Money For Nothing

by hilzoy

It's nearly April 15th, and in honor of the occasion, I've decided to post a few figures.

Amount (pdf) the government took in, 2005: $1,359,204 million (excluding Social Security and retirement receipts)

Amount the government spent on interest on the public debt in 2005: $352,350,252,507.90.

Interest payments on the debt as a percentage of tax receipts: 25.9%.

Think about that. Over a quarter of what we pay in taxes goes to pay interest on the debt. If we had been willing to raise taxes to pay for what our government spent in the past, instead of running up $8,402,073,299,705.08 in debt, we could have used that money in all sorts of interesting ways. For instance, we could have eliminated the $319 billion FY2005 unified budget deficit, eliminating any need to borrow money during that entire year. And that's with the Bush tax cuts, the war in Iraq, etc. With the $33 billion dollars we had left over, we could have fully funded the restoration of the wetlands needed to protect New Orleans (around $14 billion), fully fund the rebuilding of the levees ($10 billion and counting), and still have $9 billion left over for other things. Rail security! Fixing crumbling infrastructure! Fully funding Head Start! The possibilities are endless.

Instead of which, we get to spend the money on interest, which buys us nothing. This -- $352,350,252,507.90 -- was the price we paid in 2005 alone for letting people convince us that we didn't actually have to live within our means.

Just imagine how that sum will grow when interest rates rise. It will be a huge proportion of our budget, and one that is entirely beyond our control.

That's why sometime soon, some politician is going to have to have the guts to say the obvious: that we need to raise taxes if we want to get out of this hole. When that happens, we need to have their back if we don't want to go on spending money for nothing forever.

Comments

[hilzoy]

By the claim that the portion of the budget that's devoted to interest payments is beyond our control, I meant that once we've borrowed the money, how much we have to spend on interest depends on the interest rates we have to pay to finance it, which is beyond our control. Obviously, whether we borrow money in the first place isn't.

[Larv]

Money for nothing, yes, but aren't we also getting chicks for free? I'm pretty sure I heard that was part of the deal. I'll bet the MSM (and its blogger minions like hilzoy) are just under-reporting the free chicks angle because they hate Bush/republicans/free chicks.

But if I've been misinformed and that's not the way it works, then I agree that this is bad.

[IntricateHelix]

hilzoy:

Are there any studies that accurately evaluate what tax rates would need to be raised to in order eliminate our debt? For how long?

Then, what would tax rates be once we reduced this debt to practically nothing? How about rephrasing that last question to- what would current tax rates be in present day without a national debt?

Thanks for the informative post-- as usual.

[rilkefan]

One wonders what we would like not to have done with the money we spent, or what we would like people not to have done with the money we didn't tax.

[Gary Farber]

A helpful link.

[rilkefan]

An unhelpful link.

[bob mcmanus]

Fixing the Fiscal Nightmare

kash at Angrybear crunches numbers for plausible fiscal solutions,4/5. Most liberals I have seen discussing think that it will not be possible to raise the marginal tax rates in any serious way now that the rich have gotten the FICA ripoff*. The rich, as the good Americans they are, will simply take their money to Costa Rica if threatened. It is called "capital flight."

So a combination of minor marginal rate increases, VAT taxes on consumption and the middle class, and serious cuts in Medicare etc.

*The FICA ripoff is the raising of FICA rates on working class, cutting the marginal rates on upper brackets and unearned income, moving the FICA revenues into the general budget to disguise the actual deficit. It is directly related to those "cabinets of worthless paper" the President gleefully pointed at.

[rilkefan]

That's a very depressing link, bob.

My back-of-the-envelope calculations suggest that, to raise an additional $500bn in revenue per year through income taxes, changes in marginal rates would have to be of roughly this order of magnitude: today’s 15% rate would rise to 25%, today’s 25% rate would rise to 35%, today’s 33% rate would rise to 45%, today’s 35% rate would rise to 55%.

[rilkefan]

Heart-warming budgetary article: "Several deaf-theater groups are struggling to stay afloat after the federal government mysteriously cut funds for cultural programs for the deaf around the country 16 months ago. [...] Congressional aides in the offices of Senators Christopher J. Dodd of Connecticut and Tom Harkin of Iowa, both Democrats who have been trying to reinstate the funds, said they had no idea who pulled the plug or why." We're not talking $500 billion, in case anyone doesn't have time to click the link.

