Imagine running your household. You earn money (income), spend on essentials (expenses), and sometimes need to borrow for bigger purchases (debt) that exceed your income or savings. The national debt is similar, but on a much larger scale, affecting the entire country. While it is not the same as the US has some other unique features that allow it to potentially borrow more, it acts in the same way.
What is it?
The National Debt is simply the total amount of money the US government owes. It accumulates whenever the government spends more than it collects in taxes and other revenue. It is like using a credit card – convenient in the short term, but the bill comes due eventually and like a credit card the Government must pay interest on the debt in the form of Interest payments, often referred to as Debt service.
Who manages it?
Several key players manage the National Debt:
The Treasury Department1: They issue debt instruments like Treasury bills, notes, and bonds, borrowing money from investors to raise money “credit” for the Government.
The Federal Reserve: They play a role in managing interest rates, which affect the cost of borrowing for the government. They set a key borrowing rate known as the Fed Funds rate at which other banks’ rates are set against. As interest rates rise, so does the expense of service the debt, much like credit card companies raising the interest rates for your credit.
Congress: They authorize the government to spend and borrow money, responsible for managing the debt. Congress holds the purse strings on spending by authorizing spending bills and setting the Debt limit with authorized Debt ceilings.
Who does what?
Several independent agencies track the National Debt:
Government Accountability Office (GAO): They audit the government’s financial statements and report on the debt.
Congressional Budget Office (CBO): They provide economic forecasts and analyze the impact of debt on the budget.
Bureau of the Fiscal Service: They manage the day-to-day operations of the national debt.
Executive (President of the United States): The President sets the Fiscal Policy, Priorities, and Plan for the budget.
Office of Management and Budget (OMB): They help prepare the President’s budget, manage the Execution once Congress has approved the budget, and manage the oversight and performance management of the budget.
How does it grow or shrink?
Debt grows when the government spends more than it takes in. This can happen through various scenarios:
Fiscal Policy: When the President’s Fiscal Policy spends (intentionally or unintentionally) more than the taxes and revenue collected.
Tax cuts: When taxes are lowered and not offset by the Economic growth from the tax cuts.
Increased spending: More money on programs like entitlements including Social Security and Medicare or discretionary items like national defense, infrastructure programs add to the debt.
Economic downturns: When the economy shrinks, tax revenue falls, and the government chooses to borrow to stimulate it instead of reducing spending.
Exogenous events: Events like the 2008 Financial Crisis, Wars, or the COVID Pandemic can lead to debt spending to address.
The debt shrinks when the government collects more revenue than it spends or through strategic debt payments. Many of these are possible but often not used as they can be politically risky.
Government Spending Cuts: The Government can reduce spending by cutting or reducing programs.
Increased Taxes: The Government can increase taxes, although the long-term effects are mixed potentially reducing long-term growth which also impacts taxes collected.
Economic Growth: While not shrinking the debt, as the Economy grows more taxes are collected. If expenses remain the same, growth will reduce the ratio of expenses to revenue, effectively shrinking the budget.
Where does it fit in with spending and policy?
Fiscal policy is set by the President and refers to how the government manages its spending and taxes. It is a balancing act: providing essential services while keeping the debt under control. Like household credit it must be balanced with the benefits of immediate spending versus the challenges of paying items back later knowing that for every dollar you put on credit you will be reducing your available money to spend because a portion of your income will now go to credit card fees.
“If you choose not to decide, you still have made a choice”
Freewill performed by Rush
Historical context
The National Debt started during the Revolutionary War to finance the fight for US Independence. Since then, it has fluctuated based on several factors like wars, economic recessions, and government priorities.
How is it authorized?
Congress authorizes the government to borrow money by passing legislation, setting limits on the amount of debt allowed, known as the Debt Ceiling. From time to time this limit must be authorized to expand the Debt Ceiling to enable more debt to pay government bills.
The Future?
The National Debt is a complex issue with no easy solutions. Balancing competing priorities, managing interest payments, and ensuring long-term economic stability are key challenges. While there is no magic bullet, responsible fiscal policy, public understanding, and informed debate are crucial for navigating the complexities of the National Debt. The debt burden and interest on the National Debt are very real and left unmanaged can lead to negative consequences to the Economy and our Country.
