Not raising the debt ceiling could cause another sell-off in the stock market. If so, history has shown it is worth buying the dip as politicians eventually agree to raise the debt ceiling limit and curb some spending.
However, have you ever wondered why the government doesn't spend more responsibly? After all, we individuals are tasked to budget and spend within our means. Why shouldn't the government as well?
If we individuals continue to spend far beyond what we earn and can comfortably afford, we'll ruin our credit, get our assets confiscated, and be shunned from society. Nobody will trust us if we consistently can't pay back our debt.
Let's explore this double standard regarding fiscal responsibility! It's too bad there is so much infighting in Congress that we have to keep expecting government shutdowns.
Why The Government Doesn't Spend More Responsibly
The concept of “spending within your means” for a government is different from that of an individual or a household. Governments have the ability to issue debt and borrow money to finance their spending. Individual households largely do not.
Here are a few reasons why governments may not always spend strictly within their means:
1) Desire To Stimulate The Economy
During economic downturns, governments may engage in deficit spending to stimulate economic activity and mitigate the negative impacts of recessions. By increasing government spending, they can create jobs, support businesses, and provide social safety nets. This approach aims to boost economic growth and eventually increase government revenues.
For example, during the heart of the pandemic, the government spent trillions of dollars to support and stimulate the economy from devastation. Programs such as PPP loans and student loan forbearance helped keep small businesses and college graduates afloat.
2) Creation And Maintenance Of Social Programs and Safety Nets
Governments provide social programs, such as healthcare, welfare, and unemployment benefits, to support their citizens. These programs are aimed at promoting social welfare and reducing inequality. Fulfilling these commitments often requires government spending that may exceed current revenue.
During the 2008 global financial crisis, the federal government famously provided 99 weeks of extended unemployment benefits. As a result, the term “funemployed” was formed to label those who collected unemployment benefits while traveling and having fun for almost two years.
When the federal government offers extended unemployment benefits beyond the standard 26 weeks offered by the state government, the value of a severance package goes way up. After all, if you are able to engineer your layoff, you can collect all the unemployment benefits you want.
If you quit your job, you are usually ineligible for collecting unemployment benefits. Why? Because you quit, which the government and your employer presumes means you don't need the money. An employer can accept or contest the unemployment insurance claim.
3) Public Investments For The Greater Good
Governments often invest in infrastructure, education, healthcare, and other areas to promote long-term economic development and societal well-being. A lot of the time these types of projects require borrowing to cover the upfront costs. In large urban areas, it's not uncommon to see projects that run in the multi-millions.
Such spending is portrayed as an investment in a locale's future and is may be considered justifiable even if it leads to temporary deficits. The problem lies with running up a large deficit, which leads to future generations getting saddled with debt and higher interest payments.
If you don't have children, you may be more amenable to the government spending beyond its means. Constantly raising the debt ceiling is a logical act to cover inflation and a growing economy.
However, unless you have generational wealth, perhaps you will feel more stress and anxiety for your children who will have to shoulder more debt. In general, most people want to leave the world a better place for future generations, not worse.
4) Revenue Volatility
Government revenues are subject to economic fluctuations, which can affect their ability to balance budgets without borrowing.
During economic downturns, tax revenues may decline while government expenditures for social safety nets increase. This can also result in budget deficits that need to be covered through borrowing.
For example, many office buildings are at lower occupancy levels than before the pandemic. As a result, there is less economic activity in business districts, resulting in a negative loop of fewer home sales, fewer restaurants, fewer conferences, and more.
The desire for lower revenue volatility is one of the reasons why local governments make you fight to get your property taxes lowered, even though property prices are coming down.
5) Political Priorities and Trade-Offs
During election years, politicians will often pander to the public to gain the most amount of votes. Therefore, fiscal discipline sometimes gets thrown out the window. The more free money you can promise people, the more support you will likely gain.
If politicians don't meet the needs and demands of their constituents, they won't be politicians for much longer. Public policy objectives also influence the allocation of resources. Different priorities and trade-offs can thus lead to deficits and debt accumulation.
