US Debt now > GDP

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  • #1
Oltz
As of yesterday our National Debt surpassed our GDP. Comments?


Those opposed to a balanced budget amendment must know that this symbolic landmark puts us on track to a place we can not recover from.

We need to end deficit spending until our Debt is below 35% of GDP and we need an amendment capping our debt at 45% with a 10 year average balance requirement of 30%.

(as in we can borrow money in bad times up to 45% but need to pay off the additional in time to maintinain the needed average)

The only way to do this is to cut spending and decrease overhead. Taxes alone can not solve this problem.
 

Answers and Replies

  • #2
phyzguy
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While I agree we need a credible plan to get the Federal Government income more in line with the expenditures, it's not clear that this debt=GDP threshold is a real danger area. It has happened before - after WW2 our federal debt reached ~120% of GDP, and the world didn't end. In fact the post WW2 period was a period of rapid economic growth. Wikipedia has some nice charts:

http://en.wikipedia.org/wiki/United_States_public_debt#Is_there_a_.22danger_level.22_of_debt.3F
 
  • #3
Oltz
While I agree we need a credible plan to get the Federal Government income more in line with the expenditures, it's not clear that this debt=GDP threshold is a real danger area. It has happened before - after WW2 our federal debt reached ~120% of GDP, and the world didn't end. In fact the post WW2 period was a period of rapid economic growth. Wikipedia has some nice charts:

http://en.wikipedia.org/wiki/United_States_public_debt#Is_there_a_.22danger_level.22_of_debt.3F

I believe it was During WW2 that the debt spiked to 120% but with in 5 years was down to 80% and ~60% in 10 years and ~40% in 15 years.

Not the same situation at all IMO as I do not believe our Government is capable of cutting the Debt in half in 10 years.
 
  • #4
phyzguy
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So it sounds like you agree that the problem is not the level of debt per se, it is the inability of our government to take action. This is what we must address. Remember this next November!
 
  • #5
Oltz
So it sounds like you agree that the problem is not the level of debt per se, it is the inability of our government to take action. This is what we must address. Remember this next November!

Take a look at this graph and note that it is from 2007 and keep in mind how much the debt and interest on it have grown
GAO_Slide.png

What the graph forecast as happening in thw 2030's will likely happen before 2025

We can cut every dollar the Govt spends that is not SS Medicare/caid and Interest and still not be reducsing the debt.

It is not the inability of our government to take action it is the over commitment of resources we do not have.

Now think about the ~47% of the population that recieve benefits from those programs and the fact that we have reduced contributions to SS for the past 2 years.

Do you think the people will let our Government take any action that is substantial enough to end this cycle?

No matter how you tax a population its been shown that you do not receive more then ~20% of GDP in revenue.
 
  • #6
phyzguy
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Take a look at this graph and note that it is from 2007 and keep in mind how much the debt and interest on it have grown

Note that the problem is not really the increase in spending on benefits, it is the large increase in interest payments (the red bars) because revenues are not keeping pace with spending. It only takes a manageable increase in taxes to keep this scenario from happening.


No matter how you tax a population its been shown that you do not receive more then ~20% of GDP in revenue.

This is nonsense! Most industrialized economies generate more tax revenue than this. See below for example. All we have to do is raise taxes to a level matching our expenditures and we will be fine. It is the repeated tax cuts that have gotten us into this mess.

http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP
 
  • #8
mheslep
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While I agree we need a credible plan to get the Federal Government income more in line with the expenditures, it's not clear that this debt=GDP threshold is a real danger area. It has happened before - ...
I disagree. The spending problem now is different now in that the spending is structural due to entitlements. Wars end. In WWII everybody, especially those lending money to the federal government, knew the war and the war related spending would end. People do not take to the streets and burn things down when proposals to reduce war spending become law, unlike proposals to reduce entitlements, as demonstrated recently in Europe. Entitlement spending is planned to continue with no end. Lenders know this, making the debt load (which is periodically rolled over) dangerous.
 
  • #9
Take a look at this graph and note that it is from 2007 and keep in mind how much the debt and interest on it have grown
GAO_Slide.png

What the graph forecast as happening in thw 2030's will likely happen before 2025

We can cut every dollar the Govt spends that is not SS Medicare/caid and Interest and still not be reducsing the debt.

It is not the inability of our government to take action it is the over commitment of resources we do not have.

Now think about the ~47% of the population that recieve benefits from those programs and the fact that we have reduced contributions to SS for the past 2 years.

Do you think the people will let our Government take any action that is substantial enough to end this cycle?

No matter how you tax a population its been shown that you do not receive more then ~20% of GDP in revenue.


Why does this graph forecast no increase in revenue?
 
