Thoughts on the Debt Ceiling

by Don Fredrick, The Complete Obama Timeline, ©2023 

(Jun. 3, 2023) — The last few weeks have showcased a fascinating display of politicians and media talking heads making the most absurd attempts to justify the unjustifiable. They have twisted themselves more than Harry Houdini trying to get out of a straitjacket. The difference is that the price of admission to a Houdini escape performance was far less than $31 trillion — and Harry never forced anyone to buy a ticket. The usual comparison to the federal “debt ceiling” is requesting an increase in the limit on a credit card. The difference is that in the real world the bank can say no, while in Washington, D.C. the response is always a resounding yes — despite the theatrics surrounding the request and the valid arguments against it.
 
Both sides of the political aisle have, not surprisingly, declared victory. The Democrats claim they have “saved democracy” and ensured that Social Security payments will be issued on time, while the Republicans claim they have slashed spending. Both sides are lying. The nation has not been saved. Its demise has merely been postponed. No spending has been slashed. Anyone who believes federal spending will go down has perhaps been sharing drugs with Hunter Biden.
 
What the nation needs is a balanced budget. The Democrats, if forced to do that, would do so only by raising taxes. But they would cause a revolution if they raised taxes to a level high enough to offset spending with additional tax revenue. The Republicans claim they would balance the budget by reducing spending, but the most they ever do is propose minor trimming around the edges of the forest when entire trees should be felled. All the politicians did this week was kick the $31+ trillion debt can down the road, while calling for several more trillions to be added to that can.
 
Democrats call for higher taxes but ignore the fact that, regardless of the tax rates, the government can never collect taxes that exceed about 18 percent of Gross Domestic Product (GDP). That limit is not set in law, it is set in the minds of individuals and businesses in the form of a breaking point. When taxes are raised to too high a level, tax revenue actually declines because individuals and businesses are discouraged from investing and working. Raising taxes is typically counter-productive. Alternatively, lowering tax rates can result in increased tax revenue because investment and productivity are encouraged.
 
A simple example is a tax increase once imposed on yachts and luxury watercraft. Congress assumed that because only wealthy people bought yachts and expensive boats, boosting the tax on them would automatically and easily boost tax revenue. But the tax had the opposite effect. In response to the new tax, wealthy individuals simply chose to cancel orders for boats and yachts. The result was the lay-off of thousands of middle-class workers in the boat-building industry. A rational person with common sense might have predicted that outcome, but members of the House and Senate often act irrationally and show few signs of having common sense. Congress eventually saw the error of its ways, and the tax increase was reversed. The lesson Congress learned (but subsequently forgot) was that a low tax on something yields more tax revenue than a high tax on nothing.
 
For some reason, politicians and media “experts” seem to think that common sense applies only to average people dealing with decisions in the thousands of dollars, and not to “elites” dealing with decisions in the trillions of dollars. But common sense realities do not change just because amounts increase.
 
Take Sam as an example. Sam owns a six-flat, and his six tenants each pay rent of $1,500 per month. His monthly rental income is therefore $9,000. Sam wants to remodel his house and plans to pay for that project by raising the rent on his six apartments from $1,500 per unit to $2,000 per unit. His monthly income will then be $12,000, and the $3,000 increase will pay for his remodeling project.
 
Sam, thinking like a politician, simply assumes raising the rent will increase his monthly rental income by $3,000. But Sam neglects to realize that four of his six tenants cannot afford to pay $2,000 per month, and they decide to move. Sam now has only $8,000 per month in rental income, with four remaining tenants each agreeing to the increase to $2,000 per month. Not only has Sam’s total monthly income not gone up to $12,000, it has declined from $9,000 to $8,000.
 
Each of Sam’s tenants has a breaking point. For two of the six, that breaking point was exceeded with the demand for $2,000 per month in rent. For the U.S. economy as a whole, the breaking point is about 18 percent of GDP. That is, when corporate income taxes, individual income taxes, and capital gains taxes are increased in an effort to generate tax revenue that exceeds 18 percent of GDP, some businesses and individuals simply refuse to cooperate. They have reached their breaking point. No, they do not refuse to pay taxes (because they do not want to be prosecuted by the IRS and sent to jail), they simply become less productive. Some corporations decide not to expand their operations. Some investors decide not to risk money on new business ventures. Some employees choose to work less overtime. Some workers get laid off and go on welfare. Some workers quit and go on welfare.
 
Assume the capital gains tax is 20 percent. Sally considers selling $250,000 worth of stocks she owns to start a new business that would employ 20 workers. She bought the stock years earlier for $150,000. If she sells the stock for $250,000, she will have a gain of $100,000 and therefore have to pay a capital gains tax of $20,000, leaving her with $230,000 to start her new business.
 
