Tag: Federal debt

The Limits of Taxing the Rich

Mary Pat Campbell

Link:https://manhattan.institute/article/the-limits-of-taxing-the-rich

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Sanders’s agenda is not limited to taxes on corporations and wealthy families. The campaign also proposed to partially finance Medicare-for-All through 4.6% of GDP in new tax revenues from broad-based payroll taxes and tax-preference eliminations (within health care). However, even if one uses the inflated revenue figure of 8.6% of GDP (4.0% from the wealthy and 4.6% from broad-based taxes), it still falls far short of financing Sanders’s spending promises. Sanders proposed $23 trillion in new taxes over the 2021–30 period, yet also proposed a $30 trillion Medicare-for-All plan, $30 trillion government job guarantee, $16 trillion climate initiative, and $11 trillion for free public college tuition, full student-loan forgiveness, Social Security expansion, housing, infrastructure, paid family leave, and K–12 education. That is $87 trillion in spending promises, on top of a baseline budget deficit that, at the time, was forecast at $13 trillion over the decade.[104] Even the rosiest revenue estimates of Sanders’s tax policies would cover only a small fraction of his spending promises (see Figure 9).

At the same time, Sanders has obfuscated the funding shortfall by: 1) regularly claiming that his tax policies can cover all his spending promises, even as official scores show otherwise; and 2) proposing most spending increases separately, in order to make each one appear individually affordable within his broader tax agenda.

Summary: Some progressives suggest that Bernie Sanders has identified extraordinary potential revenues from taxing the rich. However, his proposed tax increases on corporations and wealthy individuals show revenues of 4% of GDP—and that is before accounting for constitutional challenges and unrealistic tax rates that far exceed the consensus of revenue-maximizing rates. Given behavioral and economic responses, the total potential tax revenues are (at most) 2% of GDP, and possibly far less. Indeed, leading progressive tax officials assume plausible tax rates and revenues far below those of Sanders’s proposals. Even assuming Sanders’s full static revenue estimate and including his steep middle-class tax proposals would not come close to paying for his spending agenda. The contention that Sanders has unlocked an enormous tax-the-rich revenue source is false.

Author(s): Brian Riedl

Publication Date: 21 Sept 2023

Publication Site: Manhattan Institute

The Rich Aren’t Rich Enough to Balance the Federal Budget

Mary Pat Campbell

Link:https://www.wsj.com/articles/the-rich-arent-rich-enough-to-balance-the-federal-budget-with-tax-increases-60969410

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As budget deficits surge toward the stratosphere, Congress will soon have to get serious about savings proposals. Yet reforming Social Security and Medicare—the leading drivers of long-term deficits—remains a political nonstarter. Neither party is willing to raise middle-class taxes. And cutting defense and social spending would save at most $200 billion annually from deficits that are projected to approach $3 trillion by 2034.

That leaves one option: Tax the rich. It won’t be nearly enough.

There are a few excessive tax loopholes and undertaxed corporations that lawmakers could address. It’s farcical, however, to suggest that the tax-the-rich pot of gold is large enough to rein in our deficits and finance new spending programs. Seizing every dollar of income earned over $500,000 wouldn’t balance the budget. Liquidating every dollar of billionaire wealth would fund the federal government for only nine months.

In a study for the Manhattan Institute, I set upper-income tax rates at their revenue-maximizing level, while paring back tax loopholes and fighting tax evasion. As background, the Congressional Budget Office projects that our budget deficits—which currently exceed 7% of gross domestic project—will surpass 10% of GDP over the next three decades. My research shows that the “tax the rich” model would raise at most 2% of GDP in additional revenue over the long term.