  • #10
mheslep
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So it sounds like you agree that the problem is not the level of debt per se, it is the inability of our government to take action. This is what we must address. Remember this next November!
Given that the interest on just the current debt could jump from $200-$400B to ~$800B with a rise in interest rates, yes the current debt load itself, today, is a problem.
 
  • #11
Oltz
Why does this graph forecast no increase in revenue?

As I was trying to show in a Previous post regardless of income tax rate changes through history Federal revenue has remained static at ~20% of GDP. Hence revenue as a percent of GDP is flat.

In general the other revenue the government takes in is directly related to specific projects that are self funding.

Think of income tax revenue as the Disposable income of the country.
 
  • #12
1,039
1
How long would it take for a countrywide sales tax increase of 1% to solely pay off the debt?
 
  • #13
Oltz
How long would it take for a countrywide sales tax increase of 1% to solely pay off the debt?

That depends on if you include food,shelter,clothing and utility purchases.
Does it also tax wholsale or is it retail only?
Do bussiness purchases count?
Can you tax the same good more then once?
Are components taxed when they are sold or only finished products?

Short answer a very long time.
Depending on the answers to the above questions and several others you can also anticipate some pretty serious secondary effects on the economy.
 
  • #14
As I was trying to show in a Previous post regardless of income tax rate changes through history Federal revenue has remained static at ~20% of GDP. Hence revenue as a percent of GDP is flat.

In general the other revenue the government takes in is directly related to specific projects that are self funding.

Think of income tax revenue as the Disposable income of the country.

Oh. Okay. I should have looked at the graph closer. I'm not sure what percentage of the GDP you can bring in as tax revenue. Anyway, you should lay out the assumptions which produced the graph:
1) What interest rate is assumed?
2) What growth rate in GDP is assumed?
3) What birth and death rates were assumed?
4) Was Medicare cost assumed to remain constant per person per age group or will technology raise or lower cost?
5) Will the retirement age remain the same?
Also keep in mind that even small differences in revenue could make large differences in forecasts by the way debt compounds.

Now as for the original thread for numerous reasons I don't think things are the same now as at the end of World WII. I discussed some of these reasons previously in another thread:
https://www.physicsforums.com/showthread.php?t=528582

There seems to be some consensus that debt levels of 120% GDP are sustainable for countries which can’t inflate their way out of it. Countries which have control over their currency have sustained higher debt levels without problems. Japan is an example of this.
 
  • #15
1,039
1
That depends on if you include food,shelter,clothing and utility purchases.
Does it also tax wholsale or is it retail only?
Do bussiness purchases count?
Can you tax the same good more then once?
Are components taxed when they are sold or only finished products?

Short answer a very long time.
Depending on the answers to the above questions and several others you can also anticipate some pretty serious secondary effects on the economy.

I know that there are some bounds missing in my question, but lets say that you tax anything that is bought retail, and yes you tax the same good twice. And yes to food shelter clothing and utilities.

I don't think a 1% increase in price is going to stop anyone from buying anything, so I may have to disagree with the "serious" secondary effects on the economy. Unless these serious secondary effects include an angry population. Americans and tax get along just as well as Coca-Cola and Mentos.
 
  • #16
FlexGunship
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Just as a side note after reading the discussion... it does seem to be universally true that 20% is the maximum that can be taken in by taxes without mandatory work programs. As taxes rise economies shrink...

The misconception is the classic fallacy of "the increase is so small no one will notice." Any increase, no matter how small, pushes SOMEONE below the poverty line or causes SOMEONE to lose their home, or causes SOMEONE to give up insurance.

EDIT: I should mention that I also don't think of this as some historic landmark in our economy. Stagnant economies increase debt. Hopefully debt doesn't increase stagnation of economies.
 
  • #17
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The misconception is the classic fallacy of "the increase is so small no one will notice."

I don't believe that is entirely a fallacy. I see your point and I agree to a certain extent, but a 0.5% sales tax increase isn't really going to deter anyone from buying something that they need/want.
 
  • #18
FlexGunship
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I don't believe that is entirely a fallacy. I see your point and I agree to a certain extent, but a 0.5% sales tax increase isn't really going to deter anyone from buying something that they need/want.

That's easy to say, but in my fair state of NH food sales at small restaurants (not fast food and not major chains) decreases proportionally with the increase of the prepared food tax.

I'm looking for a source now.
 
  • #19
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That's easy to say, but in my fair state of NH food sales at small restaurants (not fast food and not major chains) decreases proportionally with the increase of the prepared food tax.

I'm looking for a source now.

