Federal government finances

Great Debates
1

Regardless of political party, there’s a simple thing going on regarding funding the federal government :

  1. Both political parties are choosing to borrow money instead of raising taxes/cutting spending so that the money spent is the same as the revenue collected.

  2. Borrowing money means paying back more money in the future

  3. Therefore, refusing to raise taxes/cut spending now means that in the future, taxes will have to be raised **more ** than the tax increase that you would have to do now, or spending will have to be cut more than the spending cuts you would have to do now.

In short, due to #3, both political parties are full of idiots…or the voters are. They are taking an action that will ultimately result in more of the thing they are trying to avoid now.

I’ve heard the argument that “national finances are more complex than mere dinner table analogies”, “the national debt isn’t that bad”, “all the other Western nations are doing it”, “we’ll just cancel the national debt some day instead of paying it”, “if you owe so much money the bank will collapse if you refuse to pay, you own the bank”…but, fundamentally, I don’t see how any of that matters.

Not paying the national bills as we go means bigger bills in the future. Even if the Federal government decided to just cancel the debt in the future, the cost of doing that is probably larger than paying it. (because it would cause catastrophic disruptions to the U.S. economy, resulting in trillions in lost production over time)

No matter how complex the system may actually be, am I correct? The reason this is happening is that individual politicians in office right now won’t be in office when the national debt actually has to be paid, and so voters vote for politicians who give them perks now instead of the tax increases that are needed.

2

Yeah okay.

Not always in real terms. You might borrow money today and pay back with money worth less.

But yeah, normally this is true. We can go with it.

No.

This could be true, but it is not a mathematical necessity.

Tax revenue raised isn’t a pure function of the tax rate by itself. It’s also a function of the economic productivity of the economy as a whole. If the federal government claims 20% of all income from a trillion dollar economy, the revenue claimed is significantly less than 20% taxed from a 17 trillion dollar economy. As long as economic growth is robust enough, the tax rate would not have to be raised for the government to collect more than enough money to pay back both the principal from the debt and also the interest without any “tax increase” – meaning, a change in the rate of taxation.

The core mathematics of debt sustainability is about the growth rate exceeding the interest rate. Everything else is ornamentation. If your income increases faster than your debt load, then you should be okay.

People can be plenty stupid but not necessarily for this reason.

It can make sense to borrow now and pay more later if the borrowing now is invested in things like infrastructure improvements, which we might assume could lead to stronger growth. And for Keynesians who believe spending today might jump start the economy, they would believe a similar argument would hold for deficit spending in a time of depression.

You don’t have to agree with this to see the nature of the argument. It could be true. If they’re wrong, the stupidity here wouldn’t be any contradiction within the nature of their argument, but rather the belief that their argument applies sufficiently to the reality we currently inhabit.

National finances are more complex than dinner table analogies, and this thread is yet another demonstration why. Deficits can disappear even if tax rates remain unchanged, as long as growth is strong enough.

I think the US government spends too much. There are places where we could slow the growth rate of some of that spending. Your number three could be true in our present circumstances. My point here is that it is not necessarily true. An argument about the appropriate level of debt will have to be more complex.

3

Theoretically this is possible. But nobody has been able to make laffernomics work in the real world.

Here’s an example of the difficulty. Suppose you have some economic sector that produces a $100,000,000 a year and the government is taxing it at 25% for a revenue of $25,000,000 a year. Then some political group decides to “grow” that economic sector by lowering the tax rate and argues that the revenue will remain constant because the growth will compensate for the lower rate. So the tax rate is lowered to 20%.

But to maintain a revenue of $25,000,000 a year at a 20% tax rate, the sector has to produce $125,000,000 a year. And where did that increased production come from? Why would a $5,000,000 reduction in tax expenses produce a $25,000,000 increase in production?

4

That’s not “laffernomics” and it happens every time revenue increases when tax rates are not raised.

That’s a story you created, not something that always happens. I’m not even sure that it’s humanly possible to make a calculation year-to-year to figure out how often revenue increases without tax rates increasing, but your example doesn’t prove anything other than that you can create a hypothetical when it wouldn’t.