Ideally, the breadth of tax payers will increase beyond the current ~50 percent of working Americans. The higher the participation, the greater the tax revenue and buy-in from our citizens.
How Much Could The Stock Market Crash If The Debt Ceiling Isn't Raised?
Based on history, the maximum S&P 500 decline during the 2011 debt ceiling debate was -19.4%. In 2013, the S&P 500 declined by -5.8%.
Hence, we can assume that if the current debt ceiling issue doesn't get resolved quickly, the stock market could also decline by a similar magnitude or more.
2023 stock market valuations are in the top 15% of historical averages while aggressive rate hikes are slowing down economic activity. As I wrote in my post, How I'd Invest $1 Million Today, I'm not a fan of buying the S&P 500 at the ~4,200 level.
Sure, there could be a nice relief rally when the debt ceiling debate is resolved. But fundamentally speaking, the stock market isn't a table-pounding buy at the moment.
Ironically, I'd much rather lend the government money in the form of Treasuries, yielding higher yields due to the debt ceiling issue. In addition, I prefer buying real estate as a catchup play to the stock market.
Fitch Ratings put the U.S.' AAA long-term foreign-currency issuer default rating on a negative watch on May 24, 2023. The rating agency said the ongoing debt ceiling negotiations have raised the risks that the government could miss payments on some of its obligations. However, Fitch said it still expects a resolution before the X-date.
Variables Affecting The Magnitude Of A Stock Market Correction
The failure to raise the debt ceiling and its effect on the stock market depends on several variables. Here are a three main points to consider.
1) Government Shutdown
Failure to raise the debt ceiling can result in a government shutdown, leading to a disruption in various sectors of the economy. A prolonged shutdown can have negative impacts on businesses, consumer spending, and investor sentiment, potentially affecting stock market performance.
For many in the private sector or who are proponents of smaller government, a prolonged shutdown may be welcome.
In 2020, when the government forced to shutdown small businesses, members of congress and other federal government employees were able to keep earning their full salaries and benefits. This double-standard infuriated many business owners and employees who had no other choice but to close.
A long government may force politicians to spend future dollars more carefully. It may also help politicians empathize more with common people who don't have pensions, access to insider trading, and bulletproof incomes.
2) Policy Response
The response of policymakers, including the government and central banks, to a debt ceiling impasse can influence market reactions. If appropriate measures are taken to address the situation and restore confidence, it may help mitigate the negative impact on the stock market.
A strong response to COVID-19 helped the economy and stock market rebound quickly in 2020. If the Federal Reserve decides to pump more liquidity into the system again when markets are crashing, like it did when regional banks failed, perhaps the stock market won't sell off so bad.
3) Contagion Possibility
The failure to raise the debt ceiling can have broader implications for financial markets beyond the stock market. It may impact the bond market, interest rates, credit ratings, and overall financial stability.
In addition, the debt ceiling issue could cause debt fears in other countries. If there is a global crisis of confidence, all types of risk assets could sell off hard.
The Importance Of Sustainable Fiscal Policy
Maintaining a sustainable fiscal policy is essential for long-term economic stability. Excessive deficits and mounting debt can pose risks to the economy, leading to concerns about inflation, a weakened dollar, damage to U.S. creditworthiness and reputation, and limited fiscal flexibility.
Foreign investors in U.S. debt will require a higher interest rate to account for greater risk of non-payment or delayed payments. As a result, economic activity could slow even further, creating a negative economic loop.
Achieving a balance between spending priorities, revenue generation, and managing debt is a challenge that requires careful consideration of economic conditions and long-term sustainability. Given the United States has a democratic system, resolving the debt debacle can be messy.
Personally, I want the debt ceiling raised with some future spending cuts for more fiscal discipline. As an investor in risk assets, I don't want the stock market or other asset classes to crash.
I depend on the normal functioning of government and credit markets to sustain and grow our economy. You should ultimately want the debt ceiling to be raised as well.
However, for those of you waiting on the sidelines with a lot of cash or are just starting on your financial journey, a lack of resolution in the debt ceiling may be exactly what you want. You might be able to buy assets for cheap until politicians no longer want to play chicken with our livelihoods.