Author(s): Brian Riedl

Publication Date: 22 Jan 2024

Publication Site: WSJ, op-ed

The Fed Is Very Concerned Over Spending and Interest on the National Debt

Mary Pat Campbell

Link: https://mishtalk.com/economics/the-fed-is-very-concerned-over-spending-and-interest-on-the-national-debt/

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  • The current setup is nothing like the situation following WWII. Don’t expect another baby boom.
  • Instead, expect a massive wave of boomer retirements (already started) that will pressure Medicare and Social Security.
  • Depending on the kindness of foreigners to increase demand for US treasuries is not exactly a great plan.
  • Artificial Intelligence (AI) will undoubtedly increase productivity. But that is not going to offset the willingness of Congress to spend more and more money on wars, defense, foreign aid, child tax credits, free education, and other free money handouts, while trying to be the world’s policeman.

Author(s): Mike Shedlock

Publication Date: 12 Feb 2024

Publication Site: Mish Talk

Is There a “Pecking Order Theory” for US Government Debt?

Mary Pat Campbell

Link: https://govmoneynews.com/bills-blog/f/is-there-a-pecking-order-theory-for-us-government-debt

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I got a great question from a finance student today, asking whether the “pecking order” theory of corporate capital structure could be applied to the government. OK, let’s think this out. Who comes first, in the pecking order?

Author(s): Bill Bergman

Publication Date: 6 Dec 2023

Publication Site: GovMoneyNews, Bill’s Blog

The Debt Crisis Is Getting Real

Mary Pat Campbell

Link: https://reason.com/2023/10/04/the-debt-crisis-is-getting-real/

Excerpt:

When Yglesias wrote that column for Vox in 2016, the federal government owed about $19 trillion. Today, it owes more than $33 trillion, and we just added another $2 trillion in a fiscal year with no major national emergencies.

In short, the federal government followed Yglesias’ advice. But it might be more accurate to say it went along with what was clearly a bipartisan consensus formed in the mid-2010s: that borrowing was cheap, debt was easy to afford, and deficit spending allowed everyone to enjoy “a better life” with none of the downsides of austerity.

Unfortunately, the downsides have arrived.

The yields on U.S. Treasury bonds are now hitting levels not seen in decades. The 10-year Treasury bond is nearing 5 percent, while the 20-year bond has already crossed that threshold—and some analysts expect higher yields to be coming, CNBC reported Tuesday.

Why does that matter? “We took out a mortgage thinking we’d be paying 2%, but now we’re paying 5%,” Marc Goldwein, director of policy at the Committee for a Responsible Federal Budget (CRFB) wrote on X (formerly known as Twitter) on Tuesday.

Unlike most mortgages, which have fixed interest rates, much of the U.S. government’s debt is tied up in short-term bonds which periodically “roll over” into new bonds with updated interest rates. As a result, higher interest rates mean higher interest payments—and those funds come directly out of the federal budget, leaving less revenue for everything else the government might aspire to do, whether funding welfare programs or buying more fighter jets.

“That debt, borrowed at low rates, is now being rolled over into Treasuries paying interest rates between 4.5 and 5.6 percent,” the CRFB explained last month. “Though borrowing seemed cheap during those periods, policymakers failed to account for rollover risk, and we are now facing the cost.”

Interest payments on the debt will be the fastest-growing part of the federal budget over the next three decades, according to the Congressional Budget Office’s (CBO) projections. In the shorter term, interest payments are set to triple by 2033, when they will cost an estimated $1.4 trillion—a total that will only grow higher if more unplanned borrowing takes place before then, or if interest rates rise higher than the CBO expects.

Author(s): Eric Boehm

Publication Date: 4 Oct 2023

Publication Site: Reason

Fitch Downgrades U.S. Credit Rating

Mary Pat Campbell

Link: https://www.wsj.com/articles/fitch-downgrades-u-s-credit-rating-56c73b89?mod=hp_lead_pos1

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Fitch Ratings downgraded the U.S. government’s credit rating weeks after President Biden and congressional Republicans came to the brink of a historic default, warning about the growing debt burden and political dysfunction in Washington.

The downgrade, the first by a major ratings firm in more than a decade, is evidence that increasingly frequent political skirmishes over the U.S. government’s finances are clouding the outlook for the $25 trillion global market for Treasurys. Fitch’s rating on the U.S. now stands at “AA+”, or one notch below the top “AAA” grade.

