It’s been a few weeks, and the memory of April 15th is fading away – at least until next year. But as unpleasant as this year’s check to the IRS might have been, within a few years we may be looking back on 2010 as the good old days of low taxes.
If we fail to address the out-of-control entitlement spending that’s driving our national debt, we’ll have no choice but to raise taxes to unbearable levels. The non-partisan Tax Policy Center has done the math, and the results are sobering. To reduce our deficits to a sustainable level without cuts in spending will take a massive across-the-board increase in income taxes: For a husband and wife each earning $50,000 per year, those new taxes will take an extra $8,000 out of their pockets every April.
For the past few decades, it’s been easy to put off thinking about the growing national debt. It’s unpleasant and confusing. You have to look at lots of charts and the numbers are hard to comprehend.
But for all of the debate and research, our debt situation is actually pretty simple: the government is spending more money than it receives in taxes. And the gap is getting bigger every year. There are only two reasonable options for restoring balance. We can spend less, or we can raise taxes.
Despite all the talk of wasteful government spending, the overwhelming bulk of federal dollars aren’t actually going toward pork-barrel earmarks. Next year, nearly forty cents out of every dollar in the federal budget will be spent on just two programs: Medicare and Medicaid. That’s twice as much as the share for national defense. And with baby boomers hitting age 65 at the rate of 10,000 every day, Medicare and Social Security costs are going to create problems that have no precedent in our country.
The reality of our enormous entitlement programs means that eliminating earmarks to balance the budget is like giving up your Starbucks habit to save for retirement. It’s a start, and it’s worth doing, but you’re fooling yourself if you think it’ll actually solve the deficit crisis.
And while President Obama’s health reform law was sold to the public as a deficit reducer – its 2,000 plus pages are full of budget gimmicks that hide the bill’s true cost. Every credible analysis of the government takeover of health care acknowledges that despite the bill being packed with hundreds of billions of dollars in new taxes, it will barely make a 1% dent in our future borrowing.
As of today, the national debt is a record-breaking $12.8 trillion. It is expected to nearly double by the year 2020.
We cannot keep doing this. I don’t mean that in a figurative sense – we literally cannot keep doing this. Without a plausible road map toward fiscal sustainability, eventually no rational investor will be willing to lend us money at current rates. In Europe, Greece hit that point a few months ago. When that happens, interest rates spike for consumer loans as well. Buying a home or a car gets expensive, or impossible. The economy slows. Job creation grinds to a halt.
Whether our own day of budgetary reckoning happens when our debt has grown to $15 trillion or $30 trillion, the bill is going to come due. Unlike Greece, there will be no one around to bail us out.
Using President Obama’s spending plans as a reference, non-partisan economists have calculated that preventing a financial catastrophe will require a proportional 49% increase across all income tax brackets. The top bracket would jump to 52%, in addition to the burden of state and local levies. While we have had higher marginal rates in the past, prior laws were riddled with loopholes that made the rates easier to avoid. And even if we did soak the top five percent with a bigger tax burden, there is still what I call (for Ayn Rand fans) the “Galt Point” of diminishing returns. That top 5% is already paying 67% of all federal income taxes. Push too hard and you trigger the law of unintended consequences.
If we want to avoid this grim future, there is no time to waste. Reforming our entitlement programs is going to take a lot of work, but addressing the growing costs will only get harder as time goes on. There is some low-hanging fruit, like eliminating the $60 billion Medicare spends annually on fraudulent claims. Other changes, like raising the Medicare eligibility age, are unlikely to be easy or popular but are almost certainly necessary. There are plenty of questions left to be answered, but waiting to take action is no longer an option.