[Sara]

Well, this sure makes me feel better about my credit card debt.

[IntricateHelix]

rilkefan:

I agree it is a sad article, but where do you draw the lines as to what is the responsibility of the federal government to fund? It is not as though these children are being deprived of an education and skills essential to their well being. I fully support programs, such as Head Start, which has a significant impact on the lives of children. But is this of the same impact level as, lets say, Head Start?

Where do we draw the lines? Should we support choir groups for the blind?

[Anarch]

Where do we draw the lines? Should we support choir groups for the blind?

If it's an issue of what we need to cut in order to restore fiscal sanity to the government, let's start with programs whose budgets exceed a round-off error to the round-off error on the deficit.

[And as it happens, I have no problems supporting choir groups for the blind, inasmuch as I think choral groups should be government supported in the first place. Who needs the glory of music more than those for whom hearing is now their primary method of interacting with the larger world? Choirs for the deaf, however, might be stretching it...]

[Anarch]

And Larv, you were indeed misinformed. It's a free pony; the additional poultry is only for those making more than seven figures a year.

[rilkefan]

I linked mostly to indicate that the budget process is being run in a less than transparent and professional manner, and to contrast $0.001 billion to $500 billion.

[Anarch]

I linked mostly to indicate that the budget process is being run in a less than transparent and professional manner, and to contrast $0.001 billion to $500 billion.

Fun game you can play to get a feel for large numbers. Everyone, grab a sheet of your standard letter sized paper (8.5"x11" for those in the US, A4 for those in the Commonwealth). Now...

* Put it into landscape, i.e. with the longest side going horizontally.

* Draw a line from the left edge to the right edge. This represents the total budget in question ($500 billion).

* Now mark on that line where you think the smaller amount in question ($0.001 billion) should be. [Assume the scale is linear, of course.] Answers on the flip side!

[This was actually a live-action demonstration I did for my students the year my union went on strike, only instead of using a piece of paper I used our 15' long blackboards. The results were... instructive.]

This applies to far more circumstances than just the present one, of course, and I'm sure that most of you here have done something similar at some point. Nonetheless, I think it's an incredibly important exercise to remind oneself periodically of how big/small these things are relative to one another, especially if you don't (as I don't) routinely work with such disparities in magnitude.

[IntricateHelix]

Food for thought: Tax rate levels vs. Incentive to Work harder

During my early college career, I received a good amount of financial aid to enable me to attend a prestigious university (also expensive). My parents were still working extremely hard to pay those bills (as was I). By working extremely hard, I mean, my mother who is a nurse, and my father who is in marketing and sales, put in tons and tons of overtime. My mother was working close to 80 hours a week to put me through college.

The result-- the next year, after my parents’ income had risen--my aid was eliminated. But we had worked so hard to make it. Also, my parents broke into the next tax bracket and significantly jumped in tax rates.

So aid was eliminated, taxes were higher, and we were now S.O.L.--- So what is the point of working harder if 1) you break into the next tax bracket and it screws you, or 2) end up loosing aid because of the governments absurd FASFA calculations?

The direct quote from the financial aid director at my university was: "Well, what do you want me to tell you or do here, being middle class sucks. Sorry."

I guess my point with this random story is why work harder if taxes are going to eliminate those hours of hard work?

[ral]

Anarch, a meter stick makes a very good prop in a grade 8 class. So for 10^6, I tell them to imagine a meter stick in one of the millimeters.

[washerdreyer]

Intricatehelix: Let me deal with your 1) and 2) independently, because one of them is a better argument than the other, and they're not really related. 1) simply ignores the concept of marginal tax rate. That is, the only money being taxed at the higher rate is the money made after the point at which your parents yearly income passed the point at which the bracker was set. It's hard to see how this "eliminate[s] those hours of hard work."

Point 2) is either an argument that need based financial aid shouldn't exist or that if one qualifies for need based financial aid in their first year, they shouldn't need to requalify in any additional year or an argument that the thresholds for need based aid should be set higher, I can't tell which.

[ral]

I remember seeing "Powers of 10" as a kid. Nowadays, start here.

[Francis]

Anarch: 1 in 500,000 on 11 inches? can't write that small.

on a 15' blackboard? still can't write that small.

you're talking about 1 inch in about 8 miles.

[Anarch]

you're talking about 1 inch in about 8 miles.

