What can the “Fiscal Cliff” tell us about whether we will ever pay off the national debt?
The “Fiscal Cliff”is the combination of the end of tax cuts resulting in higher income tax rates at the same time government spending is severely ratcheted down. And while most people looking at the Fiscal Cliff are focusing on it’s impact on our economy, what about the national debt?
Our national debt is approximately $15 trillion. Our population is approximately 300 million. That means there is approximately $50,000 in debt for each person (man, woman and child). We tend to think about the Bush tax cuts, but what about the Obama tax cuts? They also factor into the damage we could face at the fiscal cliff. Obama lowered employee payroll taxes by 2% a year for 2 years to help stimulate the economy. With an average salary around $50,000 those tax cuts average $1,000 per worker. Let’s say instead of 2%, we look at $2,000. Without factoring in interest, if we want to pay off the national debt in 25 years we would need to increase federal taxes by $2,000 a year per person. Now a lot of people don’t pay taxes. Some are children. Some are adults not making enough. Some, unfortunate to just be living on their Social Security checks and nothing else are exempt from paying income tax. So let’s shift the $2,000 per person from those not paying taxes to those making over $250,000 (per couple). This way we can keep the $2,000 per year per person for everyone falling into the middle class. 25 years. But that is without any interest. Fortunately, interest rates are at a historic low (the lowest in almost 40 years). If we assume a 1% interest rate on the national debt, each person would need to pay $500 a year in interest charges. So only $1500 would go towards lowering the debt. Now instead of 25 years, we get 33 years.
That’s 33 years of paying an extra $2,000 per person in income tax – without any additional benefit.
Not an extra dollar spent on defense spending (so no increase in security). Not an extra dollar spent on health care, either for low income (Medicaid) or elderly (Medicare) or nursing home assistance (Medicaid). Not an extra dollar spent on Social Security Cost of Living Adjustments (COLA). Not an extra dollar spent on food subsidies either to farmers or end users (food stamps). Not an extra dollar spent on food safety testing. Not an extra dollar spent on any federal assistance (disaster relief), research, pensions, law enforcement (FBI, CIA, homeland security), or infrastructure (no increase in federal building of roads, dams, bridges). Whatever benefit you like and support, whatever pet project you favor – not an extra dollar for it. Now what happens when interest rates go back up to say just 3%. Understand 3% is still pretty low historically. Before 2009, only for a portion of 2003 have 30 year Treasury Bonds (which have the highest interest rates) been at 3%. At all times before 2009 (and about half the time from 2009 to now), interest rates have been above 3%. Now what would happen?
First, anyone with bond funds in their 401k, 403b or IRA accounts would see losses in their account values.
Second, instead of $500 of that $2,000 going toward interest, now $1500 would be for interest. Which means everyone would pay an extra $2,000 a year in taxes to pay off the national debt (without increasing the debt limit) so that we could pay off the debt in 100 years (not 33). If we want to pay it off within 33 years, we would have to raise that tax increase to $3,000 a year. Would people who just saw their retirement accounts, their nest egg, take a deep dive be eager to hand over another $1,000 in income tax each year on top of $2,000 more than they pay now?
So are we really ever going to pay off the national debt?