The US Economy, measured by its Gross Domestic Product (GDP), represents the total value of all goods and services produced within a year. However, looming over this economic output is the ever-growing shadow of National Debt, raising concerns about sustainability and future generations. This article delves into the comparison between these two figures, explores how recent events impacted them, and examines the challenges posed by a large National Debt exceeding the size of the US Economy.
The National Debt of the United States has been steadily climbing, driven by several factors including fiscal policy, increased spending, and economic downturns. The COVID pandemic significantly accelerated this trend, adding over $7 trillion to the debt, while the roots run deeper. The Great Recession of 2008 also played a major role, pushing the debt-to-GDP ratio above 60% for the first time since World War II. As of Valentines Day 2024, the US National Debt stands at a staggering $34.3 trillion, that’s 34 x 10(12), exceeding 125% of the country’s GDP1.
Inflationary Dance with Debt
This high debt burden intersects with another economic concern: inflation. Increased spending and money supply expansion are often cited as contributing factors to inflation. In 2023, the US experienced inflation rates not seen in decades, exceeding 9% at one point2. While complex and multifaceted, the correlation between debt, money supply, and inflation cannot be ignored3. As Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Growth in money supply does not automatically mean inflation, but if it outpaces productivity, inflation often follows.
“Only when the tide goes out do you discover who’s been swimming naked.” 4
Warren Buffet
Sustainability Concerns and Interest Bite
Beyond inflation, a ballooning debt raises concerns about its long-term impact. Servicing the debt consumes an increasingly larger portion of the federal budget, diverting resources from crucial areas. The interest on our debt in 2023 reached $659 billion dollars4, to put that in perspective there are less than 40 countries in the World whose entire economy is greater than the interest alone we are paying on our debt5. As interest rates rise, often seen during periods when the Federal Reserve is combatting inflation, interest payments balloon exacerbating the challenge of pay down the debt. Additionally, a high debt can weaken investor confidence, potentially leading to higher borrowing costs and hampering economic growth6.7
“I have yet to see a time when it made sense to bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
Warren Buffett
Balancing Act and Looking Ahead
Managing the national debt requires a delicate balancing act. Reducing spending can be politically unpopular, and raising taxes carries economic risks. Meanwhile, relying solely on economic growth for debt reduction is an uncertain strategy. Finding a sustainable path forward necessitates responsible fiscal policy (spending within our means) and bipartisan cooperation, both of which remain elusive in the current political climate.
However, as Warren Buffett has bullishly stated: “I have yet to see a time when it made sense to bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
While expressing confidence in the long-term potential of the US economy, acknowledging the need for responsible debt management remains crucial.
Taxation, often seen as unavoidable, is more an art form than a mere financial obligation. It is a delicate balance between funding government operations and not overburdening the taxpayers.
“The art of taxation is the art of plucking the goose so as to get the most feathers with the least hissing.” Jean-Baptiste Colbert
This concept was famously summed up by Jean-Baptiste Colbert, who knew that taxation was the art of collecting the most taxes while minimizing the complaints over taxation.1 This analogy is more relevant today than ever, especially when considering the U.S. tax system’s complexity and its relationship with citizens.
The challenge lies in the inherent tension between the need for the government to collect taxes to fund public services and the natural desire of individuals and businesses to minimize their tax liabilities. Tax policies must be designed to be fair, efficient, and effective, encouraging compliance while discouraging evasion and avoidance. This balance is precarious, and tipping too far in one direction can lead to dissatisfaction, economic distortion, or both.
The Challenge of Taxation
How to solve Unlimited Wants with Finite Means
Jean-Baptiste Colbert, serving as the Finance Minister under King Louis XIV of France, revolutionized the way we think about taxation.1 His philosophy emphasized the importance of a tax system that is as painless as possible for the taxpayer while still being effective in meeting the needs of the state. His approach underlines today’s tax policies, aiming for a system that extracts necessary resources without stifling economic growth or public contentment.
US Tax Code
The U.S. tax code, a labyrinth of rules and regulations, is a testament to the complexity and intricacy of modern taxation. It is akin to a vast, sprawling metropolis, where every street, building, and alleyway has been meticulously planned, yet can still confound those navigating it without a map. This complexity arises from the need to address a multitude of scenarios, ensuring fairness across diverse economic situations.
