates due to the sheer size of debt, which causes the estimated interest to increase to $915 billion by 2028, tripling the value from 2018. This would result in the net interest alone reaching over 3% of GDP in 2028, almost doubling the 1.6% from 2018. Even if government spending were reduced to balance the budget, it would not stop the effects interest rates would have on the national debt and would make the interest payment the single largest portion of the national debt.[footnoteRef:6] Paying off the national debt today will effectively lower the amount of interest that is incurred in the long-term. [6: The Budget and Economic Outlook: 2018 to 2028 (cbo.gov)]

The national debt is reduced through government tax revenue. Therefore, to ensure payments are made to quickly lower the national debt, taxes should be raised. In 1993, President Clinton raised taxes, which caused a massive change to the national budget and ultimately resulted in having a budget surplus by 1998.[footnoteRef:7] Additionally, from 1993-1998, the economy continued to grow despite the tax increase. In fact, from 1994-1999 the U.S. had the single largest wealth creation in the history of the world and more than 200,000 jobs were created each month.[footnoteRef:8] This shows that taxes can be raised to improve government tax revenue without causing economic setbacks. However, taxes should not be raised above the point where revenue and production are at a maximum. The Laffer Curve describes that if taxes are too high then productivity will lower, which ultimately lowers the tax revenue. Yet if taxes are low and productivity is high then the tax revenue seen by the government could be the same. This means for any given tax revenue there are two different tax rates, one that has high taxes with low productivity and another with low taxes with high productivity. However, there is one point that balances where revenue and productivity are both maximized. [footnoteRef:9] [7: RELEASE: The Real Heroes of the 1998 Budget Surplus: Clinton and His Economy - Center for American Progress] [8: Unit 1 Readings: (MAN5716-0002.sp21) Business Conditions Analysis (fsu.edu)] [9: WebCite query result (webcitation.org)]

If the Laffer Curve is used and productivity is GDP, then it stands that tax revenue is not being maximized. Starting in the early 2000s up until the COVID-19 pandemic, GDP had a growth rate of about 3% and was the largest period of continued growth in U.S. history.[footnoteRef:10] The GDP growth in 2019 was 2.3% following 2018’s 2.1%, showing that the economy was doing very well.[footnoteRef:11] This means that, once the economy has fully recovered from the pandemic, the tax rate could be increased to raise tax revenue to pay off the national debt. Using the Laffer Curve, the ideal tax rate that would maximize tax revenue and would also be the same point where GDP growth was approximately 0%.[footnoteRef:12] While this would cause economic growth to come to a standstill in the U.S., it would also drastically reduce the overall amount required to pay off the national debt. Additionally, the large tax rate could be a temporary measure because as the national debt lowered, so could the tax rate. To not cause an economic shock or overshoot of the critical point, the tax rate should be slowly raised until GDP growth was near 0% and then adjusted to maintain a constant or slight growth in GDP. Once the national debt becomes more controllable due to the smaller size, then taxes can be slowly lowered to cause more economic growth through GDP. [10: Unit 1 Readings: (MAN5716-0002.sp21) Business Conditions Analysis (fsu.edu)] [11: United States: GDP: Moody's Analytics Economic View (economy.com)] [12: WebCite query result (webcitation.org)]

Cons of Increasing Taxes

The equilibrium for the Laffer Curve can be interpreted differently in favor of reducing taxes to reduce the national budget deficit. There are three examples where the United States produced more taxable revenue and economic growth by reducing the tax rate. These examples include the Harding-Coolidge tax cuts of 1923, the Revenue Act of 1964, and the Tax Reform Act of 1986. Prior to these acts, the peak tax rate was 77% in 1918, 94% in 1945, and 70% in 1981. After the introduction of these policies, rates were dropped to 25% by 1925, 70% by 1965, and 50% by 1984.[footnoteRef:13] Finding a balance between taxation and economic growth is a challenge, but the mantra “less is more” is apparent when reviewing historical data from inefficient taxes and the solutions that helped resolve the budget in the United States. [13: https://www.tax-brackets.org/]

