Commentary
The National Debt Stems from an Unwillingness to Tax the Wealthy, not Increased Spending
(Note: Footnotes, Tables and Graphics for this commentary are available in Chapter 6 of Falling Behind, which is posted at DrDavidDemers.com)
By David Demers*
Nothing is certain but death and taxes.
That idiom is only half true, of course.
Some Americans refuse to pay taxes. And some don't have to pay federal income taxes, because their incomes are too low or because they have high incomes and know how to reduce their tax burden through loans on business assets or through trust accounts.
But there's one other thing no citizen in America can escape.
Debt.
The United States government has carried debt since its inception, and today every American technically owes U.S. creditors $100,000.
In 1790, the government owed more than $71 million to France and other countries, which was borrowed to fight the Revolutionary War. I'm sure the founding fathers were a bit concerned about that debt.
But brace yourself.
Because the debt has grown at a massively fast rate since 1970, from $371 billion to $33.2 trillion in 2023, which is 89 times higher. Since 1980, the average annualized increase in the debt, not adjusted for inflation, has been about 8.7 percent. The growth was 5.4 percent adjusted for inflation.
If this pace of increase continues, the debt will be about $70 trillion in a decade, and each American will owe at least $200,000. At that time, the top 1 percent of the population will have an average assets of $27.3 million; the top 10 percent, $5.4 million; and the bottom 50 percent, only $18,513.
The National Debt and Tax Revenues
The national debt wouldn't be a problem if there was sufficient revenue to pay it off.
But tax revenues have not kept pace with the debt since 1981, and the gap is growing every year. In fact, the current debt is 6 to 7.5 times greater than tax revenues, depending upon whether one includes or excludes intragovernmental debt (debt that one department in the government owes to another).
Gaps between federal tax revenues and the national debt were much smaller from 1960 to 1980. The debt began growing during the early years of the Reagan administration (1981 to 1984), after Congress approved his first round of tax cuts. In 1983, the debt was twice as much as tax revenues ($1.4 trillion vs. $601 billion). In 1986, the debt was three times higher ($2.1 trillion vs. $769 billion).
The debt reached $4.1 trillion in 1992 and remained about three times higher than tax revenues through the year 2001, when the first set of George W. Bush tax cuts kicked in. After that, the debt-to-revenue ratio began a very steep increase, doubling twice, about every 10 years. In contrast, tax revenues have doubled only once in 20 years.
Today the government takes in about $4.4 trillion in tax revenues each year, which is $28.8 trillion less than the total $33.2 trillion debt.
Tax Revenues and Expenditures
Fiscal conservatives often argue that the national debt is growing because too much is being spent on welfare programs, public health care, and Social Security. To prove their case, they often cite raw numbers. There's nothing like the sound of "trillions of dollars" to bring out the fiscal conservative even in a progressive.
But government spending has increased much on an annualized (compounded) basis when the numbers are controlled for inflation.
From 1960 to 2023, total government expenditures increased from $92 billion to $6.1 trillion. That's a lot. But when you control for inflation (2023 dollars), the beginning number is $941 billion. Over the 63-year time period, that comes out to an annualized inflation-adjusted increase of just 3 percent per year. That even includes the $6.2 trillion spent combating the Great Recession and the COVID epidemic.
From 1980 to 2023, inflation-adjusted expenditures increased even less, about 2.3 percent, from $2.3 trillion to $6.1 trillion.
For comparison purposes, here are the annualized increases from 1970 to 2022 in the S&P 500 Index (7.5%) and home values (5.9%). The upshot is that politicians don't spend as much as many of us think.
The problem of the national debt isn't expenditures, its revenues. The federal government is not raising enough tax revenue, largely because it has doled out way too many tax breaks for the wealthy (see Chapters 1-5 in my book, Falling Behind: Why Wealth Gaps Are Preventing You and Half of America from Getting Ahead). The working-and middle-classes are paying 59 percent more in taxes than they did in the 1950s and the top 10 percent are paying about 50 percent less.
