Addressing the National Debt

The national yearly deficits and long term debt in the United States is increasingly in the focus. People, regardless of political persuasion, generally recognize our current path is unsustainable. We got here through increased spending by both parties on programs and wars, as well as through substantial tax cuts for the wealthy.

The question is what do we do about it? While one could write volumes on ideas to deal with the national debt, there are three key areas that I feel deserve more debate:

1) Reforming our approach to assistance to the working class and those in poverty

2) Reform defense spending

3) A very small national sales tax dedicated to debt service

Reform Assistance

Currently, many welfare programs exist. Increasingly there is a move toward programs that are tied to work. However, many cash assistance programs still exist (and need to exist) for the sustenance of those in poverty. However, over the next two decades, we should gradually reduce cash assistance programs to a minimally necessary level and increase assistance programs that are tied to work, creating a truly American brand of assistance for the low income.

Such programs may include more strict work requirements to existing programs and expansion of temporary unemployment benefits. But my favorite programs are those tax incentives like the Earned Income Tax Credit which provide tax credits to low income workers when they file their taxes. These programs have been shown to be moderately effective in reducing poverty. Often, jobs do not pay enough to compensate someone for the added expenses that result from the job: child care, transportation, etc. The Earned Income Tax Credit helps address this problem to some limited extent.

If we’re expanding tax incentives for employment while reducing cash assistance, how are we really reducing the deficits? For one thing, the expansion of tax incentives for employment would not necessarily equal the reduction in cash assistance. But tax incentives for employment, to the extent they encourage low income people to remain employed and incentivize others to join the work force, also add to a limited degree to the nation’s economic productivity and tax base.

Sales Tax

In terms of a sales tax, a tax of 1% could have serious implications for our national debt over time. In 2009, our national private consumption was $10.1 trillion. A 1% sales tax would provide approximately $100 billion annually toward our national debt. While there are many limitations to this figure and it is arguably oversimplified, it gives a picture of the significant effect it would have on the national debt.

Such a policy would show a serious commitment to becoming debt free and it would come at little cost. The tax on a transaction of $100 would be a mere $1. Any such policy should come with a sunset clause of, say, 10 years to ensure the tax is a temporary solution to a temporary issue. As well, such a policy should not become a substitute for current payments on the debt nor fiscal responsibility in general as this solution certainly would not completely address the national debt crisis alone.

A small temporary sales tax increase to improve our fiscal situation is sure to come with great controversy. I am not even sure that I feel it is the best solution as other revenue measures such as income taxes could be adjusted (including the rollback of the Bush tax cuts for the wealthy). But it certainly deserves debate as it is a fairly harmless and temporary means of beginning to address our existing national debt crisis.

Defense Spending

Aside from billions of dollars disappearing here or there because of lack of responsibility and oversight, there are many problems that plague defense spending. First, there is a serious lack of accountability on prices and cost overruns. Even Defense Secretary Gates who has served under Bush and Obama has recognized the need for greater accountability. Second, there is the issue of producing weapons, programs, and systems that are outdated or unwanted by the Pentagon. One recent example is the F-22 jet. Spending on outdated or unwanted items is difficult to cut because often powerful members of both parties have manufacturing plants in their districts. Third, a general restructuring is necessary to modernize the military for current and future warfare. There is a need for cuts, particularly in the enormous Pentagon bureaucracy. The need for such cuts and an overall redesign has been recognized in recent years by both Rumsfeld and Gates.

It amazes me that those who often consider themselves to be fiscally conservative/responsible often reject out of hand accountability when it comes to defense spending.

Do you have your own ideas on how to address the deficits and long term debt? Leave a comment below!

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5 Responses to Addressing the National Debt

  1. Michael says:

    First!

    I actually like your idea of welfare reforms that simultaneously grow the economy while providing assistance rather than simply spend money. I was flabbergasted that you didn’t say a single word about entitlements, since the overwhelming majority of projected debt is due to entitlement insolvency. And I was disappointed, but not surprised, that you blamed tax cuts for reduced government revenue even though the federal government took in record revenue following what became known as the Bush tax cuts. Look at this pretty table:

    http://www.heritage.org/budgetchartbook/growth-federal-spending-revenue

    As you can see, revenue is responsive to economic conditions, and spending is not. The idea that higher tax rates always yield higher revenue, and never the other way around, is a tremendous fallacy. I’m sure you’re familiar with the idea of taking a smaller slice from a bigger pie, which is good for everyone – including government.

  2. Troy says:

    “While one could write volumes on ideas to deal with the national debt, there are three key areas that I feel deserve more debate.”

    I focused intentionally on three areas that I feel are often neglected in the debate about our financial situation. I did this partly in effort to expand discussion beyond the usual talking points, thereby creating a more diverse and thoughtful discussion. But I also did this due to space and time limitations.

    Thanks for adding your 2 cents.

  3. Jennifer says:

    I appreciate the links to outside resources and data!

    Thanks for the blog!

  4. […] and force Republicans to put their votes where their mouth is. (As noted in my first post “Addressing the National Debt,” former Defense Secretary Rumsfeld and current Defense Secretary Gates have called for […]

  5. […] like these (and wind farms) can begin coast-to-coast. If offset by cuts elsewhere in the budget (waste in Defense is a good starting point), this would be a clear […]

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