You're right, it is easy to say. Maybe I'm being hindered by my own perspective. I can't see myself not purchasing something over a few pennies on the dollar, but I also wouldn't describe myself as a thrifty individual
 
  • #20
FlexGunship
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You're right, it is easy to say. Maybe I'm being hindered by my own perspective. I can't see myself not purchasing something over a few pennies on the dollar, but I also wouldn't describe myself as a thrifty individual

Taxes rarely (significantly) affect the average person which is why they're so often targeted AT the average person. Which, ironically, is my second objection to random tax increases; they always seem to target MEEEEEE!

Honestly, (and I'm talking to anyone in the U.S. here) when was the last time you paid MORE taxes and felt like you got more for them? Education is in a general decline, I likely will never see my social security "investment," Medicare doesn't help me even though I have crappy insurance, and I still get random traffic tickets for nonsense violations.

It's infuriating!

The idea that all of this is happening and they want to RAISE taxes is absurd in my mind. Meanwhile, there's some group of (arguably) morons "occupying" Wall Street complaining about businesses and banks! They're the only things growing right now!!!!!!!
 
  • #21
Oltz
Based on a quick look at Bureau of Labor stats
http://www.bls.gov/cex/2010/share/cucomp.pdf"

....................Comsumer Units..... Annual Expendeture avg.............. Total
Single person .............54,227.........$34,471.00............$1,869,258,917.00
Single parent .............7,141...........$36,933.00............$263,738,553.00
Husband and Wife .......59,739.........$61,762.00............$3,689,600,118.00
Total/AVG .................121,107........$48,078.13............$5,822,597,588.00
*Various numbers of Minor children are included in both single parent and H/W families

So assuming the proportions of the sample they used cary across the entire population.

$480.78 per comsumer unit per year spent after income taxes at a 1% sales tax on everything.

Another table gives us 2.5 persons per unit avg with 1.3 being earners.
We will say the US has 350 Million people (got lazy)
140,000,000 Consumer units = $67,309,376,197.91 a year

Thats 67 Billion our debt is 15 Trillion all things equal 223 years.

A secondary effect is 1% more for everything is alot for those who live pay check to pay check. also the 1% on everything bought with welfare and foodstamps and so on well is just adding redundant over head charges.

EDIT : Used dots to make columns Bleh
 
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  • #22
1,039
1
I'm going to go through a quick little estimation of my own.

Lets go with 350 000 000 people in the US, 250 000 000 of which have an income. Fair?

Lets say that the average income per year per person is 30 000 dollars. (seems reasonable)

250 000 000 people * $30 000 = 7.5 E12. On a 1% sales tax I get 75 000 000 000. Which is surprisingly close to your answer considering I made up everything.

My conclusion is that I agree with you, well played good sir.
 
  • #23
Oltz
SO if we all agree we can not Tax our way out of this How do we convince a Majority in our Country to willingly reduce Govt. services/entitlements/benefits?

We need a roughly 10 Trillion dollar budget surplus over the next 15-20 years to get us back to something a bussiness would be comfortable with.

I wish candidtaes could come out with real numbers and that people were not to stupid to understand them.

They get confused when you tell them the top 10 percent pay 40 % of the total taxes collected bleh.
 
  • #24
FlexGunship
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SO if we all agree we can not Tax our way out of this How do we convince a Majority in our Country to willingly reduce Govt. services/entitlements/benefits?

We need a roughly 10 Trillion dollar budget surplus over the next 15-20 years to get us back to something a bussiness would be comfortable with.

I wish candidtaes could come out with real numbers and that people were not to stupid to understand them.

They get confused when you tell them the top 10 percent pay 40 % of the total taxes collected bleh.

I believe the actual number needed is 14%. A 14% tax on all income generated in the entire country (including capital gains, and retirement investments) would be sufficient to maintain current levels of spending. More than that would begin to reduce the national debt. Does anyone remember where that number came from?

If this seems like a really low number to you (it is to me!!!!!!!!!!!!!! I had an effective rate of ~30% last year) it's because a lot of people aren't helping out.

EDIT: Before you correct that number, it's a REAL flat tax, so there are no exemptions or deductions. It wasn't the GAO but it was an independent group. I want to say Cato, but that doesn't seem right.
 
  • #25
1,039
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SO if we all agree we can not Tax our way out of this How do we convince a Majority in our Country to willingly reduce Govt. services/entitlements/benefits?

We need a roughly 10 Trillion dollar budget surplus over the next 15-20 years to get us back to something a bussiness would be comfortable with.

I wish candidtaes could come out with real numbers and that people were not to stupid to understand them.

They get confused when you tell them the top 10 percent pay 40 % of the total taxes collected bleh.

