Taxes, Bankruptsy, and the Future of the American Economy

Three things are happening to the American economy that are ultimately unsustainable:

1. Rising national debt.
2. Simultaneous increase in military  presence and social programs.
3. The federal reserve continues to pump $85 billion dollars into the economy monthly.

The only solution seems to be a massive overhaul of our current economic methodology, but first we need to understand where are our tax dollars are going and what solutions are available.

Tax Expenditure in America

Major areas of spending breaks down as follows [source]:

Military: $929B
Mandatory Spending:
Medicare & Medicaid: $802B
Social Security: $768B

These three programs account for about 75% of the total national budget. This means that, without major budget overhaul, mandatory spending alone will quickly exceed all federal revenues.

“Since the federal government has historically collected about 18.4% of GDP in tax revenues, this means these three mandatory programs may absorb all federal revenues sometime around 2050. Unless these long-term fiscal imbalances are addressed by reforms to these programs, raising taxes or drastic cuts in discretionary programs, the federal government will at some point be unable to pay its obligations without significant risk to the value of the dollar (inflation).” [source]

If the United States continues its current model without significant reductions in military or entitlement programs we can safely assume that taxes will continue to increase until we are more closely aligned to western European countries.

Comparables: Tax in the U.S and Europe

Currently the United States collects 26.2% of total GDP in taxes (State + Federal). That puts us at number 62 between South Africa and Kazakhstan. [source] We can compare this to the top 10, which include countries like Denmark and France, who each collect well over 40% of GDP in tax Revenue. But that number doesn’t mean much because every country has a different GDP and population. So we have to look at something else.

Perhaps a better number to look at is total tax revenue per capita where the United States ranks 14th.  [source] The U.S. collects about $13,084.80 per person in Tax Revenue, which puts us more closely in line with countries like Denmark ($18,100) and France ($15,120). Maybe that doesn’t sound like much, but it would take over 1.5 trillion dollars in tax revenue to catch up to Denmark or 600 billion to catch up to France. That would be about ¼ of our current budget.

Solutions: What should we do?

It seems pretty clear that doing nothing is not an option. We can’t cut taxes, expand military, and social programs. That doesn’t work. So what gives?

To avoid bankruptcy the most likely scenario is a combination of modest reductions in spending and increased taxes. Considering the size of our economy and military these changes could be relatively nominal.

For example, if the U.S. were to reduce military by 25% and increase taxes by 2.5% of GDP that would be a swing of $624.25B. Maybe we could even do some unorthodox thing like legalize marijuana and tax the hell out of it. Some studies estimate another $8.7B in federal tax revenue a year. That would put us at $632.25B.

A number like that wouldn’t burden the economy and would put us right up there with Western European countries like France. Perhaps that is something we can all live with.

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