From 1960 to 2008, the difference between expenditures and revenues was relatively small, often less than 10 percent. Revenues began to fall short of expenditures during the Reagan years, and then exceeded outlays from 1998 to 2001, during the Clinton years.
During the Great Recession (2008-2010), the government boosted spending by about $3.6 trillion, and during the COVID pandemic (2020 - 2023), by $2.6 trillion. If this $6.2 trillion were removed from the data, spending and revenues would be much closer (only about 1.5 percent apart when controlling for inflation).
The national debt tracks closely with the economic gains of the wealthiest 10 percent. This is not surprising, because the tax cuts are largely responsible for the national debt.
The Debt-to-GDP Ratio
Economists often talk about the debt-to-GDP ratio (national debt ÷ gross national product) when trying to predict nation-state bankruptcies and economic downturns. The theory is that the greater the debt over productivity, the greater the chances of financial disaster.
Since 1960 the U.S. national debt and GDP have grown at a superlinear rate. The debt exceeded the GDP in 2013, but the high levels of debt since then do not appear to have adversely affect the real GDP, which continues to grow about 3 percent per year (above the rate of inflation).
In 2010, two economists argued in a widely cited article that GDP should begin to decline when the debt-to-GDP ratio goes above 90 percent. The United States reached that threshold in 2010, shortly after the article was published.
But the economic grim reaper never appeared.
In fact, the current U.S. ratio is now 121 percent (or 100% if internal government debt is excluded), and the economy in early 2024 was still growing at about a 3 percent pace along with low unemployment and an inflation rate less than 3.5 percent. The only problem is that interest rates remained high (above 7 percent for conventional mortgages).
Economist Philipp Heimberger reviewed the debt-GDP literature in 2022 and concluded that "there is little to no evidence for a universal threshold in the public debt-to-GDP ratio beyond which growth falls."
But he didn't argue there's no tipping point.
"[O]ur finding that there is a lack of robust evidence concerning a consistently negative effect of high public debt-to-GDP ratios does not imply that countries are able to sustain any level of public debt. Governments may still be confronted with country-specific unsustainable debt levels, in particular if interest payments increase ... ."
In 2023, about 11 percent of the national debt was spent paying off interest on the $33.2 trillion debt. This amounted to $658 billion net interest costs — an amount that was 38 percent than in 2022. Higher interest costs contributed to the increase. The debt payments represented 2.4 percent of gross domestic product (GDP).
The Peter G. Peterson Foundation estimates that the national debt will climb to 166 percent of GDP by the year 2054. The Wharton School of Business at the University of Pennsylvania is more pessimistic. It predicts the debt-to-GDP ratio will be more than 200 percent in twenty years.
"The U.S. debt held by the public cannot exceed about 200 percent of GDP even under today's generally favorable market conditions," it asserts.
The School warns that if the debt is not reduced, the United States will default on its loans, just like Iceland did in 2008 (see next chapter).
If current conditions continue, I estimate that the 200 percent threshold in the United States will be reached within about 10 years, by 2034.
My estimates assume that the debt will continue to increase as it has at an annualized rate of 7.7 percent and the GDP will increase at 3 percent. In 2034, the debt will be about $70 trillion, and the GDP $36.7 trillion.
My debt estimate, by the way, is much higher than the one offered in June 2024 by the Congressional Budget Office, which expects the debt to be $50 billion in 2034. The CBO figures include adjustments for the expiration of some of the Trump 2017 tax cuts.
But I'm betting that the next Congress and president won't allow that happen. Biden has promised to raise taxes on the wealthy (those making more than $400,000) if he re-elected in 2024, but he promised the same thing in 2020 and never followed through.
Unproofed drafts of selected chapters of Falling Behind are available online at
https://www.DrDavidDemers.com
Falling Behind will be published in 2025. Demers is author of two dozen books, including The Ivory Tower of Babel: Why the Social Sciences Are Failing to Live Up to Their Promises, and worked as a professor of communication and media sociology at Washington State University before retiring to spend more time writing books. He lives in Phoenix and can be reached at [email protected] or 623-363-4668.