5

IMO, you are fundamentally correct. I don’t think we’ve passed a “point of no return” on debt size, but watch the future. If another Wall St. bailout is needed, that would hurt big-time.

It’s interesting to speculate whether U.S. would resort to currency devaluation, or treasury bond haircuts when the multi-trillions to be gained might make it seem worthwhile. Anyway, as you imply, voters, politicians, banking executives, and regulators are relatively uninterested in a distant future (say, beyond their own life expectancy).

The absolute federal debt level isn’t by itself unduly alarming yet, but the political shenanigans are almost despicable – dropping the world’s-best U.S. pristine credit rating off AAA. We can all wish that well-intentioned adults were placed in charge, as in the old days, before the advent of billion-dollar campaigns.

6

I totally disagree that either political party has “chosen” the current fiscal policies of this country, to the extent that “choose” means a preferred option. The policies are the result of compromises that neither party actually wants and the fact that our Constitution deliberately makes big policy decisions extremely difficult.

It’s like if you and your office decided to order lunch one day. One person wants pizza, one person wants wants steak and lobster, another wants Twinkies and beer, and the last wants a raw food diet. In the end, you go to Subway. Nobody actually wants Subway, but it is the least unacceptable option to everyone. But that’s a long way from saying that Subway was what anyone wanted.

ETA: and anyone who says that we’re just going to void our debt in the future doesn’t know a damn thing about this subject, and shouldn’t be listened to at all.

7

You’re calling “theoretical” something that happens most every year.

Even given a constant tax rate, tax revenues go up when the economy is larger. Tax revenues drop when the economy stalls. That’s not “theory”. It is fact. This fact can be understood with grade school arithmetic. Congress does not regularly make huge changes to the basic tax brackets, but total tax revenues will nevertheless vary with the size of the economy. Most of the year-to-year variance in tax receipts are about economic growth and fluctuations in the business cycle.

This is very simple.

Nowhere in my post did I reference Laffer or anything remotely resembling “laffernomics”.

The topic here is the basic mathematics of debt sustainability. I didn’t refer at all to the effects of the tax rate on economic growth, which is what the “Laffer curve” refers to.

8

No, you’re not correct.

There’s a very basic question you need to ask: where does money come from?

The answer is not quite as simple, but I’m going to simplify it for this particular question: Money comes from the government.

If money comes from the government, then the assumption that the money has to come from taxpayers makes no sense.

Taxpayers can’t make money. And they can’t pay taxes on money they don’t have. The government must first make the money, then distribute it to the taxpayers, before taxpayers can pay any tax.

So 1.) the taxes taxpayers pay comes from the government (and must come from the government); and 2.) the government can create whatever amount is needed to either allow taxpayers to pay off the debt, or to pay off the debt itself, directly.

FWIW, the government has already paid off a substantial amount of the official national debt, by lending to itself. In other words, part of the “national debt” is money the government owes itself.

In any other context, money you owe to yourself is not debt.

FWIW, the current interest rate on US debt is lower than the inflation rate, which means in real terms, the government saves money by borrowing.

9

This post is colossally wrong. How did you come up with this gem?

10

When did you get your last “government distribution” of money? Mine seem to have all been lost in the mail!

11

You’re both trying to change the issue. I’m not talking about a constant tax rate. I’m talking about lowering the tax rate.

If you want to leave the realm of theory, go ahead. Provide a real world example of a reduction in a tax rate that produced an increase in revenue.

12

The Kennedy tax cuts did lead to a decreased deficit.
That doesn’t mean such a thing would happen today, since the tax rates he cut were very high. But it is an example. This doesn’t make Laffer right, by the way.

13

While I do tilt as bit towards the deficit hawk side, this isn’t necessarily true.

As a thought experiment, think what would happen if the deficit was reduced by $40 billion per year by eliminating almost all federal spending on roads. In the short run, this would reduce the deficit. But it would actually increase future bills because roads and bridges allowed to deteriorate have to to be fixed eventually.

You could say that only an irresponsible government would lower the deficit that way. But, almost by definition, a government with separation of powers lacks responsibility. No one branch is responsible for anything. In this sense, I totally agree with #6*.