For the Harding-Coolidge tax cuts, initially, the federal government received slightly less taxable revenue from 1920 to 1927. At the time, the United States was recovering from WWI and the devastation that took place, which resulted in slower realized growth for the nation. However, between that time, real GDP increased at an average rate of 4.7% and unemployment fell from 6.7% to 3.2%. Despite a 52% decrease in the tax rate, the business investment opportunities created from the reduced rate resulted in taxable revenue surpassing the 1920 revenue figures by 1928.[footnoteRef:14] [14: https://www.cato.org/commentary/1920s-income-tax-cuts-sparked-economic-growth-raised-federal-revenues]

Figure 2 & 3

For the Revenue Act of 1964 and the Tax Reform Act of 1986, the provided graphs illustrate the surge in revenues for the federal budget through reduced taxes. The federal reserve 4-year average YOY growth (adjusted for inflation) following the tax reforms was 8.6% and 2.7% respectively compared to the prior 4-years average at 2.1% and negative 2.8%. In addition to providing more revenue for the federal budget, GDP grew by 0.5% and 3.9% in the following 4-years and unemployment fell by 1.9% and 2%.[footnoteRef:15] By reducing one of the largest expenses on the books for companies, jobs were created, production was expanded, and cash flow was more abundant in the nation. [15: https://www.heritage.org/taxes/report/the-laffer-curve-past-present-and-future]

Referring to the previous Laffer Curve, the government created opportunities in these examples, which provided more revenue for the federal budget and balanced the curve. For a more recent example, the Tax Cuts and Jobs Act of 2017 was introduced to replicate some of the previous mentioned programs. While the Tax Cuts and Jobs Act of 2017 did not achieve the same success, economic growth increased by 2.4% in 2017, 2.9% in 2018, and 2.3% in 2019.[footnoteRef:16] If the program were combined with additional budget cuts, the long-term economic benefits could have supported the budget deficit. Not only would more opportunities be created to produce taxable revenue, but reducing taxes invites companies to realize capital gains to further fund the federal budget. [16: https://datalab.usaspending.gov/americas-finance-guide/spending/categories/]

Figure 4

In the United States, there is an estimated $2.1 – $2.6 trillion in oversea tax havens designed to delay capital gains taxes and related strenuous taxes.[footnoteRef:17] Rather than deploy capital into the nation, companies choose to sit on funds until a lower rate is available, which stunts the realizable funding for the federal budget. However, based on the attached historical data (Figure 4)[footnoteRef:18], the United States receives an influx of capital gain funding when taxes are reduced. Following the previously mentioned tax reforms, a spike in billions of dollars were realized as companies looked for investment opportunities and paid reduced capital gains. Rather than raising taxes to reduce the national budget, the United States should focus on a reduction in tax measures to grow the economy and support budgetary needs. [17: https://www.imf.org/external/pubs/ft/fandd/2019/09/tackling-global-tax-havens-shaxon.htm] [18: https://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Tax-Analysis.aspx]

Pros to Cutting Spending

The federal government spends around $4.5 trillion (an additional $14,000 per person in the U.S.) a year. With current interest rates, the income received through taxes and similar revenue leaves a shortage of almost $1 trillion per year.[footnoteRef:19] At the current pace, the debt will only continue to climb. Since the government continues to overspend, measures should be put in place to reduce spending. The United States must selectively reduce budgetary inefficiencies in defense, health care, pension funds, transportation, public safety, and education to bridge the national debt. [19: https://www.pgpf.org/national-debt-clock]

