How are we going to pay for all this?

In March, the monthly gap between federal spending and revenues was the third largest in U.S. history.

Whether Donald Trump or Joe Biden is president, federal spending keeps climbed. But raising the money to pay for it has been lacking. Even worse, under Trump spending increased and taxes were cut.

Congress had made a deal that, aside from fixed benefits, military and non-military expense would be kept about equal. That deal was broken by Trump, who boosted military spending with GOP support. He also paid billions to compensate farmers for the negative effects of his trade policy.

Biden has proposed about $2 trillion in infrastructure spending. Last week he released his proposed budget that would boost federal spending to move toward restoring the budget deal without military cuts. Both he and Trump spent without restraint to combat Covid-19, the main cause of the March deficit.

The problem is paying for it all.

The Federal Reserve can create money, but only temporarily. There is only one ultimate answer. The people who pay the taxes will have to pay the bill.

Are taxes already too high?

The political mantra is that the government is taking too much of your “hard-earned money.” Taxation is undesirable and reduces your ability to decide how to spend your own money. The mantra is mistaken.

Only about 57% of households pay any federal income tax. The rest of the households, mostly the poor and part of the middle class have no income tax liability. A small percentage of the wealthiest households also pay no income tax.

The amount of money the government will recover in taxes is partly determined by what Congress decides are the activities and actions it wants to support. So tax revenues buy things decided by the representatives of the taxpayers.

Beyond income taxes, the government levies a payroll tax, and almost everybody who works pays it. These taxes supposedly pay for guaranteed programs like Social Security. They don’t. The payroll tax usually doesn’t cover more than a fraction of the benefits the worker will receive in retirement.

Because the federal government runs up a budget deficit almost every year and payroll taxes don’t cover benefit commitments, it looks like taxes are too low.

Biden proposes to raise taxes on the most wealthy households and on corporations. If he gets his way, the new tax rates would still be lower than under President Obama. In other words, much of the Trump tax cuts will survive.

But corporations and some wealthy individuals complain that if they pay more taxes, they will invest less in the economy, creating fewer jobs. It may seem logical that raising taxes could have a negative effect on the economy, but there’s no proof. In fact, much government spending finds its way into the private sector, stimulating the economy.

Here’s an example of the doubtful effect of higher taxes. Maine collects lodging taxes, mainly from visitors. The tax revenues benefit Maine people, but some worry that if Maine raises the lodging tax, tourism will suffer. Ask yourself if you have ever made a vacation decision based on a state’s lodging tax.

If we want better roads and more warships but dislike taxes, how do we pay for them? The federal government borrows and debt increases. Don’t worry about that, say succeeding presidents.

The economy will keep growing, especially without heavy taxes, and that will produce added tax revenues that can be used in the future to pay off the debt. The annual projection about future tax revenue is one of the greatest exercises in artificial optimism.

To that hope we have joined the belief that interest rates are now so low that future payments won’t be burdensome. Add low interest rates to a booming economy and more debt is no problem.

That theory leads to tax cuts. If lower taxes help the economy, we should cut them even more. It worked once, under President Kennedy, and became an almost sacred belief. It never again worked. The national debt keeps growing, partly because increased revenue is spent, not used to pay off debt.

Add to that the fact that states cannot create their own unfunded debt. So they lean on Washington for funds, because the federal government has no such rule.

There will always be new demands on government, so for the sake of future generations debt should be kept under some control. Otherwise, making debt service payments will inevitably demand high taxes and crimp the budget. That would harm the economy.

The Washington debate focuses on limiting taxes as the way to choke the growth of big government. It ought to focus on just what we want from government and then decide if and how we pay for it.

Gordon L. Weil formerly wrote for the Washington Post and other newspapers, served on the U.S. Senate and EU staffs, headed Maine state agencies and was a Harpswell selectman. 

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