The National Debt Stems from an Unwillingness to Tax the Wealthy, not Increased Spending
(Note: Footnotes, Tables and Graphics for this commentary are available in Chapter 6 of Falling Behind, which is posted at DrDavidDemers.com)
By David Demers*
Nothing is certain but death and taxes.
That idiom is only half true, of course.
Some Americans refuse to pay taxes. And some don't have to pay federal income taxes, because their incomes are too low or because they have high incomes and know how to reduce their tax burden through loans on business assets or through trust accounts.
But there's one other thing no citizen in America can escape.
Debt.
The United States government has carried debt since its inception, and today every American technically owes U.S. creditors $100,000.
In 1790, the government owed more than $71 million to France and other countries, which was borrowed to fight the Revolutionary War. I'm sure the founding fathers were a bit concerned about that debt.
But brace yourself.
Because the debt has grown at a massively fast rate since 1970, from $371 billion to $33.2 trillion in 2023, which is 89 times higher. Since 1980, the average annualized increase in the debt, not adjusted for inflation, has been about 8.7 percent. The growth was 5.4 percent adjusted for inflation.
If this pace of increase continues, the debt will be about $70 trillion in a decade, and each American will owe at least $200,000. At that time, the top 1 percent of the population will have an average assets of $27.3 million; the top 10 percent, $5.4 million; and the bottom 50 percent, only $18,513.
The National Debt and Tax Revenues
The national debt wouldn't be a problem if there was sufficient revenue to pay it off.
But tax revenues have not kept pace with the debt since 1981, and the gap is growing every year. In fact, the current debt is 6 to 7.5 times greater than tax revenues, depending upon whether one includes or excludes intragovernmental debt (debt that one department in the government owes to another).
Gaps between federal tax revenues and the national debt were much smaller from 1960 to 1980. The debt began growing during the early years of the Reagan administration (1981 to 1984), after Congress approved his first round of tax cuts. In 1983, the debt was twice as much as tax revenues ($1.4 trillion vs. $601 billion). In 1986, the debt was three times higher ($2.1 trillion vs. $769 billion).
The debt reached $4.1 trillion in 1992 and remained about three times higher than tax revenues through the year 2001, when the first set of George W. Bush tax cuts kicked in. After that, the debt-to-revenue ratio began a very steep increase, doubling twice, about every 10 years. In contrast, tax revenues have doubled only once in 20 years.
Today the government takes in about $4.4 trillion in tax revenues each year, which is $28.8 trillion less than the total $33.2 trillion debt.
Tax Revenues and Expenditures
Fiscal conservatives often argue that the national debt is growing because too much is being spent on welfare programs, public health care, and Social Security. To prove their case, they often cite raw numbers. There's nothing like the sound of "trillions of dollars" to bring out the fiscal conservative even in a progressive.
But government spending has increased much on an annualized (compounded) basis when the numbers are controlled for inflation.
From 1960 to 2023, total government expenditures increased from $92 billion to $6.1 trillion. That's a lot. But when you control for inflation (2023 dollars), the beginning number is $941 billion. Over the 63-year time period, that comes out to an annualized inflation-adjusted increase of just 3 percent per year. That even includes the $6.2 trillion spent combating the Great Recession and the COVID epidemic.
From 1980 to 2023, inflation-adjusted expenditures increased even less, about 2.3 percent, from $2.3 trillion to $6.1 trillion.
For comparison purposes, here are the annualized increases from 1970 to 2022 in the S&P 500 Index (7.5%) and home values (5.9%). The upshot is that politicians don't spend as much as many of us think.
The problem of the national debt isn't expenditures, its revenues. The federal government is not raising enough tax revenue, largely because it has doled out way too many tax breaks for the wealthy (see Chapters 1-5 in my book, Falling Behind: Why Wealth Gaps Are Preventing You and Half of America from Getting Ahead). The working-and middle-classes are paying 59 percent more in taxes than they did in the 1950s and the top 10 percent are paying about 50 percent less.
