Debt Ceiling Nonsense and What the Government Should Be Doing

With the debt ceiling approaching soon it seems as if seems as if politicians will have to figure out what to do regarding the financial state of America. The Democratic Party wants to cut spending on programs that don’t spend that much money while raising taxes on the most successful people in society. Republicans on the other hand want to cut more spending while not increasing taxes.

I would argue that not raising the debt ceiling would be a step in the right direction. If nothing gets done spending will have to be cut. The only thing that would have to be paid is the interest on the debt. The 14th Amendment required that the United States pay interest on the debt before anything else. According to the Treasury the interest on U.S. debt for 2011 will be over $385 billion. Also remember that the United States currently has an AAA (highest) credit rating. Standard & Poor’s and Moody’s who rate the credit of sovereign countries have threatened to downgrade the United States if they don’t pass the debt ceiling. People have been saying if we don’t pass the debt ceiling we will default on our debt. I am not sure how they can claim this when the interest on the debt is $385 billion and the Treasury last year took in $2.3 trillion (while giving $467 billion in refunds). However in 2010, the government spent $3.46 trillion. It doesn’t take a financial wizard to figure out that in 2010 we had a deficit of over $1 trillion. So the interest on the debt is around 16% of all of the income the government takes in. The largest item for the national budget is Social Security. In 2010, $695 billion was spent on Social Security benefits. The second largest item was the defense budget which was $664 billion. Unemployment and welfare benefits were $571 billion for 2010. What I never understood is why the government separates spending into mandatory and discretionary. As households know all spending is discretionary. I am really boggled when the media says we have to raise the debt ceiling. If people simply called their credit card and raised their credit limit every year the credit card company would soon cut off their credit.

The United States government is bringing in plenty of revenue however Congress decides to spend more than they take in. One no brainer would be to let people opt out of Social Security. This would decrease the future obligations to future retirees which will slow down spending. The same thing should be done for Medicare and Medicaid. Some other no brainers would be to abolish the Department of Health and Human Services, Department for Education, Department of Energy, Department of Agriculture, and Department of Labor. Getting the government out of many aspects of our lives will not only save money but increase productivity since these displaced workers will have to find jobs in the private sector. Eliminating these departments would save close to $200 billion. The United States in 1948 spent under $800 per person and by 2004 this number reached $4,300 (both adjusted for inflation).

Military spending could also be reduced. We have close to 78,000 troops in Europe and over 47,000 in East Asia. I am all for the country defending ourselves but do we really need all these troops in places that are relatively free and safe. I don’t see China or Japan mobilizing thousands of troops in countries all over the world.

On the revenue side it would make sense to go to a flat tax and get rid of all loopholes and deductions to make the tax system much simpler. Americans spend 6.1 billion hours each year just complying with the tax code. Not only do Americans spent time on the tax code, but also complying with more regulations every year. In 2009 alone 60,000 new pages of regulations were added. The cost for these regulations was $1.75 trillion. Moving to a flat tax will make the tax system easier and simpler however I have a feeling: tax attorneys, CPAs, and real estate agents would lobby against a flat tax. The current tax system creates so many inefficiencies and waste. I am all in favor of a tax return that can fit in on a postcard with easy to read print. Also lowering the tax rate of dividends and capital gains to 5-10% percent would allow more Americans to keep money in their pocket and attract investment from overseas. Since 54% of people are invested in the market in some way (either through 401k plans, mutual funds, or IRAs) a vast majority of people would see an increase in their dividends. Dividends are a double tax since corporations already pay taxes on their income and then shareholders have to pay taxes on the dividends when they receive them.

Many empires have collapsed over time. It is possible for America to collapse if we don’t start taking serious steps to get our fiscal house in order. Politicians are only doing what the people elected them to do. If we don’t make changes soon our country will no doubt start to collapse like a house of cards.