The Congressional Budget Office (CBO) projects that federal spending will grow approximately 5.5% per year. Spending on Social Security, Medicare and Medicaid will claim 73% of all federal revenues by 2028 if left unchecked.[footnoteRef:20] Military spending will fall in between these two items. Social Security is the single largest budgetary item, although some may argue that it is not a true expenditure. In 2019, Social Security was 23% (or $1 trillion) of the national budget.[footnoteRef:21] Social Security cuts can be made by raising the age of eligibility or reducing benefits. This or similar measures will likely have to be done in the near future. Combined healthcare (Medicare, Medicaid, Children’s Health Insurance Program (CHIP), and ACA) made up 25% of the 2019 national budget. Research performed in 2016 suggested that by putting patients in skilled nursing facilities instead of long-term care hospitals (LTCH), over $5 billion in Medicare spending could be trimmed.[footnoteRef:22] More research like this should be done and more action taken by the government to ensure that organizations or facilities are not intentionally taking advantage of Medicare, Medicaid, or any other health program. Current military spending is estimated at $934 billion. This is the second single most expensive item on the budget. From 2004-2021, the United States has more than doubled its defense spending. Spending could be reduced by not hiring as many civilian workforce (even Military Police are no longer active military), reducing pay and benefits cost to those in the military, and closing unnecessary military bases. The Department of Defense itself claims that it has 21% excess in capacity through bases that do not need to remain open.[footnoteRef:23] Ensuring diplomacy is exhausted prior to any aggressive actions and reducing spending on high expense lines such as new fighter jets and new armored vehicles would also help with this expenditure. [20: https://www.heritage.org/budget-and-spending/commentary/these-5-changes-would-fix-the-nations-budget-woes] [21: https://www.cbpp.org/research/federal-budget/where-do-our-federal-tax-dollars-go#:~:text=Social%20Security%3A%20In%202019%2C%2023,retired%20workers%20in%20December%202019] [22: https://www.nber.org/papers/w24946] [23: https://www.thebalance.com/u-s-military-budget-components-challenges-growth-3306320#:~:text=Estimated%20U.S.%20military%20spending%20is,Defense%20alone2%EF%BB%BF%EF%BB%BF ]

Ways that spending could be cut, other than the aforementioned areas would be to use a more streamlined way of balancing the budget. First, The Bipartisan Act of 2018, which allows a $200 Billion discretionary spending could be repealed. Every five years, this Act adds $1 trillion to the national debt. Americans need to hold our elected representatives accountable and stop the earmarks, aka “pork.” An example of these earmarks would be the most recent COVID stimulus bill, which includes the following:

· $1.5 million bridge connecting New York and Canada

· $100 million underground rail project in Silicon Valley

· $480 million for Native American language preservation

· $50 million in environmental justice grants

· $10 billion going to foreign affairs[footnoteRef:24] [24: https://www.usatoday.com/story/news/factcheck/2021/03/02/fact-check-breaking-down-spending-covid-19-relief-bill/6887487002/]

While the intentions of $560 million of an almost $2 trillion come with mixed opinions, these policies deviate from a policy bill that is designed to help Americans from COVID-19. Reducing add-ins to bills would reduce the spending and curtail the growing national debt.

In the 1990s, Canada faced a nearly double-digit deficit (when compared to GDP). The nation instituted a plan for deep budget cuts of 20%+ in 4-years. Within 3 years, Canada no longer had a deficit. Canada successfully continued to cut its public debt by 1/3 within 5-years and without raising taxes.[footnoteRef:25] In the United States in 2018, The Heritage Foundation proposed a budget that would cut $11.9 trillion from federal deficits within 10-years.[footnoteRef:26] All of this would be done through spending reform and is necessary to alleviate the national debt. [25: https://www.investopedia.com/articles/economics/11/successful-ways-government-reduces-debt.asp ] [26: https://www.heritage.org/budget-and-spending/commentary/these-5-changes-would-fix-the-nations-budget-woes]

Cons to Cutting Spending

The concept of cutting spending to balance the budget is a scenario that may result in affecting military status, the quality of life for Americans, and could minimize the positive impact to the GDP. When considering the categories that could be cut within the federal budget, the most significant categories consist of Income Security, Social Security, Medicare, Health, and National Defense. In 2020, Income Security, which consists of subcategories such as unemployment compensation, food and nutritional assistance, housing assistance, and federal employee retirement, spent $1.3 trillion of the federal budget (19%). Social Security had spending in the amount of $1.1 trillion (17%), Medicare had spending in the amount of $776.2 Billion (12%), Health had spending in the amount of $748.3 Billion (11%), and National Defense had spending in the amount of 726.2 Billion (11%).[footnoteRef:27] [27: https://datalab.usaspending.gov/americas-finance-guide/spending/categories/]

