Let’s start with a quick high-level review of the federal government’s 2024 finances:
Total Revenue
Total Expenditures
$4.920 trillion - $6.750 trillion = -$1.83 trillion, which nicely corresponds to the graph below, with the red line my addition. To put this into perspective, in 2024 the U.S. government spent about $20,000 per person more than it should have. This is way beyond reckless, and don’t even think for one second that Modern Monetary Theory has any credibility left.
Pretty obvious to most that we are headed in the wrong direction, and perhaps obvious that this is not sustainable. But what do I mean by “not sustainable?” What does history tell us what will happen if changes are not made?
Consider reviewing my previous blog that describes the mechanism by which our government spends more than it receives, because contrary to popular belief, it is not borrowing money, instead, it is just redistributing an ever increasing percentage of our society’s wealth.
It is safe to assume that is not economically optimal.
The government accountants “fix” this deficit gap by issuing more treasury debt, which devalues the dollar, and causes inflation, that regressive tax that silently extracts wealth from mostly those that are least able to afford it, i.e., they do not own “inflation hedging” homes or stock.
As the government distributes a greater percentage of wealth each year, our economy becomes more centralized and socialized, and as historically proven (think USSR), less efficient. Less economic wealth will be created, which eventually results in other undesirable outcomes. Meaning that my downward red line accurately forecasts other trends, all resulting in even less future economic growth.
A downward economic spiral begins.
While historically this downward economic spiral is a gradual process (took decades for Argentina), the present downward acceleration of the deficit suggests that it may happen quicker than previously anticipated.
As more treasury debt is issued, and interest rates rise in response to higher inflation, our government must pay an increasingly higher debt payment, which today is greater than the total military budget.
To avoid this downward economic spiral, we need to make a financial course correction, and perhaps not a moment too soon. Meaning that it is time to choose your bad tasting medicine.
One proposed solution is to simply increase taxes on corporations and the wealthy. Is this feasible?
The following graph is the net tax revenue of the federal government over the same period. Note that while tax revenue has been increasing, it has not kept up with the increase in spending.
Here are the federal tax revenue sources for 2024. Could another $1,830 billion have been raised as taxes in 2024? Assuming that the social security and retirement categories are politically untouchable, the only other significant revenue sources are individual and corporate taxes.
Assume that we had doubled the corporate tax rate, naively ignoring the obvious negative economic implications. This would have raised an additional $530 billion, meaning that we are still $1,200 billion short. We would have had to also increase the individual tax revenue by 50%.
While these proposed tax increases get us close to the $1,830 billion needed, would this 50% increase in individual taxes have been feasible?
Here is a breakdown of who paid income taxes in 2024, by wealth level. Note that the wealthiest 1% paid over 40% of the individual taxes (thus shattering the “wealthy are not paying their fair share” lie).
In theory, by doubling the tax rate of the top 1%, we can almost achieve the goal. However, it should be noted that France’s wealth tax, implemented in 1982, resulted in an exodus of 42,000 millionaires between 2000 and 2012. The tax was a failure and was repealed in 2017. A similar situation occurred in most other European countries.
We should always remind ourselves that the primary reason people pay taxes is to avoid being arrested. The distance secondary reason is our generous nature.
To be clear, an excessive increase in taxes can and often will result in less, and not more, tax revenue.
An alternative plan would be to double the tax rate on the wealthier half of Americans (the top 50%) but note that this will include many in the middle class, making it politically impossible.
So having failed to find a workable “increase the tax revenue” solution, we must consider the other bad medicine, which is to dramatically reduce government spending, by about 25%. Way, way back to spending level of the year 2020….
While this will be politically difficult, it is the more logical approach, because every unneeded government employee that is converted into a private employee is a double bonus, providing more tax revenue and requiring less government spending. Plus it will make our economy less centralized, and thus more productive.
All while appreciating that there will be the transient cost of employee retraining to absorb.
This contentious job of identifying these unneeded government employees has been assumed by DOGE, which some consider to be yet another threat to democracy. Which raises the question of just how many threats to democracy have there been lately? Surely not on the scale of the Civil War, but perhaps now the doom-sayers do have a point, as the average lifespan of a “country” (loosely defined as a modern nation-state with a stable government), is roughly 200-300 years, and wouldn’t you know it, the U.S. is approaching it’s 250-year mark…
Seriously, economic collapse is one of the leading historical reasons for a country’s end-of-life, with the other leading reasons being political corruption and civil unrest. I am not suggesting that our economic collapse is anytime soon, but if I wanted to accelerate this process, I would start by devaluing the currency while bogging down economic growth with a bloated and inefficient government.
If that does not lead to civil unrest, I don’t know what will. Other than night fleets of unknown drones…
Like any other addiction, our government has a spending problem that needs to be confronted head-on and fixed. The old ways have failed. Congress has failed. The redistribution of other people’s wealth by a representative government must be both efficient and transparent, and it is way past time to modernize our government’s accounting systems to make it so.
What happens if our government is unable to change its spending ways, if the deficit continues to grow? I am not suggesting breaching the Constitution, but if push came to shove, and the choice was either to breach the Constitution or to let our country economically fail, I would choose the latter, because without a functioning economy, the Constitution is simply a piece of paper.
Those that are delaying this financial reckoning are just making the solution more difficult and are increasing the possibility of forcing this terrible choice.
I would like to think that we are never faced with this decision, that our government will grow a fiscal spine, and eventually understand that when you redistribute other people’s wealth, that you forcibly took from them, that you must do so in a responsible manner.
Comments