Can The US Tax Its Way To Fiscal Health? – OpEd


The U.S. national debt has risen to over $34.52 trillion. That’s $3.06 trillion higher than it was a year earlier. The U.S. government’s total outstanding public debt has increased at an average of $8.36 billion per day since May 16, 2023.

With interest rates rising from historic lows during President Biden’s term in office, the interest the federal government pays to its creditors has become substantial. Since February 2024, the amount of gross interest the U.S. government pays over a rolling 12-month period has exceeded $1 trillion. It has more than doubled since January 2021 and now exceeds the annual budget for every line item of government spending except for Social Security. Interest on the national debt is the fastest-growing category of government spending.

Even the Biden administration is taken aback by the nation’s deteriorating fiscal condition caused by excessive spending. But rather than rein in its spending, the administration calls for higher taxes to reduce its budget deficits. Can the U.S. tax its way to fiscal health?

According to Bruce Thompson, a former assistant secretary of the Treasury for legislative affairs and longtime director of government relations for Merrill Lynch, the answer is no. In a recent op-ed, he writes about the results of a recent study that considered the Biden administration’s bid to hike taxes and found it wanting:

Treasury Secretary Yellen is suddenly concerned about deficits, telling a congressional committee the U.S. “needs significant steps” to reduce them. The Secretary was testifying in support of the Biden budget, and was urging Congress to pare deficit financing by raising tax rates on individuals and corporations.

But a new Penn Wharton analysis of budget reduction options shows that higher individual and corporate tax rates are the least effective way to reduce our long term debt and the most harmful option to economic growth.

The Penn Wharton Budget Model analyzed three different policy approaches to reduce our fiscal imbalance, and the results are striking and definitive. The model looked at the effects of various tax increases and spending cuts, estimating their impact on economic growth, capital investment, wages, and debt.

The results of the study are clear. Trying to reduce the deficit by raising tax rates on individuals and corporations would do the most damage to the economy and do little to reduce the debt.

A bad prognosis

Here’s the Penn Wharton analysts’ assessment of the Biden administration approach, which it called “Bundle 1”: 

If enacted in 2025, Table 1 shows that Bundle 1 would generate net revenues (deficit reduction) of $3.7 trillion over the 10-year budget window and $16 trillion over the 2025-2054 period on a conventional basis, that is, before dynamic feedback effects.

Table 2 shows that the macroeconomic performance would differ very little over the next 30 years from current law, as GDP, the capital stock, hours worked, and average wages in 2054 are similar to the current-law baseline. However, debt-to-GDP declines from 217 percent under our baseline to 186 percent under this policy, although still growing and unsustainable. Intuitively, the economic effects are mainly a wash because the gains from debt reduction are mostly offset by the increase in economic distortions caused by the new tax rates.

Attempting further debt reduction with this approach would lead to economic decline relative to the baseline economy with growing debt.

Imagine increasing taxes as much as the Biden administration wants and failing to put the U.S. government onto a sustainable fiscal path.

As in medicine, the prime directive for those seeking to improve the nation’s fiscal health should be first to do no harm. Or to at least do less harm than other approaches. The Biden administration’s proposed approach of hiking taxes without any restraint on the growth of government spending fails that test.

Craig Eyermann

Craig Eyermann is a Research Fellow at the Independent Institute. He is also the creator of Government Cost Calculator. He received his M.S. in mechanical engineering from New Mexico State University and M.B.A. from the University of Phoenix, having received a B.S. in both mechanical and aerospace engineering from the Missouri University of Science and Technology.

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