Fiscal Responsibility In Households
Despite the government displaying a case of “do as I say, not as I do,” we should all continue to demonstrate fiscal responsibility. Don't expect the government to save you financially given it can hardly manage its own finances properly.
If you want to achieve financial freedom, don't stop saving and investing. Continue to spend less than you earn. If you don't, you might get into a lifetime of debt with no way out.
Loading ...Reader Questions and Suggestions
What do you think of the debt ceiling debate? How do we decide how much to raise and why? Does the United States government spending beyond its means really matter if the government can just print money? Will future generations really pay the price if the government just continues to spend beyond its means?
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The other albeit unpopular option is for the government to raise taxes, or perhaps return them to pre-2018 levels.
It would be impossible to raise enough taxes to cover the insane level of spending going on.
It’s like telling a 500-pound child to exercise more to lose weight. Even if they ran on a hamster wheel 24 hours per day, that does nothing if they are shoving pounds of cookies, cake, and gallons of soda down their throat every day, too.
Excuse me the government has not had a “budget’ since 2001. A budget has equal parts of income and spending and NO deficit. Also FASAB 56 requires secret spending and accounting by the federal goverment, missing 21 trillion Catherne Austin Fitts and Mark Skidmore. So all the budget discussion is all theater. Stop wasting your time the government continues to rob you. Enjoy your life.
A CR NOT a budget !
Sam,
Great article. Very thorough, as always.
There is one more significant difference between individuals and governments. Individual people have a limited life span. The lenders want them, in most cases, to repay their debts while they are still alive. Governments do not have that constraint. Note that many nations, especially the British, like to issue perpetual bonds that NEVER mature. As the GDP increases decade after decade, the debt vs. GDP became less and less and easier to manage.
(I am not advocating infinite debt. There are other negative effects of a large debt that should be avoided. The question is – what is “large”).
The debt ceiling is an artificial device. No other developed country with a legislature caps the amount of debt the country can obtain. Other countries just spend within their means or obtain more debt. The market will determine whether a country’s debt is worth investing in.
This a very fair and balanced article Sam. You managed to elicit emotion’s from both sides. I’m done trying to argue my point. It really makes no difference. Instead,I’m trying to figure out how to make money off the situation. Unfortunately, we all know how this is gonna end. A last minute deal that makes no one happy. Sure maybe they close a park for a week or maybe social security checks get delayed a day or so but we all know the debt ceiling will be raised. Because we all know this and the fact that most people have missed out on the market’s gains and the fact there’s 5 trillion dollars in money market funds waiting for a better market entry makes this whole conversation a big nothing burger.
The easy money has already been made.
Ambiguous calls for “spending cuts” are meaningless. Between defense, Medicare, Social Security and interest you have 73% of our annual federal budget. You simply will not make a meaningful impact on spending without altering these programs. Anyone that says we need to cut spending needs to also commit to what and how much. The so called “solutions” being bandied about aren’t about reducing our spending or debt but scoring political points.
You’re absolutely right. It’s not hard to find numerous wasteful line items in the federal budget, but in terms of actual dollars, the items that you mentioned are the lion’s share of the budget. And these are all items that can’t be cut or that are potically very difficult to cut. Bringing the deficit and debt under control can’t reasonably be done in a year or even in a decade. But I believe it’s possible (and very advisable) to start taking steps in that direction.
(Correction: My previous post should say “…politically very difficult to cut.”)
Politicians are in most instances short-sighted only concerning themselves with winning their next election. And the chances of doing that decrease significantly if they decide to take on any of the issues that drive our spending and deficit. Who amongst them is winning to define a “responsible” level, as Sam suggests, of Social Security, Medicare or defense spending? So instead what you get are attempts to demonize groups of individuals like welfare recipients (the takers) or suggestions that we reduce our funding of agencies that ensure we have safe food to eat and water to drink (the bureaucrats). And cuts in those areas can carry significant consequences while doing nothing to address our structural deficits. Because rarely is there anything “responsible” (or meaningful) in these suggested spending cuts. It’s a lazy political rallying cry which ignores the reality of our spending and debt.
