Last week, Moody’s downgraded the debt of the US government from the perfect AAA to AA1. In 2011, Standard and Poor’s similarly downgraded US debt. Fitch made the downgrade in 2023. That means all three of the major credit rating agencies see the US government as a less secure investment.
The lower credit rating will result in the US paying higher interest rates. This comes at a difficult time, since the current interest payments on the more than $36 trillion in debt, costs American taxpayers nearly $1 trillion annually.
We have this problem because in 59 of the last 63 years the federal government has spent more money than was collected in tax revenue. In the last five years the annual deficit has averaged more than $2 trillion and it looks like this year will be almost the same. How do we fix this?
The first thing to do when stuck in a deep hole, is simply to stop digging. So, we start by reducing and eventually eliminating the annual deficit.
In fiscal year 2025, the federal government will raise $5.1 trillion in tax revenue. Despite raising that huge sum, the government will spend $7 trillion, thus creating another huge deficit. To reduce the deficit, there are only two choices: raise more tax revenue or spend less.
Raising tax rates will not necessarily raise more revenue. In fact, if higher tax rates result in less economic activity, tax revenue may decline when rates are raised. President Clinton believed this to be true. He reasoned that if higher tax rates could reduce tax revenue, then lower tax rates could increase tax revenue.
In 1997, Clinton lowered the capital gains tax rate from 28% to 20%. Not only did tax revenue increase but economic growth accelerated to more than 4% annually and stayed at that level for four years. Clinton reduced government spending so that the following four years was the only time in modern history that the federal government had an annual budget surpluses.
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Raing tax revenue was accomplished by lowering tax rates.
Some in Congress currently want to raise tax rates on the highest income earners. This will reduce capital formation, slow economic growth and may not increase tax revenue.
Government spending must be dramatically reduced. Most members of Congress and most Americans agree with this. But, based on the reaction to the Trump administration’s spending reduction suggestions, cutting spending is nearly impossible.
The federal government employs about 2.4 million workers. Most are using antiquated systems to carry out their functions. By using modern technology, the functions of government could be adequately carried out with about half of the workforce. That would cut annual spending by $140 billion.
The problem is that the released workers have appealed to the court to save their jobs. In many cases the workers have prevailed, so the workers cannot be dismissed.
Then Trump, through his Department of Government Efficiency found hundreds of billions of dollars of waste, fraud and abuse. Trump tried to cut programs where this existed. Again, the court stopped him.
Almost daily we see elected officials writing that the cuts in programs will severely harm Americans. DOGE found there were millions of Americans collecting some benefits who were not entitled to them or who were physically and mentally able to provide for themselves.
Trump wants to eliminate fraud. He also wants to stop taxpayers from funding these able-bodied Americans’ healthcare. Yet, op-eds, in major media outlets, say that Trump wants to kick 8.6 million Americans off their (taxpayer funded) health insurance.
Annual budget deficits must be reduced and eventually eliminated. Raising tax rates will not solve the problem and may even worsen it. Cutting government spending is the answer.
Recall that the US went from the birth of a nation to the largest most prosperous economy in the world in about 150 years. \I believe this tremendous growth was accomplished by following four basic principles: encouraging individual freedom, encouraging individual responsibility, having low rates of taxation and having a limited role for government.
If we follow those principles today, we can ad growth to the economy, eliminate the deficit, eventually reduce the public debt and restore America’s top credit rating. The courts, our elected officials and the public must get on board.
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