It is possible our nation could have a real conversation about our national debt – if we demand it.
As I have said in an earlier column, at age 78 my wife’s and my primary focus in public policy discussion in the community, state and nation we are building for our grandchildren. I’m sure many readers share this perspective, even though they are currently worried about possible cuts in programs like Social Security, Medicare and veterans’ health care.
Our high and increasing national debt is a core threat to our grandchildren. As of Sept. 30, 2024, federal debt subject to the debt ceiling was $35.4 trillion, about 98% of our country’s total output of goods and services (GDP). National debt at or above 100% of GDP is a serious economic red flag.
High national debt creates two clear threats for our grandchildren. Increasing government interest costs will crowd out their ability to respond to their own future needs. In the Fiscal Year (FY) ending Sept. 30, 2024, interest was 12% of total spending. That cost is projected to snowball as our debt level increases.
The more immediate and acute threat is that the international financial markets would decide that our elected leaders are no longer committed to managing our national finances responsibly. Since World War II, U.S. Treasury debt has been considered the worldwide standard default risk-free debt investment against which all other forms of debt are rated and priced.
That has made the U.S. dollar the world’s reserve currency – many other countries hold their liquid assets in U.S. dollars. This status gives the United States critically important advantages in our commercial and political relationships around the world. We should not risk losing it.
Obviously, our national conversation will really be about tax and spending policy (typically called fiscal policy). The immediate central fiscal policy question is whether, and in what form, the Tax Cuts and Jobs Act of 2017 (TCJA) will be extended.
Continuing, and possibly expanding, the TCJA is clearly a very high, possibly the top, priority of Congressional Republicans. This appears to be especially true of Senate Republicans. Senator Chuck Grassley, in response to a question from Semafor reporter Joseph Zeballos-Roig on Jan. 31, 2024, about whether the Senate should approve an expanded child tax credit which had passed the House by an overwhelming bipartisan majority, stated, “Passing a tax bill that makes the President look good – mailing out checks before the election – means he could be re-elected, and then we won’t extend the 2017 tax cuts.†(Actually, there was nothing in the bill about mailing out checks.)
The Senate and House have agreed to extend the TCJA, and possibly add more tax cuts, through a complex legislative maneuver called Reconciliation, which would enable them to pass it by simple majority with no opportunity for debate. The bipartisan Committee for a Responsible Federal Budget (CRFB) reports that the Senate structure for Reconciliation would allow annual budget deficits to increase from $1.8 trillion in FY2024 to $3.5 trillion in 2035. They do this in part by changing the standard rules by which the budget impacts of proposed tax policy are measured.
It is true that tax policy is an important factor in personal and business financial decisions. At the time I had completed my military service and college education and was beginning my career in the early 1970s, there was a 10% Investment Tax Credit on purchases of machinery. If a farmer bought a new International Harvester 1066 for $20,000, he could reduce his income tax bill by $2,000. I remember going home with our young family to celebrate Thanksgiving with my parents. My dad gave me an opportunity to go out to the field and plow with his recently purchased 1066. I’m out there in my shirtsleeves in the heated cab thinking, “Wow! This is really a step up from fall plowing with the old Farmall M!†(Note: look out for old farm kids when they start talking about tractors.) The Investment Tax Credit helped sell a lot of tractors, and that helped create a lot of jobs in the Cedar Valley building tractors of varying shades of green.
It’s also true that the TCJA is a big, complicated law with a lot of parts. Some of the parts are good ideas. For example, the standard deduction was nearly doubled. That means a lot of people no longer need to keep track of itemized deductions. That’s common-sense simplification. The “big dollar†parts of TCJA are the personal and corporate tax rate reductions. Those could be “toned down†to give us more balanced policy.
Part of our conversation will need to focus on the question of whether our Federal income tax responsibility is excessive. My wife’s and my actual net cash income puts us in the highest-income 25% of Iowa households. Over the past four years our Federal income tax liability has averaged 5.2% of actual net cash income. We don’t consider that unreasonable.
The proposed Reconciliation bill includes “guidelines†related to reducing spending to offset the reduction in tax revenue (plus an increase in the debt ceiling). No actual budgets have been adopted. Any claims that we can bring deficits under control strictly by cutting spending are not realistic. About 65% of FY2024 spending was for Social Security, Medicare, Defense and Veterans and interest. Everything else totaled $2.35 trillion compared to the deficit of $1.83 trillion.
Tariffs, which would be a sales tax, might enter the conversation as a partial replacement for income taxes. (In FY2024 customs duties or tariffs were only 1.75% of total Federal revenue.) Tariffs may become a topic for a future column. However, right now tariff policy is changing daily.
A real honest conversation about our national debt will be tough. There will be no easy answers. Our elected leaders will avoid it if they possibly can. Regardless of our viewpoint, we need to join forces to block their escape!
