To Debt or Not to Debt

05/16/2011 10:33 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

The United States owes a heck of a lot more than the official $14 trillion, so the time is now for us to start finding useful solutions to our budget problems.

If you’re like most Americans, you’re too preoccupied with your own financial situation to worry about our national debt. The numbers are too big, the choices are too confusing, and the politicians are too vocal.

We figure they got us into this mess—and they’ll have figure out a way out, so why bother worrying about it?

They’re counting on that in Washington. Both parties. So the issue of raising the debt ceiling is likely to turn into a political circus, much as the spending resolution needed to avoid a government shutdown did in early April.

There will be talk show appearances, changing deadlines, task forces, proposals, and diversions, all guaranteed to raise the temperature of the debate without raising the level of discussion.

We can’t let that happen—no matter what our political beliefs. The situation is too critical now. We need to tell Washington that the sideshow is over. Get on with the main act.

The Countdown—or CountUP
There is no better place to start than with a quick visit to a Web site where the numbers speak louder than words. Go to www.TruthinAccounting.org—the national, non-profit group that has posted not one, but two doomsday ticking counters on its Web site to keep track of our constantly increasing national debt.

The top line, at well over $14 trillion, is tracking the debt we officially acknowledge. It’s the amount of money we’ve borrowed by selling IOUs—Treasury bills, notes, and bonds.

The next line is our “unofficial” national debt—taking into account all the promises we’ve made for future benefits, including Social Security, Medicare, Medicaid, Veterans benefits, and the implied interest on the ever-growing national debt (assuming reasonable interest rates.)

That debt figure now stands at more than $77 Trillion—and counting!

It is an astounding, but realistic, projection that will quickly overwhelm our economy—unless we act now. But to eliminate the political posturing, we need facts.

NEXT: Why Can’t We Just Raise Taxes?

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Why Can’t We Just Raise Taxes?
Here’s the fact: According to the IRS, in 2007 (the last year before the current economic decline), the total gross taxes collected were $2.7 trillion. That includes all individual and corporate taxes collected, including Social Security and Medicare taxes.

The top 1% of taxpayers already pay 40% of all individual income taxes collected, and the top 10% of wage earners pay 70% of all individual income taxes collected.

Forget arguing about whether they could pay more. Let’s assume you collected every penny earned by these top 10% of wage earners. It wouldn’t make a dent in our ongoing budget deficits.

Then let’s throw in all corporate profits—estimated to be about $1.7 trillion in 2011. Even if you taxed away every penny in profits from every American public company, it wouldn’t erase our budget deficit this year.

Of course, if we collected every penny in taxes, no one would bother working and no company would stay in business—so everyone would be out of work, not paying taxes! That’s obviously not the solution.

At some point higher taxes are counter-productive, slowing the economy and bringing in lower tax revenues.

As President Kennedy famously said: “Paradoxically, the way to increase tax revenues is to cut tax rates.”

Why Can’t We Cut “Discretionary Spending”—Everything Not Mandated by Law?
The fact is that’s a great place to start—but even if you cut out all discretionary spending, it wouldn’t make a dent in our national debt. Discretionary spending in 2010 was $1.3 trillion, or 38% of total spending.

That includes national defense, education, HUD, agriculture, and the Justice Department, as well as $84 billion to Health and Human Services.

Where would you start cutting to make a dent in our “discretionary” budget deficit this year? Let your Congressional representative know your views. But remember how quickly this type of cutting gets diverted into issues ranging from Planned Parenthood to Immigration. We can’t let them sidetrack us from our message: Fix the Budget!

Why Can’t We Cut Entitlements, Like Social Security and Medicare?
We can’t cut those programs this year, or in nearby future years, because our promise of benefits is as sacred as the other promises our country stands for—freedom of speech, liberty, and justice for all. Those retiring now have paid into those programs in exchange for those promises.

But we could have a serious discussion about changing the promises for future generations—giving them time to adjust their saving (and their tax rates) so they could be less reliant on these programs. Those changes would dramatically slow the growth of that $77 trillion debt figure.

The Alternative?
We could let this drag on and see what happens. After all, they’re still drinking ouzo in Greece and enjoying wine in Portugal—even though those countries are a fiscal disaster.

But the United States is different. We’re the center of the global financial system, and our currency is the basis for all global transactions. If we keep borrowing and printing, the world markets will take action for us—demanding higher interest rates to accept our IOUs, as it looks less likely we can repay them.

The Chinese foreign minister recently called on America to “act responsibly about our debt.” The Chinese hold $2 trillion of those IOUs.

They’d rather buy our assets—our mines, our farmland, our real estate—than hold paper losing more and more value as we print more. Our creditors will own us—one way or the other.

We’re fooling ourselves if we don’t act now to reach some sort of deal that will show the world we’re serious about our financial situation.

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