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Can We Solve the Federal Debt Mess...INTERJECTIONS!!

Can We Solve the Federal Debt Mess...INTERJECTIONS!!

February 26, 2024

In our first two installments on the national debt, we used Schoolhouse Rock segments as a backdrop to illustrate the problem's complex nature. First, we Unpacked Our Adjectives to explore how we would describe the debt. Next, we had Our Hero Zero help illustrate how big the national debt is.

Source: Wikipedia

In our final installment, we will explore a couple of possibilities to help us move towards a balanced budget and a smaller debt load in the future. There is only one place to turn in the Schoolhouse Rock catalog to help illustrate the enormity of the task at hand…Interjections!

Before we turn to our Saturday morning television friends to help illustrate, let’s first look to the Merriam-Webster dictionary to get a good definition of interjections: A word or phrase that is grammatically independent from the words around it and mainly expresses feeling rather than meaning.

As you would probably guess, people have a lot of feelings about our national debt situation. Most are not good, or you cannot use them in a public blog post. This theme also plays out in the Schoolhouse Rock video on Interjections. I've included a YouTube link to the video below as a reminder.

Schoolhouse Rock - "Interjections!"

To frame this conversation, we thought we would start with a quote from the US Treasury Department’s Bureau of Fiscal Services, year-end projections in which they state,” The current fiscal path is unsustainable.”

As we discussed in our second installment, the government is spending more money annually than it takes in taxes. There are only two ways to close our annual budget deficit gap.

The first way is to raise taxes. This is likely easier said than done, especially in an election year when all politicians on both sides of the aisle want to get reelected. It would also help to understand how much taxes are paid and by whom. There is a lot of talk about whether our current tax system is fair. Based on information from the 2020 tax filing year and the most recent information provided by the IRS, we can see the following.

From our first chart, you will note that the income earned, and taxes paid are skewed toward those at the higher end of the wage and income spectrum. For example, you can see that the top one percent of all income earners make 22.2% of the income and pay 42.3% of the taxes.

The top 10% make 49.4% of all revenue earned and pay 73.6% of the federal taxes under the current tax law. This begs the question: How much income do you have to make to qualify to be in the top 10%? The answer is $152,321, probably lower than you thought. To be in the top 25% of all wage earners, your income would have to exceed $85,853. This is why I remind clients that when politicians start talking about raising taxes on high-income earners, it probably means YOU!

The following chart shows the average income tax rates for people in various income percentiles. Whether we agree that the tax rates are high enough at their current levels, we can clearly see that the higher your income is, the higher your tax percentage rate is.

We know the top 10% of all wage earners paid approximately $1.25 trillion of federal tax in 2020. Even if we raised the income tax on this group of people by 33%, it would only create just over $400 billion of additional annual revenue. This amount is nothing to sneeze at. However, it will only go so far in closing deficits projected to be $2 trillion or more. That is how big the problem is.

Source: Rotten Tomatoes

The other option is to cut spending. This is also difficult as a very large part of our annual budget is taken up by entitlement programs, the national defense budget, and interest on our ever-growing debt.

As you can see from our last chart, which is put together by the Congressional Budget Office and The Committee for a Responsible Federal Budget, we would have to cut all government spending by 27%, including National defense, Social Security, Medicare, veterans’ benefits, law enforcement, border security… to balance the budget.

As you can see from the chart, the more things you exclude, more significant cuts will be needed to everything else. For example, if you exempt Social Security, defense spending, and veteran’s affairs, you must cut everything else by 50% to balance the budget.

Source: YouTube.com

As you can see, the actions of the Federal Government over the last 20 years have put us between a rock and a hard place. It will take some combination of higher taxes and lower spending to help put even a tiny dent in the problem.

There has not been a serious bi-partisan effort made in this way since the Bowles-Simpson Committee. This committee was formed by President Obama and comprised 10 senators and 10 congress members, 10 Democrats and 10 Republicans. Unfortunately, their common sense recommendations never made it out of committee and onto the floor of the House or Senate for a vote.

It would be great to think that some epiphany would sweep across Capitol Hill and make people realize the longer we wait to deal with this, the harder it will be to fix. We could all exert some pressure on our elected officials to let them know that we have already waited long enough.

Fixing our annual budget deficit, and therefore our cumulative debt, will not be easy or fun for anybody at this point. You will hear a lot of rhetoric about this during this election year. You will hear even more about it in 2025, as Congress must deal with an expiring tax law that needs to be updated.

And there you have it. We wanted to update you as we continue “Moving Life Forward.” Please feel free to reach out if you have questions or wish to discuss this further. We are here for you. And, as they say in Schoolhouse Rock…

Source: Rotten Tomatoes

© 2024 Jesse Hurst

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Featured blog image source: iStock.com/Inna Kharlamova