A Clear Path to a Balanced Federal Budget

Federal debt has now reached $19.9 trillion. That’s $61,289 owed by every man, woman, and child legally residing in the country in addition to household debt. Considering that federal revenue currently averages $10,369 per person, paying off that debt will be no easy task, but it’s certainly feasible.

Debt is at the highest level since shortly after WWII. Without changes to federal policy, fiscal deficits are expected to triple relative to GDP by 2047 (CBO, 2017). Spending growth largely derives from mandatory spending on Medicare and Social Security that automatically kicks in as Baby Boomers retire and age.

Source: Congressional Budget Office.

Congress is accustomed to being able to borrow virtually unlimited amounts of money, but as interest rates rise, this borrowing will become much more costly. In 2016, the interest expense on federal debt outstanding was $433 billion, and net interest totaled $215 billion.

Net interest in FY 2016 accounted for 6% of federal spending, equating to $670 per citizen and approximately $1,560 for every taxpayer. That’s more than the average income-earning person pays to service their own household debt: $1,440 on an annual basis. If Congress got their act together to balance the budget, you’d be able to afford an extra vacation every year without a salary raise.

How can Congress fix the problem?

In a nutshell, the government needs to increase its revenues, cut spending, or do some of both. Businesses that consistently fail to balance their budgets ultimately die, and that’s not an acceptable outcome for the United States.

1. Increase Government Revenue

  • Caffeinate the economy and boost GDP growth. It’s a complex request but it involves addressing international trade deficits through neomercantilist policies and substituting entitlements with universal basic income that would increase labor force participation.
  • Eliminate tax loopholes. Corporations are currently given strong incentives to play games with the tax code. A rational human pays no more than he or she owes, so take away the favorable treatment for some industries over others. Venture capitalists, hedge fund managers, and private equity investors don’t deserve preferential tax treatment with low carried interest and capital gains tax rates. CEOs shouldn’t be paying a lower effective tax rate than the middle class, yet the tax system enables that through the low taxation of income from stock and stock options.

2. Reduce Government Spending

  • Social Security. As experience has shown, you are better at saving for retirement than your federal government. The incentives are not properly aligned for the government to generate strong returns on your Social Security payments. There should certainly be a safety net, but people at all ages deserve to live. The government is incapable of effectively saving for retirement for us with pension programs, Social Security, and Medicare.
  • Welfare Programs. The way welfare programs are currently structured, they give people a really good reason to avoid marriage, have more children than they can afford, and avoid work. Universal basic income would turn these perverse incentives around and eliminate the need for Social Security and other welfare programs.
  • Healthcare. People deserve better healthcare, and government programs just aren’t delivering. Cutting out tax breaks for employer-sponsored health insurance will be an important part of reducing waste in the healthcare industry. In the short term, a healthcare system that ties its spending to the budget would prevent repeated fights in Congress over health spending. Better yet, a private free market healthcare system bundled with universal basic income would enable people to take their health matters into their own hands.

But don’t take my word for it! Fix the budget on your own with the NY Times interactive feature.