Fair point re: SS and Medicare but the expansion of these programs over the last 40+ years and the addiction of sizeable factions of the public to government run programs instead of funding their own retirement is a massive moral hazard. What was supposed to be an insurance policy has now become a reliance.
That is surely unsustainable.
But watch the screaming that happens when we try to cut ANY spending. Can’t even start taking steps if we can’t cut something miniscule. Of course, the media loves controversy, so will give space to a couple hundred people that are hurt by any even tiny cuts.
There are definitely parts of defense that could be cut and SSDI should be significantly reformed (and *very* slowly increase the age of SS starting). Medicare negotiating would help also. And probably 1/3 of the 27% not mentioned could be cut without anyone noticing.
Hi Sam,
You mentioned you’re buying treasuries. What’s your thoughts on long term treasuries 20+ such as TLT, given the current state of events?
Riada
It’s strange that nowhere in your commentary do I see discussion about the 2017 tax cuts and the fiscal impact of them. Cutting revenue is also a nice way to create a deficit.
To wit, extending the 2017 Tax cuts will cost $3.5 Trillion over the next 10 years.
https://finance.yahoo.com/news/extending-2017-tax-cuts-cost-225617109.html
This is a very large aspect that is, for some reason, not being discussed. Temporary tax relief for the average person, permanent cuts for the corporate tax rate. All of which contributes directly to increasing deficit, with no plan to mitigate those affects.
https://www.americanbar.org/groups/gpsolo/publications/gp_solo/2022/may-june/impacts-the-tax-cuts-and-jobs-act-2017-real-estate-ownership-and-investment/#:~:text=The%20most%20significant%20and%20noticeable,beginning%20after%20December%2031%2C%202017.
https://taxfoundation.org/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-americans/#:~:text=The%20Tax%20Cuts%20and%20Jobs%20Act%20(TCJA)%2C%20passed%20in,reforms%20to%20several%20other%20provisions.
The 2017 tax cuts did not result in a decrease in revenue. They cut tax rates on individuals and corporations, but total revenue to the federal government went up in 2018 and again in 2019, not down.
The federal government’s annual revenue is equal to about one-sixth of the total US GDP each year, and that was true both before and after the 2017 tax cuts. For 2022, the total revenue to the federal government was nearly $5 trillion dollars. The federal government has plenty of revenue. If the federal budget doesn’t balance (and it doesn’t), then tough choices need to be made on the spending side. (And I do realize that some of those choices would be very tough, and that members of Congress from both major parties are to blame for deficit spending.)
The federal government is like a high-income couple living in an expensive city, paying tens of thousands annually for private school for their children, buying brand-new luxury cars, taking expensive vacations two or three times per year — but they’re also completely broke and racking up more and more debt. Their primary problem isn’t their income; it’s their high cost of living and high expenses.
Treating a government’s debt like a household’s is a poor analogy to say the least.
The US Debt ballooned during COVID/2020 in particular but as a % of GDP actually declined between 2021 and 2022.
https://www.thebalancemoney.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287
If one were serious about containing the deficit, not accounting for the fact that the US tax burden as a share of GDP (24.4%) is closer to Mexico than our developed country peers (33.7%) needs to be taken into account. Sadly, a current political party seems perfectly satisfied with just dissolving the idea of government/taxation altogether.
https://www.taxpolicycenter.org/briefing-book/how-do-us-taxes-compare-internationally
Why is it a poor analogy to compare a country’s debt (or budget) to household debt (or budget)? The analogy is far from perfect, but analogies can have value without being perfect.
Those are very interesting numbers showing the comparison of US tax burden to other countries. Numbers that I have found show federal government revenues holding steady around 16% to 18% of GDP for the last 10 years or so. Your source pegs it much higher, at 24%, but apparently that’s because it’s including state and local tax revenue in that 24%, not just federal tax revenue. Your source also shows that this percentage is lower than most other countries, but isn’t that a good thing? Isn’t economic freedom supposed to be one of the things that sets the US apart from other countries? Where is the advantage in being the same as everyone else?
