Torrent of New Federal Spending Leaves Ominous Clouds of National Tax Hikes

The total public debt outstanding of the U.S. government has been exploding at a nearly unprecedented rate.

Starting from March 15, 2020, just before the coronavirus pandemic gave politicians a reason to open the federal government’s spending floodgates, the national debt stood at a nearly even $23.5 trillion. Three months later, on June 15, the debt had increased to nearly $26.2 trillion. In between, Uncle Sam borrowed $2.7 trillion — an average of more than $884 billion a month — just to support the spending binge.

Put another way, the amount of national debt the U.S. government has accumulated in the past three months is over 2.4 times the $1.1 trillion the U.S. government planned to borrow during its entire 2020 fiscal year when it was already going to run a record budget deficit.

What kind of impact is that massive increase in the national debt going to have for ordinary Americans?

Many proponents of the extra spending, who point to the near-zero interest rates the U.S. government is paying to borrow money, argue that Americans face little penalty for their politicians’ spending under that circumstance.

Writing at The Hill, economist Scott Sumner (author of the Independent Institute book The Midas Paradox) considers the situation of Japan, whose politicians have been running that kind of scheme for so long that its national debt exceeds 234% of its GDP. While other economists argue Japan is a role model for how to sustain large budget deficits and a large national debt, Sumner finds that policy imposes very real costs upon Japan’s people:

Japan’s case seems to suggest a third way. After all, it’s had near-zero interest rates for decades, even as public debt has grown rapidly. On closer inspection, however, the Japanese case doesn’t provide much solace.

Japan’s near-zero interest rates reflect the fact that over the past quarter century, it’s had only trivial growth in aggregate demand (total spending), the worst performance of a major economy in modern history — far worse than even Italy. That’s not much of an argument for using deficit spending to boost an economy.

Successful stimulus policies lead to faster growth and higher interest rates over time. Japan’s done almost exactly what many Keynesian economists have recommended – run persistent and large budget deficits – and the policy has failed abysmally.

The Japanese government understands that it’s risky to increase the debt-to-GDP ratio forever on the assumption that interest rates will always be zero and has gradually increased taxes to control its debt. The national sales tax rate rose from 3 percent to 5 percent in 1997, then to 8 percent in 2014, and then 10 percent in 2019. Further increases are almost inevitable. Large deficits impose costly burdens on future taxpayers.

But Japan is far from the only case of a country where higher taxes follow unrestrained government spending. In South America, Brazil has also unleashed a torrent of spending that has sent its national debt and budget deficit to record highs during the coronavirus pandemic. Brazil’s national debt now exceeds 100% of its GDP, not far behind the U.S. government’s own 110% national debt-to-GDP ratio.

To cope with its high deficits and large national debt, Brazil’s economy minister is now proposing new taxes on Brazilians.

Brazil’s Economy Minister Paulo Guedes said on Tuesday he is sympathetic to implementing a transactions tax as it is simple and can help keep value-added tax, or VAT, low.

Addressing a public congressional hearing via videoconference, Guedes said that tax and administrative reform proposals are ready and can be submitted to Congress as soon as lawmakers give the green light.

In effect, Brazil is looking to impose a national sales tax on every transaction that occurs within the country, on top of its similar value-added tax. But because politicians have the incentives to spend that they do, no matter where in the world they are, what today’s politicians propose as small taxes will almost certainly grow into much larger ones. Just as has happened in Japan.

At present, the United States has neither a sales tax nor a value-added tax at the national level. But with the explosion of spending in Washington, D.C., the writing is all but on the wall.

Unless serious fiscal restraint returns to Capitol Hill, we won’t be talking about whether new taxes will be imposed upon Americans, but when.

Craig Eyermann is a Research Fellow at the Independent Institute.
Beacon Posts by Craig Eyermann | Full Biography and Publications
  • Catalyst
  • Beyond Homeless