“The average federal debt per household will soon exceed $140,000…Federal debt is now nine times greater than revenue legally available for debt service. The U.S. last maintained its debt at that high level in the 1790s.”, Bill White, Barrons

“I think it is quite possible that many individual Americans’ personal decisions with respect to spending beyond their means and incurrence of imprudent levels of debt has been influenced in recent decades by the example set by their own government. What do you think? Isn’t $140,000 in federal debt (per household) more than double the average household’s net worth? Maybe we need to start putting this debt on all of our personal credit reports? How in the world are we going to be able to pay this debt, especially as interest rates rise from their current historic lows? And our unsustainable federal debt is supposed to get a lot bigger as my generation of baby boomers retires. My generation and other older Americans (and the politicians we elected) have created a huge, unsustainable financial burden for the young and future generations. Let’s not leave this legacy, we need to fix this now!!! And to make matters worse, the U.S. Treasury irresponsibly funds most of its debt with very short-term maturities (and the Fed, which is part of the government has bought up most of the long-term bonds)…..so the government pays very low short-term interest’s rates today, when they should be going “long” given how low long-term rates are today (and the fact this debt will never be repaid). Treasuries’ funding strategy is risky and might someday create a funding crisis for the U.S., if too much matures all at once, during some future crisis. Yes, the Fed could print money and buy it, but think about the impact of that on the value of the dollar.”, Mike Perry, former Chairman and CEO, IndyMac Bank

EDITORIAL COMMENTARY

The National Dilemma

The debt is growing faster than the revenue that services it.

By

BILL WHITE

July 19, 2014 12:39 a.m. ET

For years Congressional leaders have used federal debt to fill the financial gap between their parties’ tax-and-spending policies. Most Republicans oppose the levels of taxes that would be required to pay for the current level of spending. Most Democrats don’t fear added taxation, but they seek more spending to fill their vision of the nation’s needs. Neither party has a claim to fiscal responsibility without resolving the conflicts between its own tax-and-spending commitments.

The federal tax system rests on two principal pillars: broad-based wage taxes dedicated to Social Security and Medicare, and progressive income taxes that largely fund everything else. Federal law and public opinion prevent the diversion of trust fund revenue. Only revenue apart from trust funds — accounted for in the federal-funds budget — can be used to service federal debt, including debt owed to trust funds.

Mired in Debt

The permanent hole in the federal-funds budget has become more obvious since the end of U.S. combat in Iraq and the reduction of most recession-related programs. According to the White House budget office, this fiscal year federal-funds spending on programs and interest on the debt will exceed federal-funds revenue by 40%. The average federal debt per household will soon exceed $140,000.

Income-tax revenue won’t rise fast enough to close the deficit. Because of international competition and the inherent capacity of multinational corporations to reinvest foreign earnings, corporate income-tax revenue has declined from 4% to 2% of national income since 1960. Personal income-tax revenue since 1960 has grown no faster than national income, with only slight variations above or below this year’s level — 8% of gross domestic product — despite numerous changes in tax laws and partisan power in Washington.

Meanwhile, the incomes of Americans with the skills and training to compete in the global economy have increased far faster than the rise in average income. In 2011, the 13.7 million taxpayers with adjusted gross income greater than $120,000 — the top 10% — paid 68% of all personal income-tax revenue; in 1980, the top 10% paid 49%. That shift in the burden of federal taxation does not mean, as Mitt Romney suggested, that the bottom 47% are “dependent on government.” It does signify that the federal-funds budget — covering a global security umbrella, most domestic programs, and all federal debt service — rests on a fairly narrow tax base.

A Distant Mirror

President Franklin D. Roosevelt confronted the challenge of a progressive tax with a narrow base at the beginning of his administration. In the 1920s, Treasury Secretary Andrew Mellon had persuaded Congress to lower the highest marginal personal income-tax rates and raise both the corporate tax rate and the standard exemption from personal income taxes. Corporations and 375,000 wealthy Americans paid for almost two-thirds of the federal operating budget by 1929. That highly progressive income taxation covered federal obligations — when combined with spending discipline and a strong economy. However, when income-tax revenue plummeted during the Great Depression, the federal government raised sales and excise taxes in order to maintain essential services and provide extraordinary relief. (One major source of fresh revenue was the tax on newly legal alcoholic beverages.) By 1939, income taxation paid for less than half of federal spending.

Roosevelt rejected setting Social Security pension benefits at a level that could require use of general revenue or debt. He saw relying on general revenue as “the same old dole under another name” and objected that it would be “dishonest to build up an accumulated deficit for…1980.”

Medicare originally was funded in large part with broad-based taxation. From its inception in 1967 through 2000, premiums and payroll contributions covered about 75% of its cost. In contrast, debt has financed much of the program’s growth after 2000. That use of debt added a hidden cost of compound interest to rising federal medical expenses. By 2012, dedicated tax revenue paid for only 55% of Medicare’s cost.

Many Democrats now resist broad-based wage taxation, as reflected in President Barack Obama’s repeated vow not to raise taxes for taxpayers earning less than $250,000 and his acceptance of the use of debt to finance a two-year reduction in payroll taxation to fight the recession.

The Democrats’ first president, Thomas Jefferson, also sought to concentrate taxation on businesses and wealthy Americans. But in pursuit of that outcome, he imposed strict limits on spending and used surpluses to pay down debt. When leaving the White House, Jefferson expressed hope that “once liberated by the discharge of the public debt…the farmer will see his government supported, his children educated, and the face of his country made a paradise by contributions of the rich alone.”

Making Ends Meet Means

A tax system based largely on the “contributions of the rich” may be desirable in the abstract, but it doesn’t pay for the level of spending now appropriated by Congress, much less the soaring costs of debt service and Medicare. Interest expense will rise sharply with higher interest rates and total debt. Meanwhile, Medicare costs will skyrocket. The population over 65 will increase from 40 million in 2010 to 80 million in 2030, and the number of those over 85 will triple.

Federal debt is now nine times greater than revenue legally available for debt service. The U.S. last maintained its debt at that high level in the 1790s.

In 2011, when calling on Congress to restore fiscal discipline, Obama wisely noted that “progressives have an obligation to show that the nation can afford the policies we espouse.” There is nothing progressive about federal spending that’s much higher than the revenue produced by the taxes that progressives embrace or that other Americans are willing to pay.

BILL WHITE is the author of America’s Fiscal Constitution: Its Triumph and Collapse(PublicAffairs, 2014). He is a former mayor of Houston and a former U.S. deputy secretary of energy.
E-mail: editors@barrons.com

 

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