In Touch With Reality

How often do we hear that the reason that we have the large federal budget deficits we do is because taxes are too low?

The "rich" are not paying their fair share.

These are favorite narratives of Joe Biden and the Democrats.

It is a great talking point until you look at the facts.

If we are running deficits because taxes are too low, how do you explain this?

This is a chart of federal tax receipts over the last 10 years.

Look at the last two years.

Source: https://fred.stlouisfed.org/series/W006RC1Q027SBEA

(FICA taxes are not included in tax receipts in this chart).

Bear in mind that tax revenues have poured into the federal treasury despite the Trump tax cuts that were enacted which we were told was going to devastate tax receipts.

We have also seen this revenue growth during a pandemic that saw much business activity curtailed.

Despite this, federal government receipts were over $1 trillion higher in 2022 than they were in 2019 (+50.4%). 

If government tax receipts have grown by more than 50% in the last three years how is it that we are projected to have a $1.5 trillion budget deficit in 2023?

Spending has expanded faster than revenues even with the Covid spending now behind us.

Source: https://fred.stlouisfed.org/series/FGEXPND#0

The latest Congressional Budget Office (CBO) projections is that we will spend $6.4 trillion in fiscal 2023, collect $4.8 trillion in revenues (including FICA contributions) and end the year with a $1.5 trillion deficit.

Source: https://www.cbo.gov/topics/budget

Total federal debt outstanding is now $32.5 trillion according to the latest U.S. Treasury Department numbers as of July 6, 2023.

$25.6 trillion of this debt is held by the public and an additional $6.9 trillion is owed to the Social Security, Medicare and other government trust funds in intragovernment accounts.

An astounding $1 trillion in additional debt has been taken on by the federal government in a little over a month since the debt ceiling limit was extended (June 3).

Looked at another way, almost 3% of all the debt issued by the U.S, Treasury since the founding of the federal government in 1787  has been put on the books in the last 30 days. 

Source: https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny

Of course, as we all know, Biden and the Democrats are also telling us that in addition to not taxing us enough we are not spending nearly enough on "important priorities".

Fighting climate change.

Funding more education spending.

Funding more health care spending.

Increasing welfare spending.

Paying for millions of illegal immigrants.

Cancelling student loan debts.

Providing more weapons and economic subsidies to Ukraine.

The list is endless.

It always is.

Has there ever been enough money to provide for even a fraction of what politicians would like to spend?

The problem now is that with almost $33 trillion in federal debt, and higher interest rates, the money is going to get tighter and tighter in Washington, D.C.

It takes $1 trillion in annual federal revenue to pay 3% interest on $33 trillion in federal debt.

The federal government has enjoyed more than a decade in which its average borrowing cost has been below 3%.

In 2021, it actually got as low as 1.56%.

At June 30, 2023 it was at 2.75% and appears to be trending towards 3% or higher in the near future.

Source: https://fiscaldata.treasury.gov/datasets/average-interest-rates-treasury-securities/average-interest-rates-on-u-s-treasury-securities

$1 trillion is a lot of money.

The entire U.S. Defense Department budget for 2023 is $817 billion.

Where does the money come from if the average interest rate on federal debt goes to 6%?

How much is left for anything else after paying $1 trillion or more for interest on the federal debt?

The average interest rate on federal debt obligations was higher than 6% in 2001.

That would require $2 trillion in annual spending on interest payments alone at today's debt levels.

The federal government is only expected to collect $3 trillion in individual and corporate income taxes in the current year.

We are not far away from reaching the point that more than half of current income tax collections will be requited to pay for interest on the federal debt.

Expect to hear more cries that taxes have to be raised.

You can also expect to hear little about how we got here.

It is also a given that any amount of tax increases will not matter a smidge in the end unless the spending side of the equation is not substantially reformed.

Welcome to reality.

It simply is not a place that many people or politicians are in touch with.

Consider yourself IN TOUCH.