….

Few investors believe that Fitch’s downgrade will immediately challenge that role. Still, it is the first time a ratings firm lowered its headline assessment of the U.S. government’s propensity to pay its bills on time since Standard & Poor’s in 2011 lowered its rating one notch below the top grade. That decision followed another tense debt-ceiling standoff in Congress.

Moody’s, the other member of the three big U.S. ratings firms, continues to give the U.S. its strongest assessment.

Fitch said Tuesday that the downgrade reflects an “erosion of governance” in the U.S. relative to other top-tier economies over the last two decades.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said.

Author(s): Matt Grossman and Andrew Duehren

Publication Date: 1 Aug 2023

Publication Site: WSJ

Hello President Biden, the Ball Is In Your Court

Mary Pat Campbell

Link: https://mishtalk.com/economics/hello-president-biden-the-ball-is-in-your-court

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Key Provisions 

  • Claw back unspent Covid-19 funds.
  • Impose tougher work requirements for recipients of food stamps and other government aid.
  • Halt Biden’s plans to forgive up to $20,000 in student loans.
  • End many of the landmark renewable energy tax breaks Biden signed into law last year. It would tack on a sweeping Republican bill to boost oil, gas and coal production.

Hello Joe, the Ball is in Your Court

Republicans only had 4 votes to spare but with some last minute haggling, the bill passed 217-215. 

It wasn’t a pretty serve by McCarthy, but the ball cleared the net and landed in play.

The only way to get the ball back in the Republican court would be for the Senate to pass a measure or amend the House bill.

Author(s): Mike Shedlock

Publication Date: 8 May 2023

Publication Site: Mish Talk

The federal budget outlook

Mary Pat Campbell

Link: https://www.brookings.edu/research/the-federal-budget-outlook-2/

PDF of report: https://www.brookings.edu/wp-content/uploads/2023/03/20230313_TPC_Gale_FiscalOutlookFINAL.pdf

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The basic story is familiar. Low revenues coupled with rising outlays on health-related programs and Social Security drive permanent, rising primary deficits as a share of the economy. Net interest payments also rise substantially relative to GDP due to high pre-existing debt, rising primary deficits, and gradually increasing interest rates. Unified deficits and public debt rise accordingly.

Under current law for the next 10 years, the CBO’s projections imply that persistent primary deficits will average 3.0% of GDP. Net interest payments will rise from 2.4% of GDP currently to 3.6% in 2033, an all-time high. The unified deficit, and even the cyclically adjusted deficit, will exceed 7% of GDP at the end of decade. Debt will rise from 98% of GDP currently to 118% by 2033, another all-time high.

Over the following two decades, the projected trends are even less auspicious. Primary deficits rise further as spending on Social Security and health-related programs continue to grow faster than GDP and revenue growth remains anemic. The average nominal interest rate on government debt rises to exceed the nominal economic growth rate by 2046, setting off the possibility of explosive debt dynamics.  By 2053, relative to GDP, annual net interest payments exceed 7%, the unified deficit exceeds 11%, and the public debt stands at 195%. All these figures would be all-time highs (except for deficits during World War II and in the first two years of the COVID-19 pandemic) and would continue to grow after 2053.

Author(s): Alan J. Auerbach and William G. Gale

Publication Date: 14 Mar 2023

Publication Site: Brookings

Debtor Nation

Mary Pat Campbell

Link: https://reason.org/debtor-nation/

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Organizations incur long-term financial obligations in forms other than bonds and the U.S. federal government is no exception. Some common types of financial obligations include pension and retiree health care costs for veterans, civilian federal employees, and the general public (through Social Security and Medicare benefit commitments). Looking at the federal government’s balance sheet as of 2021, public holdings of U.S. Treasury securities make up less than one-quarter of total federal liabilities. Unfunded entitlements, like Medicare and Social Security, account for the most at 59% of obligations.