While running a deficit a lot of time is good, and having a sustainable national debt is good, I do have a problem with always running a deficit. When the economy is doing really well, that’s a good time to pay off some of the national debt. I voted for Al Gore, in part, because GW Bush was campaigning on a pledge of returning the surplus to the taxpayers at a time when we could have, without a self-imposed recession, been saving money for the next recession, for baby boomer medicare, and for, alas, the next war:

While current US deficits are at a sustainable level, my concern is that we aren’t in a good fiscal position to greatly increase the deficit the next time there is a recession.

  • However, I’m not sure I agree with the comment, at the end of #6, about sovereign default. While sovereign default is economically harmful, it does happen.
14

If you’re talking about lowering the tax rate, then you’re the one who is trying to change the issue.

The OP was not about lowering the tax rate. My first post in the thread was not about lowering the tax rate. In your “response” to my first post (using that word very loosely), you were the one to originally bring up the notion of Laffer and lowering the tax rate. This necessarily means that you were the one who changed the issue from what we were previously talking about. Laffer was not an issue in this thread before you personally brought him up.

I haven’t talked about any theory in this thread. There has been some grade school arithmetic. If you are having trouble here, then your problem is with basic multiplication, not with “theory”.

You have my sincere sympathies if you are unable to tell the difference between the two.

Why would I do that?

I have never claimed that a reduction in a tax rate would “produce an increase in revenue”. Why do you want me to produce a “real world example” of something I’ve never claimed? What would be the purpose of that?

15

The issue was constant tax rates. You changed it to lower tax rates. If you don’t think so, go back to Hellestal’s first post and quote the part where he mentioned lowering tax rates.

16

Also, regarding Laffer : you use 20% and 25% as example numbers. Those sound suspiciously like the mad rantings of some politician or another. The actual tax rate that provides peak revenue is most likely a lot higher than that. (one thing that confuses the issue is the book tax rate and the actual tax rate are two very different numbers. The official tax rate for American corporations is one of the highest in the world, but the amount actually paid is a fraction of that)

Nevertheless, I concede that if the U.S. tax rate were currently not at the peak of the laffer curve, and were actually to the right of that peak, lowering taxes would make sense. Similarly, if the tax rate were at the peak, then the logical action to take would be to cut spending only.

17

Jesus H. Christ, it was a freakin’ hypothetical to illustrate a principle. Use any number you like, but the point is if tax rates are constant, and the economy grows, the government takes in more revenue.

However, if you look at thing historically, overall tax rates for the economy as a whole has been about 20% of GDP +/- for the last 50 years or so. Specific rates for individuals at different income levels, corporations, capital gains, etc. has fluctuated, but if you just look at government revenue as percent of GDP, then 20% is a good number to use.

18

I largely agree with this. However, we do not know for certain if the current US deficit is sustainable. If the US is now in the top of the cyclical boom then a deficit of 2-3% is not sustainable imo. If the US is part way through a long economic boom then the current deficit is perhaps sustainable. We will only know the answer to this sometime in the future.

Im not even sure some debt needs to be paid off when the economy is doing well, but I think the Govt needs to be runing something like a balanced budget, and one preferably done under generally accepted accounting practices(something that is not done at the moment).

Its worth pointing out the current run-up of national debt is being accumulated in the economic cycle before US Gov’t finances come under massive pressure with an ageing population.

19

The Fed calls it “quantitative easing”. You can see a chart here.

The chart’s a little out-dated. It stops before 2014.

But it shows the Fed’s purchased $2 trillion in Treasuries and another $1.3 trillion in mortgage-backed securities, at that time. (It’s bought more since then.)

And no, you didn’t get a check.

But there’s a difference between what you would have been taxed, if the US had a balanced budget, and what you were actually taxed (because of the deficit).

You can think of that as your check, if you like.

20

I don’t want to “read about it” anywhere except in your post. Please explain how, per your own words “The government must first make the money, then distribute it to the taxpayers”. Emphasis added. If you want to cut and post the relevant parts of an article, that’s fine, but don’t tell me to go off and read a 15 page wikipedia article. Your link, btw, goes to a graph in that article, not to the article itself.