Uncle Sam, He is both Rich and Broke!
As of 2016, the US’s Income or Revenue (or in economic terms Gross Domestic Product or GDP) is $18 trillion. It is the largest income among the developed countries, and it is the largest economy in the world! But it also carries one of the the highest debt burdens.
Now, the US government taxes its people. Of the $18 trillion GDP, the US federal government (not including state government taxes) takes roughly about 22% or $4 trillion to fund government activities like Social Security, Medicare, Medicaid, military spending, etc. That is a lot of money for a government to take. And guess what, it is not enough. The government wants more!
In the last decade and a half, the US government has always exceeded its budget and has been borrowing money to fund its programs. Without going so political on this, let’s look at fiscal budget numbers as published by the US government.
Since we are still in 2016, I have posted below this year’s projected numbers.
US Government Revenues: $3,525,000,000,000
US government Expenditure: $3,999,000,000,000
Projected deficit: $474,000,000,000
US National Debt to date: $17,931,000,000,000
Does this trillions of $ make sense to you? Do you even know what this means?
For the benefit of the readers, let’s put this number into perspective. I will try to use a more relative number here. So, what I did here is I removed 8 zeros from the raw numbers (in reality, you need to divide that number by the total population of the US which currently stands around 320 million). But for simplicity, I just removed the zeros.
Let’s say US Government = Uncle Sam:
Uncle Sam’s Revenues: $35,250
Uncle Sam’s Expenditures: $40,000
Uncle Sam’s projected shortfall: $4,750
Uncle Sam’s total debt: $179,310
Given this simplification, it’s easier to understand what Uncle Sam is getting us into. He is overspending! You see, if this was your own money, you would easily say, stop spending!
Sam’s Total Loan or Cumulative Aggregate Loan is $179,310 (since 2000-2001). With an income of only $35,250, it will take years for him to pay that loan back.
So, the question is, how does this impact Sam?
This $179,301 total debt will have a day of reckoning. He will eventually need to pay this loan, but he does not have the means to pay for it. His loan to income ratio is very high at 5.08x (divide $179,301 by $35,350), meaning he has already borrowed 5x his income from the future. This is a very dangerous situation.
Whenever you have a loan to repay, there are three ways you can really address it. Let’s examine each of the options and comment a little about the difficulties of pursuing such actions.
Lower expenses. This one is very hard to implement. The political quagmire in Washington is not easy to fix. No one can agree which expense item in the US budget to cut – social welfare, medical, military spending, etc. Both Democrats and Republicans have their own agendas they run and it’s impossible for them to get to an agreement.
In reality, this should be the easiest to do and should be the first thing to implement. You need to cut the fat and live within your means.
Increase Taxes. Increasing taxes is much easier to sell to the public than to cut expenses. There is a saying that “…a luxury once experienced becomes a necessity.” This is the case for cutting expenses — “Oh, I can’t believe that I am being downgraded from business to economy.”
The argument that the rich people are getting away all the benefits, and they steal money from the poor are always good chimes that ring so well in everyone’s ear! There is definitely some truths to this because of the way our taxes are structured, but the reality is that you can only tax the rich so much. The government will need a larger base to pay for these expenses. Hence, they will also increase taxes for the middle income earners.
In reality, there should be no need to increase the tax rates if the economy is growing. Picture this: A 20% tax on a revenue of $100 is $20, but a 20% tax on a revenue of $150 is $30. So, what the government needs to do is to stimulate the economy and keep the tax rates as they are. The question is how do you stimulate the economy? This is subject for another discussion and I will think of means to simplify some economic concepts for the readers.
Go on default. Seems really easy to say but hard to do. To default has so many negative repercussions to the US economy which is already waning in many parts of the world. The US is the standard for the worldwide economy that defaulting on these loans is not even a choice for the majority of our politicians.
Personally, bankruptcy should be an option. In fact, this is so painful. But if it is the only thing that could hurt so much that we learn our lesson, this should be a route to take.
Having outlined our options, if there is unity in the government, they should actually do a combination of options 1 and 2. But since option 1 is much more politicized, option 2 is much easier to do. It is easier to ask others to shoulder the cost. And the politicians always have a way to massage and spin this message.
So, there you go, in my view, we will all bear the burden of the higher tax rates where in reality we should be cutting expenses, stimulating the economy, and be responsible citizens. Don’t spend more than you make. Invest in the future, invest in infrastructure, education, technology, and other fundamental factors in the economy.