The Problem

“The graying of America means that the portion of people who are of prime working age is getting smaller, with fewer workers available to fill open positions, ultimately reducing productivity, straining the federal budget, and slowing economic growth.” – Antonioli, J., & Malde, J. (2023)  

“…between inflation and the growing federal debt, interest payments on that debt are gobbling up a larger share of federal revenue every year. Per the Congressional Budget Office (CBO), annual net interest costs would total $663 billion in 2023, and by 2053 interest costs on that debt are projected to be nearly three times the amount the federal government has historically spent on R&D, infrastructure, and education combined.” - Exploring the Problem Space: How to Gradually Lower the Federal Debt, Part I

“Rising interest payments [on the federal debt] can crowd out other priorities in the federal budget and lead to a cycle of higher deficits, growing debt, and even more interest payments in the future…As interest costs rise, so too will the gap between federal spending and revenues. In fact, CBO [Congressional Budget Office] projects that interest costs alone will account for 38 percent of federal revenues by 2053, significantly exceeding the level of 10 percent recorded in 2022.” - Peter G. Peterson Foundation

“Blackrock Inc. CEO Larry Fink is one person expressing dismay at the pace U.S. government debt is rising, saying that  ‘the situation is more urgent than I can ever remember’ and that ‘there's a bad scenario where the American economy starts looking like Japan's in the late 1990s and early 2000s, when debt exceeded GDP [gross domestic product] and led to periods of austerity and stagnation.’ For context, the U.S. debt is rising by $1 trillion every 100 days, and neither leading presidential candidate seems focused on tackling the issue this election cycle. ‘Neither is talking about fiscal rectitude and [Trump] is actually talking about extending tax cuts,’ said David Page, head of macroeconomic research at Axa Investment Managers”- Caleb Naysmith/Yahoo!Finance, April 3, 2024

What to do?

Well, obviously: raise federal taxes, cut federal spending, grow the economy, and persuade voters to go along with a serious plan to reduce the federal debt. The following posts elaborate:

New Information has come to light

In How to Gradually Lower the Federal Debt, Part I: Increase Tax Revenue, I suggested the feds could raise $500 Billion in tax revenue by increasing tax rates on households in the top 40% of the US income distribution. That was pretty much a back-of-the -envelope calculation. However, the IRS has recently released detailed tax data for 2021 and now I can be a bit more rigorous in my calculations. First, some pertinent figures from the IRS:

Notice that 89% of federal income tax in 2021 came from the top 25% of US households. That’s the group I’d raise taxes on. A tax increase would sting but not devastate these households. Also, as much as I’d like to see a broader tax base in the US, raising taxes on less affluent households wouldn’t be feasible politically. The majority of voters would just say no.

Here’s a scenario for how to come up with $500 billion a year (ignoring inflation for now) to help pay down the federal debt:

Seems harsh…but we’re in a difficult situation.