Also, I find it very troubling that one-sixth of the money in our economy is being funneled through the federal government. No matter where they fall on the political spectrum, I think most people would not put Congress near the top of the list of institutions that they trust to spend money wisely. And yet we are OK with trusting one-sixth of our entire economy to their wisdom (or lack thereof), and some of us advocate for giving them even more than that? I think that individuals, families, churches, charities, small businesses, local governments, and even state governments and large corporations, will all tend to spend money more wisely (on average) than the federal government.
It’s not a good analogy because it’s not the same type of debt, because America can issue more. This dilutes the value of old debt, unlike racking up more household debt which actually increases the value of debt (makes t a greater burden).
Should 1/6 economy run through govt.? Hard to say, anyone who think corporations are running efficiently doesn’t work for one, and it’s clear from Credit card debt, that individuals aren’t doing so hot.
Ridding the individual mandate and the TCJA along with diminishing IRS HAS also caused debt to soar. Arguably, the individual mandate cancellation (thanks SC) driving up government healthcare costs does more long term damage than the TCJA which does favor corporations over workers.
Finally, yes we should pay more. Why? Multiple reasons. More should pay in to have more actual “skin” in the game and more money should be used to pay down debt, and we WILL have to pay more anyway, SS and Medicare won’t fix themselves -either money or pay in lost time.
Paying more worked in the 1990s and it will work again now.
There is little evidence that the tax cuts were that impactful to net treasury revenue from forecast, as the economy grew faster than expected and tax receipts have gone up considerably (fed tax income is up ~50% since the tax cut went into effect). The laffer curve is a real thing.
https://www.whitehouse.gov/omb/budget/historical-tables/
There are several comments here about the debt ceiling and that we should just increase it because the expenditures were already previously approved. There is a thoughtful article from the Hill that shows why it is good to have the debt ceiling and allow for cuts to be made based on fiscal realities.
Here is the article:
https://thehill.com/opinion/congress-blog/4018362-why-many-arguments-are-misleading-in-the-debt-limit-debate/
If you look at the growth of the national debt, it is increasing at a much faster pace and clearly needs to be addressed. I, for one, think it is a good thing that we have the debt ceiling as a way of checking to see if we are on the right path or not.
Paul Krugman (Nobel laureate economist) has an interesting, recent New York Times article for why it’s ok for governments to not balance their budget, but not for people. As to the debt ceiling debate, I believe it’s a totally artificial, manufactured crisis and yet another insane feature of our political system (like gerrymandering, Citizens United, the Electoral College, and more). No other country in the world has a debt ceiling process. We’ve already spent the money, as approved by Congress previously, and need to pay up, end of the story. Whatever happened to the GOP being the party of “fiscal responsibility”?
You are wrong.Switzerland has something similar to a debt ceiling and it works well. Maybe US might learn from better countries, but I honestly doubt it.
Many other countries have a debt ceiling, but most use a percent of GDP. The US would be far beyond acceptable debt even in those cases.
The EU target is no more than 60 percent debt/GDP, but of course there are voices to raise it.
https://www.reuters.com/world/europe/high-debt-eu-countries-should-cut-debt-ratio-by-1gdp-year-minimum-germany-2023-04-06/#:~:text=The%20existing%20rules%20require%20every,for%20COVID%2D19%20relief%20measures.
The answer is and always has been to reduce spending and start slashing the bloated federal government. The only way to possibly reverse the death spiral our USD is in is to do what none of them will do, because it’s not serving their self interests (being re elected, retaining power, allowing them to enrich themselves over decades in office with insider trading and quid pro quo). No, the answer isn’t to put more of a tax burden on the top 1,5, or even 20 % that pay all of the taxes in this country, and it’s not to take all the billionaires money which would fund fed.gov for a week, assuming they didn’t just leave the country, it’s to start eliminating every piece of waste that’s been instituted over the last century which is in direct conflict with the premise of the Constitution. Eliminate or severely cut back all the 3 letter agencies that only serve to invade our privacy or play politics, return the power of the purse to Congress, as it was intended, stop funding a global war machine and bring our military home to defend our own borders (which should reduce spending considerably), institute term limits for congress as well as mandatory retirement for other fed workers to stop making it a career (so we don’t end up with invalids in office that have no practical real world experience), return manufacturing stateside and stop importing cheap labor that are net negatives on our social net (I remember when immigration was based on merit, not just an open door policy), stop the push to waste trillions on on an ambiguous goal of “carbon neutrality” and let industry develop technology that’s more energy efficient over time that is within their own best interest, and return is to a gold standard.