But in an effort to increase tax revenue to cover the annual deficit, Congress increases the capital gains tax to 40 percent. That means Sally would have to pay a $40,000 tax on her $100,000 gain, rather than $20,000. After paying that tax, the sale of her $250,000 in stocks would leave her with $210,000. Sally realizes that $210,000 is not enough for her to start her new business, so she decides not to sell her stock. Without a sale, she has no gain. With no gain, she owes no capital gains tax — and 20 new jobs are not created.
 
Sally has common sense. She also has a breaking point. For her, the 40 percent tax rate exceeded her breaking point. But most of the members of the House and Senate (and the temporary occupant of the Oval Office) have no common sense. They seem unable to understand that 20 percent of something is more than 40 percent of nothing.
 
The politicians believe that raising taxes by 10 percent will automatically generate a 10 percent increase in total tax revenue. They are wrong. Depending on the breaking points of the businesses and individuals on whom the tax is imposed, it may generate only a 6 percent increase in tax revenue. Or 4 percent. Or zero percent. It may even result in a reduction in total tax revenue.
 
Then there are the politicians who claim to be cutting spending when all they are doing is slightly reducing a planned increase. Senator Lindsey “Goober” Graham (R-SC) might, for example, want a 10 percent increase in defense spending. He is unable to persuade his colleagues to accept that increase, but perhaps they would agree to a 4 percent increase. In the real world in which the average American lives, that would be a 4 percent increase in spending. But in Washington, D.C., that is called a 6 percent cut in spending.
 
Imagine trying to get away with that with your own family’s finances! Mike and Jane would like a new car. Mike wants a $50,000 SUV. Jane says, “We can’t afford that. How about that $40,000 minivan we looked at?” They agree to buy the minivan. Who in their right mind would call that purchase a $10,000 cut in spending? Answer: Practically every elected member of the House and Senate, and almost every fool in the White House.
 
Cutting federal spending (not just slowing down the rate of increase) should not be difficult. Congress could start by eliminating the Department of Education. That would save the taxpayers more than $80 billion per year, including almost $50 billion in various forms of financial assistance to students and the states. The Department of Education should not even exist, as it is in direct violation of the Tenth Amendment. Education is a local issue, and the federal government should not be in the business of taking tax dollars from some citizens to give or lend to students. In addition to eliminating the department, all student loan debt should be sold to the highest bidder. That would generate several hundred billion dollars in one-time revenue — as well as end the thoughts of “forgiving” any of that debt.
 
But we all know that spending will probably never be cut. With their support for nothing more than a minor slow-down of some spending increases, the Republicans are destroying the nation via slow-blood-letting. The Democrats prefer raising taxes, destroying the nation by going for the jugular.
 
The national debt stands at about $31 trillion. Congress and the President have now agreed to extend the debt ceiling for two years. They did not even agree to a specific maximum limit! They simply said, “We will spend as much as we want to spend for the next two years, whether we hit $33 trillion or $35 trillion or $40 trillion, and let the next Congress and President worry about it!” They will blissfully campaign for reelection throughout 2024, almost never challenged by the media about their irrational, risky, and dangerous actions. Most will get reelected.
 
Meanwhile, the national debt of $31+ trillion only represents the outstanding total of Treasury Bonds, Bills, and Notes. That is money owed to individuals, banks, investors, and nations that loaned money to the U.S. government. That $31+ trillion does not include unfunded liabilities, such as future Social Security benefits, Medicare benefits, Veterans’ benefits, and other promised future payments. Add those liabilities to the total, and the federal government probably has more than $150 trillion in debt, or about $454,000 for every man, woman, and child in the United States. But about half of the 330 million people in the country pay no taxes, so the per-person burden is more like $900,000. In all the media reports about the debt ceiling over the last few weeks, did anyone tell you that your portion of the debt is about $900,000? Of course not. Instead, Joe Biden called the agreement a victory for the American people, the Democrats called it a victory, and the Republicans called it a victory.
 
Not only was the debt ceiling agreement not a victory for the American people, it was another push toward total collapse of the government. It is impossible to raise taxes enough to cover the annual federal deficit, let alone enough to start paying down the total debt. A huge tax increase would either destroy the economy or cause a revolution. But without additional revenue, the only “solution” to the debt problem is to borrow more money or print more money. With rising interest rates, the government is approaching the point where annual interest will be the largest expense — exceeding Social Security payments or defense spending. Borrowing more money is therefore almost out of the question. All that is left is printing more money, also called expanding the money supply, also called inflating the money supply, also called pushing consumer prices through the roof.
 
Hold onto your hat… and your wallet.