Taxation in the U.S. embodies a symbiotic relationship between the government and its citizens. As with the ebb and flow of a river, so goes our taxes. Over various periods of time we have expected our government to provide more or less services and that balance of what the government provides, and what individuals provide creates the basis for the Social Contract (See our article: Social Contract). It is a partnership where individuals and businesses give up some of their freedoms and liberties to live in a society fueled by their taxes that provide the public services everyone relies on, from roads and schools to national defense and social welfare programs. This relationship requires trust and transparency, where taxpayers comply with their obligations, believing in the effective use of their contributions.
The Art of Taxation
The “art” of taxation, therefore, lies in crafting policies that achieve the delicate balance of maximizing revenue without discouraging economic activity or provoking widespread discontent. It is about understanding the psychology of taxpayers, employing strategies that encourage voluntary compliance, and designing a tax system that is perceived by citizens as fair and just.
A Model used by economists called the Laffer Curve2 is a U-shaped curve that shows the relationship between tax rate and tax revenue. If you tax someone nothing and move the tax up to 1% people will continue to work and revenue will rise. As rates on taxes rise, revenue continues to rise until the rates reach a point where rates are too high. The curve begins to bend before plateauing and people begin actively avoiding paying taxes (through legal and illegal means). After it plateaus, revenue begins to drop and people are both actively avoiding taxes, and at a certain point dropping out of the workforce as it is no longer worthwhile. For example, if you were taxed at 100%, would you work? Obviously not, as there would be no reward for your labor, and the model reflects that knowing that people will stop working well before 100%.
The art of taxation is akin to weaving a complex tapestry, where each thread represents a different tax rule or policy, and the goal is to create a harmonious and functional whole. It requires a deep understanding of economics, sociology, and human psychology, like Colbert’s approach centuries ago, proving that while the tools and context may have evolved, the underlying principles of effective taxation remain timeless.
Every year, it’s the same frustrating story diving into tax season. Seriously, why can’t the IRS just sort it out for us? Given the rise of AI and tools like ChatGPT, do we really need to fill out endless forms and dig through receipts, especially since many are sent directly by Banks and Employers?
The IRS already knows everything there is to know about our finances, right? Plot twist: our tax system is a maze of deductions, credits, and blind spots where the IRS may not have all the data. Beside being our civic duty and mandated by law, doing our taxes has many perks and pitfalls.
So, what’s the deal with filing taxes? Are all these forms and the giant tax code really necessary? How much time and money are we spending on this, and what’s it costing the economy?
Do We Need to File?
Even though the IRS knows a lot about our financial lives, everyone’s situation is different. Filing taxes lets us tell our side of the story, like any extra money we made or tax breaks we should get which might not have been reported to the IRS.
Forms Galore
Most of us can get away with a 1040EZ, but for the rest of us the IRS has over 800 forms and schedules for every tax situation under the sun. Whether you’ve got a simple paycheck or a bunch of side hustles, there’s a form for that.
Tax Code
The Internal Revenue Code (“Tax Code”) is 6871 pages long, and approximately 75,000 pages including rules, regulations, and instructions2. No wonder tax season feels like a marathon, 75,000 pages lined up end to end is equivalent to the distance of a half marathon, and tax lawyers are expected to be familiar with ALL of it, and technically ignorance of it is no excuse for us either.
Time and Money
Americans spend over 6 billion hours (equivalent to 1 year of work for 3 million people) with a cost of about $34 billion10,11 every year just to file their taxes. To put that into perspective, it is estimated to cost $20 billion to end homelessness in the United States1, or give everyone under the poverty line 4 a $5000 car that could last them 6 years. Americans spent approximately $14 billion on software alone for tax preparation.11
Internal Revenue Service (IRS) Enforcement
The IRS spends approximately $12 billion a year and employs over 79,000 people to process taxes and make sure everyone’s playing by the rules.5
The Economy Feels It, Too
The tax process takes a lot of productive capacity from the country and costs the economy a significant amount of output, around 0.8% to 1% of our National Output12 (Gross Domestic Product or GDP).