Frankly, I’ll take one of those to move back in the right direction, sadly we’ll get none.
Very well said Frank. Completely agree.
Spot on! Frank please run for office.
Instead of robbing Peter to pay Paul, why can’t the government do like the rest of us and invest some of its money?? If it gets any decent return, we all win, including the entity that got the funding. I’m always shaking my head as to why no one suggests this.
Well, Dubya actually did that with SS funds and was skewered for it. The SS trust fund would be in great shape still if we had and people would be getting more in retirement. But many other countries do have sovereign wealth funds. Unfortunately, even if it worked well, our government would spend it, and not pay down debt.
I know everyone hates it, but it isn’t a question of cutting spending so much as increasing revenues. We can’t just give every company and every American a tax break all the time (or more – every time a Republican is in power). We could also do other things that while they’d increase tax revenue needs, would overall decrease Americans’ net out of pocket expenses and give us all a better life – like single payer healthcare.
Total federal government revenue as a percent of total GDP has stayed in the range of about 16% to 18% for the past 10 years, both before and after the 2017 tax cuts. The idea that the tax cuts caused some major revenue shortfall is an urban myth.
Yes, let’s grow the government even more. Let them take over healthcare. While we’re at it, why not take over everything. They’ve done a marvelous job. Great ideas.
Taxes collected by the Fed government has gone up 50% in the last 6 years, tripled in the last 20 years, and has gone up ~1000% in the last 40 years. Spending is the issue, not income. Most businesses would kill for those kinds of revenue increases.
I worked in the Federal Govt for over 25 years and it would be simple to cut spending by 25% or more but the politicians and bureaucracy do not permit it.
I served as a finance officer at an Embassy in Africa. During my first year, I returned 18% of our annual budget simply by focusing on costs. Simple examples included not buying five new tires for vehicles in the motor pool, requiring multiple quotes for items I knew our employees were likely receiving kickbacks, requiring employees to review their travel costs and ensure hotels were not overcharging, not buying new appliances simply because they always did every year (the warehouse already had enough new dryers to replace every one that was in service), etc. Yet when our new administrative officer arrived she fought me at every turn even telling me that if the govt could spend a billion dollars on a B1 bomber she was not going to worry about a few dollars. Somehow she failed to realize that the bomber cost that much precisely for the reasons she gave me about the Embassy’s budget!
The only way govt employees get promoted is to manage more people and resources. Thus they have a vested interest in insuring the bureaucracy grows.
Furthermore all budgets are based upon the prior year’s budget rather than being zero based.
Thank you for doing your small part to stop our tax dollars (or our children’s and grandchildren’s tax dollars) from being wasted!
Yep, businesses do zero based budgeting every 2-4 years. No reason government should not as well. Thank you for being good stewards of taxpayers money.
Hard to look at any of this in isolation. How about not giving away the store anymore (tax cuts/subsidies/bailouts)? Right-size the military; been years since a base realignment, for instance. Two events in my time stand out: The election of Reagan (tripled the Nat’l debt.) and allowing China into the WTO in 2001. Cue that giant sucking sound Ross Perot warned us about. 70% of the U.S. economy now based on debt-fueled consumption? Billionaires telling the rest of us to boot-strap it? We need to move towards separating $$$ and politics or nothing will get better fast.
Great newsletter/blog, Sam :)
I lived in a state with a law saying we could not pass a budget with an expected deficit. It worked great. The federal government just needs to do that and exceptions carved out for “emergency measures” in case of war, disease etc.
At some point there needs to be a prioritization discussion between pentagon, social safety, infra etc. It feels morally wrong for these boomers to spend their grand kids money instead of their own knowing how much more difficult life will be for them.
