With no side seemingly willing to compromise on the mounting debt issue at hand, August 2 could very well be judgement day, forget 2012. If a deal is not struck by then concerning the $14.29 trillion debt limit, an economic Armageddon could be right around the corner, as the U.S. will begin to default on its loans. Come August, the government will have to raise the debt ceiling — at least the $2.4 trillion needed to make it to next November — and a long-term plan will need to be at least outlined.
In order to really affect the growing debt problem, the amount of revenue feeding the government coffers needs to increase. The government must look to raising taxes on the wealthy or eliminating tax breaks for the wealthy and corporations as a potential revenue stream, because closing tax loopholes and spending cuts will not sufficiently impede the continued growth of government debt.
Most Americans would agree that spending cuts alone would not do enough to dig the country out of our massive debt, with 67% in favor of a deal that involves both spending cuts and taxes on the wealthy. Another poll found that in swing states nearly 80% of respondents approved of tax hikes to individuals making over $1 million, with some approving tax hikes for those making over $150,000.
Hundreds of billions of tax dollar revenue could be brought in by raising taxes on the wealthy. Legislation sponsored by Rep. Jan Schakowsky (D-Ill.) looks to raise tax rates to 45% on millionaires, with rates set as high as 49% for billionaires. "Instead of cutting Medicare and Medicaid benefits, lawmakers could pass the Schakowsky millionaire's tax and raise about a trillion dollars," Dean Baker of the Economic Policy Institute said.
President Barack Obama’s budget plan back in April provided an adequate outline for the hikes. It would have reverted the tax rates to 39.6% and 36% for the top two income rates, while also increasing capital gains and dividend rates to 20% and reducing the amount of deductions and exemptions for the wealthy. This plan, affecting those making over $200,000, could potentially bring in over $1 trillion dollars in 10 years.
Continued tax breaks for the wealthy is not in the best interest of the country. The Congressional Budget Office found that continued tax breaks would only exacerbate the debt problem, as the breaks do not pay for themselves. Obama’s proposed cuts back in March would have reduced revenue by $2.3 trillion, while allowing the interest owed on the debt to rise significantly.
Plans to end subsidies for oil and gas companies as well as closing loopholes in the corporate tax code will bring in modest revenue, but limiting deductions for those making over $500,000 would, over the years, bring in sufficient revenue returns.
The biggest problem in terms of debt that our country faces is the growing interest payments of the debt. If tax revenue is kept at its historical amount — 18% of GDP — the government would essentially be only able to cover the mounting interest payments, which is expected to be roughly $931 billion come 2021.
It is easy for one to say that the best way to combat the excessive debt is to simply dial back on spending, but that will not work because of the immense nature of the problem.
According to CNNMoney, the debt owned by the public is at 62% of GDP. In order to freeze the debt at that rate the government would have immediately cut spending by $1.2 trillion, maintaining the same amount of spending cuts permanently. Discretionary spending — including defense — amounted to $1.35 trillion in 2010 alone, meaning programs would face deep spending cuts in order for the deficit to be reduced. Even more spending cuts would have to be made to get the debt back down to its historical amount of fewer than 40%. By implementing tax hikes or eliminating tax breaks the government could avoid having to make extreme cuts — though minor cuts will likely have to be made — to Social Security, Medicare, Medicaid, and other important programs.
Though they may seem like a logical choice, spending cuts alone will only hurt the middle class and those in dire need of help, as cuts will undoubtedly affect common Republican targets: education, health care, and social security. There has to be some revenue coming in; tax breaks and spending cuts do not pay for themselves.
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