Bad Ideas

The solution is simple, but that doesn’t mean it’s easy. When you already owe a lot of money, the first step toward recovery is not borrowing more money. Every year we wait to address this problem, the debt grows larger and the solution gets more expensive.

If we spend less than we collect in taxes, the difference can go towards paying down the debt. In 1999 and 2000 we had a budget surplus of about $360 billion, but since then we have borrowed about $7 trillion, or $7,000 billion.

That ability to pay down debt came from increased tax revenues, which in turn were the result of an expanding economy. But the massive size of the new debt threatens to slow our economic growth and make repayment much more difficult..

A Bad Idea: The Value Added Tax

Politicians are exploring new sources of revenue to close the federal budget deficit. One policy under consideration is the Value Added Tax. Read more…

Can We Tax Our Way Out of This?

Erskine Bowles – a chair of President Obama’s debt commission and former chief of staff to President Clinton – recently warned that Congress can’t tax its way out of a national debt crisis.

He’s right.

Some have suggested that we could just raise taxes on the richest Americans. But consider: the top 1 percent of income earners in the US already pays 40 percent of our country’s taxes. In fact, the top 1 percent currently pays more in taxes than the bottom 90 percent combined!

Attacking the deficit by “soaking the rich” would mean creating a top tax rate of 91 percent (pdf).  Using current tax brackets, 91 percent of any income a family earned over $372,000 a year would become the property of the federal government.

Although it seems counter-intuitive, a tax rate as high as 91 percent could decrease government revenue, as wealthy Americans choose to work less and find creative ways to bypass the top tax rate. Ask yourself: Would you work hard to earn an extra $10,000 if the big spenders in Congress  required you to give them 91 percent (all but $900) of it?

So obviously we would have to spread the tax burden to more people – many of whom pay no federal income tax today. For instance, the top tax rate for a family earning $50,000 a year would have to rise from 25 percent to 37.2 percent (pdf), which is more than the current rate for families making $400,000 a year.

What does all this mean?  Congress needs to stop spending its way to over $3.5 billion a day in new debt. No one has suggested these spending cuts will be easy; but unless we start soon, raising taxes won’t be one option – it will be the only option.