The total debt owed by the U.S. government to the public is nearly four-fifths the value of GDP, the dollar amount of all goods and services produced by our economy. According to the Congressional Budget Office, without any changes, that number could grow to 150 percent of GDP in the next 30 years.
The looming debt problem is not getting sufficient coverage in the press and has largely been ignored in the tax reform discussion. And that is problematic.
Tax reform is getting all the attention, given passage at the federal level. On one hand, that is promising. The U.S. tax system is overly complicated. On the other hand, ignoring the tax reforms’ impact on the public debt is imprudent.
The current package of tax reforms will reduce revenues to the government while spending continues to rise. As the sum of what the government owes on past and future spending deficits plus interest gets bigger and bigger, so does the debt.
Why is dealing with the debt perhaps more important than reforming the current tax code? What does more public debt mean for the average household and business?
As debt mounts relative to what the U.S. economy can produce, investors — especially those in international markets — will become increasingly nervous about buying more of our debt. As concerns grow over the U.S. government’s ability to spend responsibly and tax strategically, buyers of our government’s debt will require higher rates of interest. As interest rates paid by the federal government rise, so too will rates on mortgages, student loans and small-business loans.
This increase in borrowing costs means that it will become more expensive to expand businesses or start new ones. This could stall the already slow pace of economic activity. Any further slowing in economic growth translates directly into a reduced standard of living for future generations.
Slower economic growth also means less tax revenue accruing to the government. That will occur unless the lurking debt problem is addressed by increasing tax rates, broadening the tax base, or both. Unfortunately, these solutions to the debt problem also are likely to stunt economic growth.
This unpleasant scenario suggests that an ever-increasing government debt burden is a no-win situation for our long-term economic interest.
Given the projected size of U.S. debt and less than robust economic growth, it is unlikely the U.S. economy can grow its way out of this situation. If actually reducing the debt is doubtful, how can we at least slow the increase in the debt? Realistically, there are only three options.
1. Shrink government spending, or at least slow its growth.
2. Increase government revenues by raising tax rates and expanding the tax base.
3. Combine tax increases with spending reductions.
Reducing government expenditures is an enormous hurdle. The CBO’s projections of escalating government debt are based on two key factors: Our aging population and our increasing dependency on government-provided social programs like Social Security and Medicare. Liberals and conservatives alike have grown accustomed to and increasingly turn to the government providing more and more services.
Cutting the growth of such services like Medicare to a growing segment of the population is unlikely.
More tax revenue could be raised to offset such increased spending if there is a broadening of the tax base, loopholes are closed, and lower tax rates provide people with stronger incentives to invest and work more. Unfortunately, the current version of the tax reform package will only make the impending debt problem worse.
Poorly designed tax reform combined with our current portfolio of government-funded social programs will only exacerbate the burgeoning federal debt and the problems associated with it.
Rik Hafer and Tawni Hunt Ferrarini are economics professors at Lindenwood University. They can be reached at firstname.lastname@example.org and email@example.com.
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