From 1960 to 2008, the difference between expenditures and revenues was relatively small, often less than 10 percent. Revenues began to fall short of expenditures during the Reagan years, and then exceeded outlays from 1998 to 2001, during the Clinton years.
During the Great Recession (2008-2010), the government boosted spending by about $3.6 trillion, and during the COVID pandemic (2020 - 2023), by $2.6 trillion. If this $6.2 trillion were removed from the data, spending and revenues would be much closer (only about 1.5 percent apart when controlling for inflation).
The national debt tracks closely with the economic gains of the wealthiest 10 percent. This is not surprising, because the tax cuts are largely responsible for the national debt.
The Debt-to-GDP Ratio
Economists often talk about the debt-to-GDP ratio (national debt ÷ gross national product) when trying to predict nation-state bankruptcies and economic downturns. The theory is that the greater the debt over productivity, the greater the chances of financial disaster.
Since 1960 the U.S. national debt and GDP have grown at a superlinear rate. The debt exceeded the GDP in 2013, but the high levels of debt since then do not appear to have adversely affect the real GDP, which continues to grow about 3 percent per year (above the rate of inflation).
In 2010, two economists argued in a widely cited article that GDP should begin to decline when the debt-to-GDP ratio goes above 90 percent. The United States reached that threshold in 2010, shortly after the article was published.
But the economic grim reaper never appeared.
In fact, the current U.S. ratio is now 121 percent (or 100% if internal government debt is excluded), and the economy in early 2024 was still growing at about a 3 percent pace along with low unemployment and an inflation rate less than 3.5 percent. The only problem is that interest rates remained high (above 7 percent for conventional mortgages).
Economist Philipp Heimberger reviewed the debt-GDP literature in 2022 and concluded that "there is little to no evidence for a universal threshold in the public debt-to-GDP ratio beyond which growth falls."
But he didn't argue there's no tipping point.
"[O]ur finding that there is a lack of robust evidence concerning a consistently negative effect of high public debt-to-GDP ratios does not imply that countries are able to sustain any level of public debt. Governments may still be confronted with country-specific unsustainable debt levels, in particular if interest payments increase ... ."
In 2023, about 11 percent of the national debt was spent paying off interest on the $33.2 trillion debt. This amounted to $658 billion net interest costs — an amount that was 38 percent than in 2022. Higher interest costs contributed to the increase. The debt payments represented 2.4 percent of gross domestic product (GDP).
The Peter G. Peterson Foundation estimates that the national debt will climb to 166 percent of GDP by the year 2054. The Wharton School of Business at the University of Pennsylvania is more pessimistic. It predicts the debt-to-GDP ratio will be more than 200 percent in twenty years.
"The U.S. debt held by the public cannot exceed about 200 percent of GDP even under today's generally favorable market conditions," it asserts.
The School warns that if the debt is not reduced, the United States will default on its loans, just like Iceland did in 2008 (see next chapter).
If current conditions continue, I estimate that the 200 percent threshold in the United States will be reached within about 10 years, by 2034.
My estimates assume that the debt will continue to increase as it has at an annualized rate of 7.7 percent and the GDP will increase at 3 percent. In 2034, the debt will be about $70 trillion, and the GDP $36.7 trillion.
My debt estimate, by the way, is much higher than the one offered in June 2024 by the Congressional Budget Office, which expects the debt to be $50 billion in 2034. The CBO figures include adjustments for the expiration of some of the Trump 2017 tax cuts.
But I'm betting that the next Congress and president won't allow that happen. Biden has promised to raise taxes on the wealthy (those making more than $400,000) if he re-elected in 2024, but he promised the same thing in 2020 and never followed through.
Unproofed drafts of selected chapters of Falling Behind are available online at
https://www.DrDavidDemers.com
Falling Behind will be published in 2025. Demers is author of two dozen books, including The Ivory Tower of Babel: Why the Social Sciences Are Failing to Live Up to Their Promises, and worked as a professor of communication and media sociology at Washington State University before retiring to spend more time writing books. He lives in Phoenix and can be reached at [email protected] or 623-363-4668.