Budget cuts to programs such as Medicaid and Health Care Services can result in a decreased quality of life for Americans that benefit from health care services. For example, Medicaid’s long-term impact on health is improved oral health, fewer chronic conditions, fewer hospitalizations, and fewer overall ER visits. Medicaid covers nearly 39% of children nationwide.[footnoteRef:28] Having access to Medicaid has assisted with reducing childhood mortality rates and healthier birthweight. Medicaid coverage of children and their mothers have also resulted in a higher high school graduation rate. However, the Medicaid program is now at risk of budget cuts at the federal level which may trickle down to the state level due to the federal budget deficit. If spending is cut for health programs such as Medicaid, this could result in a reduction in high school graduation rates and an increase in child mortality rates, ER visits, and hospitalizations. [28: https://www.commonwealthfund.org/publications/issue-briefs/2020/dec/short-term-cuts-medicaid-long-term-harm]

Federal military spending is currently the second highest category of expenditures after health services. Although there have been significant expenditures made on behalf of the military, Congress has had concerns regarding spending jeopardizing national security. This would result in a cutback of about 100,000 troops, closure of domestic military bases, and termination of some weapons systems.[footnoteRef:29] The loss in weapons systems would not only harm the military but the economy overall as some weapons and tools that are developed by the military are used by other areas and therefore assist in fueling the economy. For example, the military provides excess weapons and other tools to the police force. If the spending is cut for the military, this could also potentially result in a lack of weapons for the police force and civilians being put in harm's way. [29: https://www.thebalance.com/u-s-military-budget-components-challenges-growth-3306320]

National Debt (Con Side)

The National Debt in the United States has become an issue for the stability of the nation and has the real potential to become a crisis in the future if spending is not curtailed or tax revenue is not increased to balance the budget. The magnitude of the crisis and the timeline before the nation hits critical mass can be debated, but the seriousness of the potential problem should be acknowledged. Currently every man, woman and child in the United States owes a portion of the national debt ($84,758 to be exact).[footnoteRef:30] If you are skeptical about how serious of a problem the national debt could become look at the recent case of Greece. [30: https://www.pgpf.org/national-debt-clock]

In 2010, Greece admitted to the world that it was in danger of defaulting on its massive debt. This not only threatened the sovereignty of Greece, but it also threatened the European Union as a whole (particularly smaller countries in the union that held significant portions of Greece’s Debt). At the time, the budget deficit in Greece was 15% of GDP. Currently, the United States’ budget deficit is 16% of GDP.[footnoteRef:31] The explosion of the U.S. budget deficit in the last year related to the pandemic escalated the problem more than it did prior to 2020. While this can be reversed, politicians are not known for their budgetary restraint and curving the momentum can be particularly challenging. As a percentage of GDP, the National debt has been over 100% of GDP every year since 2013 and reached an all-time high of 136% of GDP in 2020.[footnoteRef:32] The amount of debt the United States has accumulated exceeds stable levels. The continuation of the spending pattern without acknowledging limits could be catastrophic.[footnoteRef:33] [31: https://www.thebalance.com/what-is-the-greece-debt-crisis-3305525] [32: https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287] [33: https://www.politico.com/news/2020/09/02/us-deficit-triples-2020-407798]

Currently, the national debt is still manageable in theory, but it is far more challenging than the numbers might suggest. The trend over the last 30 years (with minimal exceptions during the ‘90s because of the dot com boom) has been rapidly expanding deficit spending. Reversing the trend will take discipline that is not often found with politicians, particularly when their constituents reap the benefits of the deficit spending and are willing to kick the can down the road as far as possible. To further illustrate how significant this problem can become, consider a couple of statistics:

1. During the Clinton Presidency the National Debt was 4 trillion dollars. It is now 28 trillion.

2. In 2020, the cost of servicing the interest on the national debt exceeded the total cost of the Medicare program. In 2025 the cost of servicing the debt will exceed the cost of the military budget making servicing the debt the most expensive line item in the federal budget.

In 4-years, the interest on the national debt will be the largest line item in the entire federal budget.[footnoteRef:34] Think about that for a moment and relate it to your own budget. If the interest on your personal debt is the largest expenditure in your annual budget, would you consider yourself to be financially stable? Relating the finances of the country to your personal finances is overly simplistic and comparing apples to oranges, but that level of debt is unsustainable and will eventually lead to irreversible damage if measures to slow the deficit spending are not acted upon. [34: https://fee.org/articles/the-national-debt-is-the-most-serious-crisis-america-faces/]

The first step to address an addiction is to admit you have a problem. The United States government and the citizens of the country have a problem. Will the nation admit our addiction to spending before it is too late?

References