I don't think that taxes can do the job by themselves, but I think that it has to play a part. Cutting services and benefits hurts the poor, and sacrifices more overall quality of life in the country than increasing taxes does. Nothing is black and white and I think this is a complex problem.
 
  • #26
Oltz
I don't think that taxes can do the job by themselves, but I think that it has to play a part. Cutting services and benefits hurts the poor, and sacrifices more overall quality of life in the country than increasing taxes does. Nothing is black and white and I think this is a complex problem.

We Can not Raise significant money with out increase the number of people taxed. 47% have a net 0 or negative tax burden (Federal since we are talking about federal)

The poor are either going to loose benefits or loose what little pay they have to an increased burden.
It is next to impossible to get more out of the top 50% then we are now with out making the "poverty" level 30K a year which will only mean more benfit pay outs.

There is simply not enough money if you can find it please show me where it is.
 
  • #27
Oltz
I believe the actual number needed is 14%. A 14% tax on all income generated in the entire country (including capital gains, and retirement investments) would be sufficient to maintain current levels of spending. More than that would begin to reduce the national debt. Does anyone remember where that number came from?

If this seems like a really low number to you (it is to me!!!!!!!!!!!!!! I had an effective rate of ~30% last year) it's because a lot of people aren't helping out.

EDIT: Before you correct that number, it's a REAL flat tax, so there are no exemptions or deductions. It wasn't the GAO but it was an independent group. I want to say Cato, but that doesn't seem right.

Make it 15% and take out retirement and drop inheritance to 0-5% and I am on board. I would even take 20% is you leave capital gains at 15
 
  • #28
FlexGunship
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I don't think that taxes can do the job by themselves, but I think that it has to play a part. Cutting services and benefits hurts the poor, and sacrifices more overall quality of life in the country than increasing taxes does. Nothing is black and white and I think this is a complex problem.

Russia's economy grew tremendously when they instituted a flat tax. Some much so that they kept calling off of the Laffer curve and actually had to RAISE taxes to control growth. Could you imagine having that problem?

The problem is the number of uneducated people... not "academically uneducated" but people who don't care to understand the problem.

I've seen a woman at a grocery store ARGUE with the cashier because she couldn't buy energy drinks with food stamps. I would've revoked her food stamps on the spot if I had any control over my government.

I've also heard (twice, now) this gem: "the stupid government didn't give me any money this year." Referring to the fact that he/she didn't receive a tax refund. Don't even both trying to explain that you only get a refund if you pay too much in taxes.
 
  • #29
FlexGunship
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Back in '62, Milton Friedman (a preposterously smart economist) suggested a Negative Income Tax. It was a special type of flat tax. The idea was that you cut most programs (like Medicare/Medicaid and Social Security), but allow households to actually get paid by the government instead.

I'm not a big fan of this model of "wealth redistribution" but his plan was oddly non-objectionable. Wikipedia has an except about it.

[PLAIN said:
http://en.wikipedia.org/wiki/Flat_tax]The[/PLAIN] [Broken] negative income tax (NIT), which Milton Friedman proposed in his 1962 book Capitalism and Freedom, is a type of flat tax. The basic idea is the same as a flat tax with personal deductions, except that when deductions exceed income, the taxable income is allowed to become negative rather than being set to zero. The flat tax rate is then applied to the resulting "negative income," resulting in a "negative income tax" the government owes the household, unlike the usual "positive" income tax, which the household owes the government.

For example, let the flat rate be 20%, and let the deductions be $20,000 per adult and $7,000 per dependent. Under such a system, a family of four making $54,000 a year would owe no tax. A family of four making $74,000 a year would owe tax amounting to 0.20 × (74,000 − 54,000) = $4,000, as under a flat tax with deductions. But families of four earning less than $54,000 per year would owe a "negative" amount of tax (that is, it would receive money from the government). For example, if it earned $34,000 a year, it would receive a check for $4,000. The NIT is intended to replace not just the USA's income tax, but also many benefits low income American households receive, such as food stamps and Medicaid. The NIT is designed to avoid the welfare trap—effective high marginal tax rates arising from the rules reducing benefits as market income rises. An objection to the NIT is that it is welfare without a work requirement. Those who would owe negative tax would be receiving a form of welfare without having to make an effort to obtain employment. Another objection is that the NIT subsidizes industries employing low cost labor, but this objection can also be made against current systems of benefits for the working poor.

The reason I like this more than normal welfare programs is that it still requires the individual to be responsible with the money they get.
 
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  • #30
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Uneducated people are definitely a problem. But you cannot successfully put a larger burden on the poor. The correlation between poverty and lack of education is extremely strong. Placing more burden on the poor is feeding the fire, and they are the ones in the most need. As per usual, the middle class has to take the burden...somehow...
 

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