Overall federal obligations have now surpassed $300,000 per American. While substantial in their own right, the debt obligations of state and local governments across the country are dwarfed by the various categories of federal debt.

Author(s): Jordan Campbell, Marc Joffe

Publication Date: 16 May 2022

Publication Site: Reason

Why Interest Rates Could Drive a Debt Crisis

Mary Pat Campbell

Link:https://www.nationalreview.com/2022/02/why-interest-rates-could-drive-a-debt-crisis/

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The average interest rate paid by Washington on its debt has fallen from 8.4 percent to 1.5 percent over the past three decades. However, economic variables tend to fluctuate, and only a fool would assume that a current economic trend will last forever. In the past, economic forecasts and markets told us that high inflation and high unemployment cannot happen simultaneously, that the late-1990s tech-stock bubble wouldn’t burst, and that national housing prices can never fall. Just last year, the Federal Open Market Committee consistently underestimated current-year inflation by three full percentage points. Interest-rate forecasts have proven spectacularly wrong for 50 years.

But now, economic commentators assure us that soaring federal debt is affordable because interest rates will remain low forever.

By contrast, the Congressional Budget Office projects that rates will nudge up to 4.6 percent over three decades. That is easily possible. After all, a broad range of studies show that the projected 100 percent of GDP increase in federal debt over the next three decades should, by itself, add three percentage points to interest rates. Added federal debt over the past 15 years also put upward pressure on interest rates, but this was offset by low productivity, baby-boomer savings, and Federal Reserve policies that pushed rates downward. For interest rates to remain low, those offsetting factors would have to accelerate much further to counteract the three-percentage point effect of future debt.

Author(s): Brian Riedl

Publication Date: 4 Feb 2022

Publication Site: National Review

Opinion: The ‘interest rate comet’ is about to slam into the U.S. economy

Mary Pat Campbell

Link:https://www.cnbc.com/2022/01/27/opinion-the-interest-rate-comet-is-about-to-slam-into-the-us-economy.html

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According to the U.S. Treasury, in fiscal 2021, the amount of interest paid on the national debt was $562 billion including government transfers. The amount actually paid out to holders of U.S. securities was $413 billion.

That figure alone, which is over 20% of what we paid in income taxes in FY 2021, should be alarming when compared to other government expenditures.

Compare the $413 billion we pay in interest to holders of these securities to the annual budgets of other parts of the government. The State Department annual budget is “only” $35 billion and the Justice Department $39 billion.

….

Interest rates are still near an all-time low. According to the Monthly Treasury Statement, in 2001, interest paid on the national debt was an average of 5.4%, about 3½ times what it is now.

If we get back to that rate, which is far from inconceivable, interest on the debt would cost American taxpayers $1.4 trillion, based on our present level of national debt. That is twice the budget of the Defense Department.

Author(s): Peter Tanous

Publication Date: 27 Jan 2022

Publication Site: CNBC

McConnell Won’t Block Debt Ceiling Increase, Says He Wants Democrats To ‘Proudly Own It’

Mary Pat Campbell

Link:https://reason.com/2021/12/08/mcconnell-wont-block-debt-ceiling-increase-says-he-wants-democrats-to-proudly-own-it/

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Congressional showdowns over the debt limit are nothing new, but this time around there’s a unique wrinkle. The House approved a bill on Tuesday night with what was essentially a party-line vote that paves the way for Congress to avoid a possible default on the national debt in the coming weeks. Here’s the tricky part: “The measure would create a special pathway—to be used only once, before mid-January—for the Senate to raise the debt limit by a specific amount with a simple majority vote, allowing Democrats to steer clear of a filibuster or other procedural hurdles so that Republicans would have no means to block it,” The New York Times reports.

The upshot, assuming this deal holds up long enough to avert the December 15 deadline for raising the debt limit, is that there won’t be another showdown like this before the midterm elections next November.

Author(s):Eric Boehm

Publication Date:8 Dec 2021

Publication Site:Reason