All states balance their budget. They don’t print money. When the government prints money we collectively (but not necessarily individually) get richer. MMT has a lot to say about this.
“No, enough is enough. The government needs to learn how to spend within its set budget.”
It’s a quirk of how the thing works, but by raising the debt ceiling the government is simply spending within its set budget. The budget was already passed. This is just new debt to pay for budgeted items. I think you know this as it’s well described everywhere so I’d just change the way you describe this answer meant to tap into the outrage people feel towards government spending.
I’d argue the primary reason the US government doesn’t spend within their means is because they have the ability to create money to finance trade and fiscal deficits. As long as we continue to devalue the dollar using money creation it prevents the debt from “hardening” and is easier to pay back.
A secondary reason is that no politician would be (re)-elected on a platform of cutting government spending and increasing taxes . So, over the long arc of time, we trend towards more government spending and lower tax revenue despite worsening fiscal deficits. These politicians know that more dollars will be printed and that the future debt will be easier to pay back in the future.
Rather than cutting programs that benefit the marginalized and underserved how about cracking down on Medicare and Medicaid fraud by contractors and vendors; disgustingly inflated pricing from defense department contractors (see last Sunday’s 60 Minutes); and raising taxes on the Uber wealthy and major corporations. The Republican response is to never raise taxes on the wealthy, but rather to make the poor pay for the deficit by cutting programs that provide critical services to them. They are the party of the rich not the everyday working person.
If the Republicans are the party that doesn’t want to tax the wealthy, then why is it that the top 1% of income earners have an average effective federal income tax rate of 26%, the top 10% of income earners have an average effective rate of 20%, and the bottom 50% of income earners have an average effective rate of only 3%? (And the 3% figure doesn’t take into account refundable tax credits, which would bring that number even lower.)
These are the latest stats I could find for effective income tax rates by income range, for 2020. I also found stats for 2018 that were very similar. (These stats are reported on the taxfoundation.org web site, but their source is the IRS.) Please keep in mind, these numbers are *after* the Republican-supported tax cut plan that passed in 2017.
Having said that, I’m not here to promote Republicans. Republicans share a huge part of the blame for wasteful and excessive federal spending that has gotten us into this mess with the national debt. Also, I agree with you 100% about cracking down on fraud and inflated pricing.
Agree on the first two, but almost no evidence the tax cuts have reduced revenue (tax rev is +50% vs 6 years ago, 3x vs 20 years ago and 10x vs 40 years ago. Plus, the top 1% already pays 40% of taxes and the bottom 50% pays a net zero (vs 25% and 10% respectively 40 years ago).
For many of the amenities that we enjoy in this country, things like highways, bridges, ports, hydroelectric dams and the like, the only way that “we, the people” can invest in these infrastructure items is through governments. Governments pay for this kind of investment by issuing fixed interest bonds, backed by the ability to tax the public to pay principal and interest on that debt. That portion of a yearly budget, coverage of long term borrowing, whether local, regional or national, should be considered differently than spending on non-durable goods and services. If the government makes a commitment to the public to provide services in return for taxation (i.e) Medicare, the cost of paying for those services should be considered separately and the medicare portion of one’s payroll tax should adjust according to the actual cost of maintaining that health care insurance product. Social Security is a pension system. You pay in and receive a return based on your contribution, an expected rate of return on your contributions and an actuarial calculation on how long you’ll live to collect benefits, plus cost of living updates. The cost of providing this pension system should be an independent assessment on earned wages. Mortgages are long term financing mechanisms for real property needed today. Payroll taxation is a means of purchasing insurance; premiums now for benefits later (health care services and income stipends in the future) available to all who participate through deduction from earned wages. These should not be a part of a yearly budget negotiation, beyond the calculus of what is needed to pay out benefits and keep the system solvent for the long term.
Perhaps we’ll need state-linked federal benefits; These systems are solvent or not solvent based on state by state decisions on yearly deductions in the state where the individual lives. If you move, you must take action to move the state-home of your benefits. Take the heat of the federal government, place it with governers to make their states’ residents contributions adequate to pay their benificiaries.