Bingo ;)

[And my original demonstration was just 1 in 1000, which you *still* can't do with conventional chalk.]

[Sebastian Holsclaw]

"That's why sometime soon, some politician is going to have to have the guts to say the obvious: that we need to raise taxes if we want to get out of this hole."

Umm sure, but if my current read of the political landscape is correct any such thing proposed by Democrats is likely to come with hugenormous new permanent entitlement spending. The fact is that the wants of the US voter vastly exceed their desire to pay. We need both politicians who will state the obvious--that we need larger taxes without additional benefits, and a populace that will respond to it.

[Sebastian Holsclaw]

See by way of example the atrocious Medicare drug benefit. The key complaint by Democratic lawmakers at the time the bill was being debated (the rhetoric has evolved since then) was that it was about half the size it 'should' be.

[bleh]

the obvious--that we need larger taxes without additional benefits

That would be one solution, but it's not the only solution, and so not "obvious," methinks.

Another solution is to change current spending. For example, the Iraq war is now running close to $2 billion per week in direct costs, and considerably more than that if one adds in deferred costs such as those of replacing all the equipment we're busily grinding into uselessness in the desert.

And on a larger scale, one might also suggest some cuts in the "national security" budget, which helpfully does not include the costs of the Iraq War, and is over $1 billion per day. It just strains the imagination to try to justify that level of expenditure, which is weighted very heavily to maintaining a standing army and purchasing weaponry for large-scale third-generation warfare, in a world where the threats to us are mostly fourth-generation, e.g., guerrilla action against foreign economic assets important to our economy (read: oil) and sabotage at home using unconventional weapons.

So yeah, maybe some higher taxes or maybe not. And maybe a little more money for things like Head Start and national health care -- which right now is a national disgrace -- and maybe not. But we can go a long way toward reducing our deficit (we DID, after all, under Clinton) without "hugenormous new permanent entitlement spending" (always a favorite strawman of the militaristic Scrooge Right).

[Jesurgislac]

Sebastian: and a populace that will respond to it.

Be fair, Bleh. If Sebastian means by "a populace" the 1% of the US population who benefited hugely from Bush's tax cuts, and who will under a fiscally-sane administration get "larger taxes without additional benefits", then he's quite right. And it does appear to have become standard Bush-speak to refer to that 1% as if they were a significant majority, rather than a tiny minority.

[Sebastian Holsclaw]

The national debt isn't just about the Bush tax cuts (which were irresponsible going into a war). Repealing them wouldn't fix the problem.

[alex]

Man, are you people thinking small. The way to get rid of all that pesky debt is obviously hyperinflation! Look at everything it did for the Weimar Republic!

Okay, bad example.

But black humor aside, Republican bread and circuses have convinced the population that they don't have to pay for what they get. We can decide to clean up our act or we can wait until reality comes knocking. In the latter case, I would advise a diversified portfolio in precious metals, canned goods, and long shelf life antibiotics.

[Jesurgislac]

Sebastian: The national debt isn't just about the Bush tax cuts (which were irresponsible going into a war).

Which were irresponsible, greedy, and corrupt at any time. But when starting a war, the tax cuts were stupid and the motivation for them deeply selfish.

Repealing them wouldn't fix the problem.

Repealing them would save half a trillion dollars, according to this estimate, which would at least be a start on fixing the problem.

[Sebastian Holsclaw]

Means testing Social Security and Medicare would save lots of money too. Eliminating farm subsidies would be fabulous.

The whole point is that many people in the US want to have the government make their cake and eat it too.

[hilzoy]

Sebastian: Yep. Which is why, when someone proposes raising taxes, we need to be behind him or her. We should also recognize that for the act of political courage that it will surely be.

[Gary Farber]

I don't know if anyone clicked on any of the sublinks of the link I gave above, but when I hear from conservatives that we can't, say, afford to spend money on housing for those without, I consider that for the cost of the Iraq War, we could have built 2,455,132 additional housing units.

We could have fully funded global anti-hunger efforts for 11 years.

We could have ensured that every child in the world was given basic immunizations for 90 years.

IntricateHelix is concerned about college scholarships; we could have provided 13,218,439 students four-year scholarships at public universities.

But I hear we can afford the war, no problem. No problem!

And we don't even have to raise taxes!

So, great!

We could have, if those statements are true, irrefutably have afforded these other things, or yet other things, instead.

