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Can You Fix the U.S. Government Deficit?

Ask Americans on the right and the left about the federal government deficit and virtually all will agree it is a huge problem. After blame is placed on Congress and/or the president, the debate (argument) turns to fixing the federal deficit. There the problems begin.

The left says we should raise taxes, especially on the rich. The right says we need to cut spending. Who has the correct answer?

Well, we could start a healthy (or unhealthy) debate here on how to fix the federal government’s fiscal problems. But all we end up doing is saying things that are totally removed from reality. That is why I am going to let you fix the problem using real numbers.

At the end of this post I have embedded an interactive budget simulator for the U.S. government. Before you jump right into solving the deficit once and for all, I need to point out a few things.

First, the simulator has an introduction video you can safely pass.

Once you close the video you can start working on the government’s budget. At the top there is a sliding bar indicating the expected results of your budget. It is set at a $1.6 trillion deficit based upon the current budget estimate. It also appears the real world will be worse than the projection. This will change in the future as facts (and tax laws and spending) change.

You can toggle between revenue and spending.

There is a red box at the top of the simulator: Towards a Sustainable Budget. Each step you take to lower the deficit you will see the percentage needed for a sustainable budget go up. If you make matters worse, you get a negative percentage. The indicator turns green when you build a budget that doesn’t make matters worse.

Understand a sustainable budget is not a balanced budget. Depending what revenues and spending you change will determine when you reach sustainability, defined as the deficit growing around the same speed as GDP. This means the total national debt will remain about the same percentage of the GDP. It is felt this will not harm the economy.

Keep in mind certain tax increases help you reach sustainability easier because tax revenues to the government climb with the economy while lowering spending has a diminishing benefit as the projected budget moves into the future. (Extreme example: If you cut a spending item to zero there is no increasing benefit as time goes on while tax increases keep climbing as the economy grows.)

Also note you can’t just jack tax rates. The simulator knows that after a certain level of taxes government revenue can actually fall.

Now we turn to spending. There are a lot of areas you can cut. You will notice federal unemployment insurance tax revenues and expenses are locked. This tax is paid solely by employers and currently generates a surplus. It plays a minor role in the budgetary process.

Interest expense is also locked. The reason is simple. If you decide defaulting on the national debt is a wise idea you must also accept the government will no longer be able to borrow, including for national emergencies or national defense. It’s a nonstarter so it isn’t allowed.

Fixing the Government Deficit

I played with the simulator to see if I could fix the problem our elected officials could not. It proved more difficult than I imgined.

I started with a few personal rules. Social Security and Medicare could not be touched. People paid a tax for that specific benefit. If you eliminate the program you also eliminate the revenue stream (payroll tax). And what about the money in the trust fund? Do we return it or just steal put it in the general fund? Too messy and never a real possibility so fingers off Social Security and Medicare. This includes no payroll tax increase either.

The last thing I considered sacred was defense and VA benefits. We need a strong defense and we are honor bound to take care of our veterans after the sacrifice they made serving this nation.

Now that Social Security, Medicare, national defense, veterans, and the interest were paid, it was time to cut.

Ah, we have a problem. I discovered if we cut 100% of all spending outside the areas mentioned to zero we get “close” to balancing the deficit. Close.

Cutting spending will never fix the problem unless we harm sacred cows. And what about food safety, traffic control, and the million other things the federal government spends on to keep us safe? No more TSA? Nobody gets checked before they step on a plane?

I had to start over. Spending cuts will never balance the budget unless sacred cows faced hamburger heaven. And there are some government services I like. For example, we should support mothers and young children. As a nation we decided to reduce a woman’s reproductive rights while a child is in the womb. Is it right to toss the child under the bus once baby reaches open air? The right to life exists for a child after being born too, I would hope. I want children protected so only a small decrease, accomplished by efficiencies. Barely a dent in the scope of things.

And so it went. Small cuts with a few bigger percentage cuts. It was not adding up as fast as I hoped.

I introduced aggressive cost controls on Medicare and increase the Social Security full retirement age. It helped a bit.

After several hours trying to cut all the deadwood from the federal budget, I managed a mere $200 billion in savings. And how am I going to get this past the 535 elected people in Congress, another 100 in the Senate, and the president?

I hate taxes. I hate paying them and I hate it when my clients pay them. A reasonable amount is okay. I guess. But it just seems taxes are so high. And the only way to turn this around is by increasing taxes.

I pinched my nose and dived in. Raising taxes was easier when it came to balancing the budget. I can’t imagine the kinds of tax increases needed would be possible without major economic dislocation.

The steps needed to balance the federal budget would never pass Congress. Neither political party would even begin to entertain the steps needed for a full elimination of the deficit. Spending cuts and tax increases would make everyone very unhappy. And it would be bad for the country.

Finally I settled on the idea that we could have a “Sustainable Budget” with a mere $1 trillion deficit. If the economy keeps growing the debt should not become a bigger burden, as the economy and size of the national debt would step in unison.

Still, I was unhappy I could not fix the problem. I could not find a solution Congress would pass or a president sign. It wasn’t that all hope was lost. Massive spending cuts with some tax increases got me to just under a $1 trillion deficit. Sustainable according to the algorithm. But a trillion in debt every year? I did not take a victory lap.

It isn't as easy as you think to fix the U.S. government deficit.
It isn’t as easy as you think fixing the U.S. government deficit.

Respect

I have a greater respect for the fine people in Congress. Armchair quarterbacking is always easier than real life performance. And I had no idea it was this hard. Even taking massive parts of government spending to zero was not enough. How Congress gets anything done is… Ah, right.

Now it is your turn. Have fun. Share your results. I want to see how you solve the deficit issue. Or at least where you say, “Good enough for government work.”

Can you actually balance the budget? Or at least get to a sustainable budget? How much will you cut? Who gets a tax increase?

How did this exercise mess with your biases? To my democratic readers: How did you feel about cutting so much spending even after increasing taxes? To my republican readers: How did you feel when you realized spending cuts would not cut it? Even getting rid of any ideas for a wall or defending that wall.

This exercise is humbling. But it is also important. Once you understand the size and scope of the problem you can do more than just complain, “Fix it!” to our elected officials. Instead of asking for the impossible due to our lack of understanding, we can offer our educated thoughts so members of Congress know what we will tolerate. And not.

Begin.

Note: While you can use the simulator on a phone, it works best on a laptop or tablet.

John McCarthy

Monday 8th of July 2024

I would advocate that the only reasonable way out of this situation is to remove the cap on SS wages and substantially increase the Medicare tax. This would align revenue more closely to expenses.

The other answer would be to fix the medical insurance and healthcare system in America. I have no clue how that happens based on our starting point, however.

Keith Taxguy, EA

Monday 8th of July 2024

We align, John. Removing the wage cap on the Social Security portion of the payroll tax significantly improves the situation. I painted myself in the corner when I said "No new taxes." And, "Don't touch those sacred cows."

The healthcare system in the U.S. is a hot mess. That involves taxes and a whole lot more. I have no idea what Congress will do about that.