If its congress that must present and ratify a yearly budget, perhaps the president should not release a proposed budget until the debt ceiling has been passed. We may need a constitutional amendment that states even more explicity that the debt ceiling shall not be used as a bargaining chip in a budget discussion.
The entire point of the debt ceiling is to bargain in budget discussions. In 1980, the government collected $0.51T a year. 20 years ago, it collected $1.8T a year. 6 years ago, it collected $3.3T a year. Today is collects $4.8T a year and growing. This would have outperformed the revenue growth of 99% of businesses in the US in that time period. Over that same time frame, spending has gone from $0.59T a year to $6.4T. It’s time to admit we have a big spending and waste problem in the Fed government.
Oh we can definitely manage our budget as long as we cut defence, Medicare, Medicaid, welfare and social security. Who will go for that?
No improvement or no worthwhile
projects can be done.
Only rich people will get richer and I do not know how anybody will get any relief or help.
Major amount taxes are collected I
think comes from middle class that money can go for middle and lower class and rich can get benefit from their taxes only and no more relief from taxes and close all the loopholes.
We as people should have a say on things
like this. No politician should be able to go against our will. Thanks
You do realize the top 1% pays 40% of federal taxes, the top 10% pays 75% of federal taxes, the top 25% pay 90% of taxes and the bottom 50% pays 1% of federal taxes. The middle class is not paying hardly anything in taxes, either in aggregate or as a % of their income.
We owe money and holding the American people hostage is no way to manage our money. We should raise the ceiling, commit to reductions in spending, and restore taxes to pre-Trump days. However, with so much divisiveness between D and R, nothing good is likely to happen. Each side just wants to stick it to the other…damn the consequences.
Taxes collected is up 50% in the last 6 years…tax rates are not the issue. We have a spending problem, and even if we raised taxes, they’d simply increase spending rather than reduce the debt (assuming we aren’t at that point in the laffer curve where tax increases drop collection). And Biden could commit to prioritizing the debt first and this wouldn’t even be a risk, and what Rs are asking for is not a lot, frankly.
Great concept, but our economy runs on leverage. Companies dont pay off their debt. They are in a constant buy down, pay off, borrow more cycle. I cant imagine what would happen to the US government if it couldnt continually create value through QE or “printing money”.
I guess it would be the greatest Ponzi Scheme of all time. The losers would be those incurring debt believing the debt ceiling would always be raised. Kinda like musical chairs, they would be left standing when the music stopped. Those standing would be responsible for their debt, while those who stopping playing the leverage game early on would survive any financial repercussions.
Again a great idea, but that idea sailed a long time ago. I dont see how the govtmt could survive spending responsibly.
Sam, one note on debt ceiling. This money has already been passed in appropriations bills earlier in the year. The debt ceiling standoff is more akin to someone racking up credit card debt than deciding not to pay the bill. Just a political game played to appease the base.
Better solution would be to have more balanced districts so if someone decides to play roulette with the full faith and credit of the United States, reasonable voters and moderates would vote them out. Unfortunately for too many politicians the risk is someone running even more conservative or liberal then they are so here we are.
Sam probably knows this as does anyone who spends more than 2 minutes reading about debt ceiling but this is what Republicans do. They make an absurd idea (like holding the economy hostage) look “normal” in the world of bothsidesism. And somehow a bunch of people fall for it every time. But credit to them they are the party of let’s tax the rich as little as possible and the poor eat that slop up everyday because America.
If Republicans are “the party of let’s tax the rich as little as possible,” then why is it that under a Republican-supported tax plan (the Tax Cuts and Jobs Act of 2017), the top 1% of income earners have an average effective income tax rate of 26% (meaning that 26% is what they actually pay, after deductions, credits, etc.), while the bottom 50% of income earners have an effective rate of 3% or less?
“ Sam, one note on debt ceiling. This money has already been passed in appropriations bills earlier in the year. The debt ceiling standoff is more akin to someone racking up credit card debt than deciding not to pay the bill. Just a political game played to appease the base.”
The appropriation was atypically done by the outgoing congress, not the current congress, so it’s more like someone else racking up your credit card debt. The game played was by the democrats passing the budget when they shouldn’t have.