Something to keep in mind whenever one hears a conservative/libertarian explain that government can't afford to do these things. (Nothing personal, Sebastian, or Slart.)

[Sebastian Holsclaw]

"Something to keep in mind whenever one hears a conservative/libertarian explain that government can't afford to do these things."

The government can afford to do all sorts of things that a conservative or libertarian thinks would cause perverse incentives if the government did it on a regular basis--taking over larger and larger bits of control over housing being a key example.

It could probably afford to install a TV camera in lots of households to monitor for illegal drug activity, but it would be a bad idea.

"We could have, if those statements are true, irrefutably have afforded these other things, or yet other things, instead."

Yes opportunity cost is a wonderful thing to look at. We could afford tax cuts which let people spend money on the things they want instead of what you want to spend it on--and that is an opportunity cost argument that is more appealing to me.

Arguments about opportunity cost don't HAVE to lead to further government spending. Which is something you should keep in mind whenever a liberal.... oh nevermind it just sounds meanspirited.

[Jesurgislac]

Sebastian: The whole point is that many people in the US want to have the government make their cake and eat it too.

Yes, I agree. The richer you are, it often seems, the more you want: corporations want fat welfare checks, rich people want to pay less or no tax, and yet they expect to profit from the government cake to which they are reluctant to contribute.

[bob mcmanus]

Do We Pay Too Much in Taxes

Another contribution from the Angry Bear, this time PGL praises Bruce Bartlett as the first NRO economics writer to actually get some numbers right. (I am not so sure, but hey...)

I think Bartlett and PGL are going directly to Sebastian's argument about increasing taxes specifically targeted to getting us out of the hole, not something I am wholly opposed to...call it a "feed-the-beast" theorey. But PGL asks this question:

"But let me toss this tidbit in – disposable income equals taxes paid minus transfer payments received. Over the long-term, net taxes must equal government purchases, which were about 19% of GDP in 2005. And if we cut entitlements to reduce the deficit, don’t net taxes rise?" ...PGL

[Gary Farber]

"The government can afford to do all sorts of things that a conservative or libertarian thinks would cause perverse incentives if the government did it on a regular basis--taking over larger and larger bits of control over housing being a key example."

Sure, but I don't know anyone who is for that. It seems rather a non-sequitur.

[Cryptic Ned]

"Several deaf-theater groups are struggling to stay afloat after the federal government mysteriously cut funds for cultural programs for the deaf around the country 16 months ago. [...] Congressional aides in the offices of Senators Christopher J. Dodd of Connecticut and Tom Harkin of Iowa, both Democrats who have been trying to reinstate the funds, said they had no idea who pulled the plug or why." We're not talking $500 billion, in case anyone doesn't have time to click the link.

Presumably it was some 24-year-old graduate of Patrick Henry College who was put in charge of deciding how to spend $50,000,000,000, and took one look at the previous year's budget and said "Bwahahahaha! Deaf theater! That's the funniest thing I've ever heard. Boy, when I become a lobbyist I'll have some funny stories about those crazy bleeding-hearts in the government. Cutting this out should save the average taxpayer...let's see, $0.0000000000001. If I can find a few more examples of fraud and waste like this, we'll be in business.

[Cryptic Ned]

"Several deaf-theater groups are struggling to stay afloat after the federal government mysteriously cut funds for cultural programs for the deaf around the country 16 months ago. [...] Congressional aides in the offices of Senators Christopher J. Dodd of Connecticut and Tom Harkin of Iowa, both Democrats who have been trying to reinstate the funds, said they had no idea who pulled the plug or why." We're not talking $500 billion, in case anyone doesn't have time to click the link.

Presumably it was some 24-year-old graduate of Patrick Henry College who was put in charge of deciding how to spend $50,000,000,000, and took one look at the previous year's budget and said "Bwahahahaha! Deaf theater! That's the funniest thing I've ever heard. Boy, when I become a lobbyist I'll have some funny stories about those crazy bleeding-hearts in the government. Cutting this out should save the average taxpayer...let's see, $0.0000000000001. If I can find a few more examples of fraud and waste like this, we'll be in business."

[KCinDC]

Cryptic Ned, just for the sake of numeracy, the actual savings is more in the neighborhood of $0.01 per taxpayer. A program that cost each taxpayer only $0.0000000000001 would have a total yearly budget measured in thousandths of a cent.