Jobs, Jobs, Jobs
The tax prep world is huge, the AICPA estimates there are over 2 million tax professionals in the US (public accounting, private industry, government).6 We’re talking hundreds of thousands of jobs for tax lawyers, consultants, accountants, administration, and techies making tax software.7
Is There A Better Way
A lot could be done to greatly simplify our tax code and reduce or eliminate many of the arcane sections, and in lieu of that make preparation easier. America is home to brilliant technology that brings the knowledge and history of the known universe to our fingertips with tools that mimic human intelligence, and yet here we are. Several countries including Denmark, Sweden, Estonia, and South Korea have automated pre-filled tax submission where filers only need to review and submit. The IRS just rolled out Free File9 to allow online guided tax filing. While not fully pre filled or automated, and not as comprehensive as commercial software it is a step in the right direction. While this may not be of comfort as you file your taxes now, the march of improvement is never ending and eventually we’ll figure this out.
Summary
So, yes our tax code is overly complicated, our systems are not as easy or automated as they could be, and filing taxes feels like a chore we could do without, but until we see these improvements it is our Civic Duty. Taxes are a necessary component to support the services, freedoms and protections we enjoy. As Oliver Wendell Holmes succinctly said, “Taxes are the price we pay for a civilized society.”
Imagine, you negotiate a raise at work, feeling a sigh of relief knowing your pay will finally outpace your expenses. But wait, the grocery bill is steeper, gas prices are soaring, and now even your morning coffee feels like a luxury. Did your raise suddenly lose its bite? Welcome to the hidden world of inflation, where prices silently rise, eroding your purchasing power like a phantom tax.
What is Inflation?
Inflation, simply put, is the sustained increase in the general price level of goods and services in an economy, often measured by the Consumer Price Index (CPI)1. Since the start of the pandemic in 2020, the CPI has climbed dramatically, not just reaching a peak of 9.1%2 in June 2022, but cumulatively increasing by over 18% between January 2020 and December 2023.3 This means a product costing $100 in 2020 might set you back $118 today – a noticeable difference that adds up quickly across all your purchases.
But what fuels this price rise? One significant factor is the money supply, which refers to the total amount of money circulating in an economy. Governments can increase the money supply by “printing money,” essentially injecting new cash into the system. This might sound like a quick fix, but it can lead to devaluation of existing currency if the increase outpaces genuine economic growth.
Role of Federal Reserve
In the case of the US, the Federal Reserve (Fed), the central bank of the US, plays a significant role in this process. Since the start of the pandemic, the Fed increased the money supply by a staggering 40%4, aiming to stimulate the economy during the downturn. While this measure may have achieved its immediate goal, it also contributed to the current inflationary pressures.
Risks of Inflation
The risks of excessive money printing are not merely theoretical. Countries like Venezuela, Zimbabwe, and the Weimar Republic in Germany serve as stark reminders of the devastating consequences of runaway inflation.5The US is not close to the conditions in which these countries experienced HyperInflation, and has unique economic advantages over these countries, however we are not immune. When Money Supply grows faster than Economic Output, inflation follows.6 The massive injection of money by the Fed increases those risks.7 Ratings agency Fitch recently downgraded the US credit rating, meaning they perceive higher risks investing in the US dollar, yet it remains the most stable currency globally.8
Is Inflation a Tax?
So, is inflation a tax? In a traditional sense a tax is an obligatory contribution placed directly on the population, so the simple answer is no. However, “to tax” meaning “to burden, or put strain upon” certainly applies and therefore in a broader sense many argue it is. Governments have two ways to raise money, they can either Raise Taxes or Print Money. Raising taxes is unpopular and for elected officials this is politically risky to have an angry constituent, but Printing Money is indirect, nobody sees it coming out of their pocket but it comes with inflation that is no less real. This “hidden tax” silently reduces the value of your savings and income, impacting everyone from retirees living on fixed budgets to families struggling to afford necessities and whether you are wealthy or poor nobody is immune. Since 2020, wage growth has lagged behind inflation, meaning your paycheck buys less even if the number on it is higher.
Regardless of your perspective, the impact of inflation is undeniable and during periods of high rapid inflation the average American can really see it and feel it. It disproportionately affects lower-income individuals who spend a larger percentage of their income on essentials. While some asset holders might initially gain as investment prices rise, inflation can erode the value of their savings in the long run.
What do you think? Does inflation feel like a stealthy tax impacting your daily life? Do you believe policymakers should prioritize other options over printing money, even if it means less popular decisions like raising taxes?
Ultimately, understanding inflation empowers us to make informed decisions. By keeping the conversation open and questioning the underlying forces at play, we can work towards a more stable and prosperous economic future for all.
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
