A fiscal compromise to get the federal debt under control
In 1790, Thomas Jefferson, James Madison and Alexander Hamilton agreed to the Dinner Table Bargain, a compromise whereby the new federal government assumed all of the states’ debts incurred during the war, in return for moving the new seat of government to the banks of the Potomac.
It is time for another compromise regarding our burgeoning debt and deficits. The U.S. owes $35 trillion, representing over 120 percent of GDP, compared to 30 percent in the 1970s, 40 percent in the 1980s, and 60 percent from the 1990s up to the financial crisis.
Meanwhile, the deficits keep on growing, further pushing up the debt balance, with a shortfall of $2 trillion in 2024 compared to roughly $200 billion in the 1990s and 2000s.
Most of the increase in the deficit has been the result of a significant expansion in federal outlays. Spending ranged from 19 percent to 21 percent of GDP from the 1970s through the 2010s. After hitting a peak of 30 percent during the 2020 pandemic year, it has since settled into the range of 22 percent to 24 percent.
Of the spending, transfer payments excluding Social Security have increased from 5 percent of GDP in 1980 to more than 10 percent today. Expenditures for national defense have fallen to less than 4 percent of GDP, compared to 6 percent to 8 percent during most of the 1980s. And federal receipts have for the most part ranged from 15 percent to 19 percent since the early 1950s.
This compromise would be a constitutional amendment requiring a balanced budget set at 20 percent of GDP, in return for a one-time wealth tax that would cut the existing debt in half, returning it to roughly 60 percent of GDP.
As part of the balanced budget, defense spending would be increased back to 5 percent of GDP from its current 3 percent level. Any future yearly deficits to fund emergency spending above 20 percent of GDP would require a 75 percent vote from both houses of Congress and could not be funded by money creation by the central bank. Tax expenditures such as special tax credits would count toward the 20 percent spending limit.
Modest adjustments to Social Security start dates and future inflation adjustments, along with reduced payouts for those with significant income should be able to resolve the trust fund problem, while the other transfer payment programs will need to be reexamined. Small increases in personal and corporate tax rates would bring revenue up to 20 percent of GDP.
The second part of the amendment would be a one-time wealth tax used to reduce the federal debt by roughly $15 trillion, representing about 10 percent of the current household net worth of $150 trillion, made up largely of stocks, bonds, private businesses and real estate.
For perspective, since 1990 stocks and public debt have increased over ten times in value while median income has only increased 2.5 times. Asking wealth holders of all levels to share in the debt reduction seems reasonable given the massive increase in asset values over the past 30 years.
The 10 percent wealth tax would apply to all financial and real assets and their substitutes. Asset holders could choose to either remit public securities or their cash equivalent value to the Treasury. The tax on real estate, ownership of private businesses and other non-publicly traded assets would not be collected until the asset is sold, but any distributions on these assets, including loans taken out against asset collateral, would be subject to the same 10 percent tax up until the disposition of the asset, at which time 10 percent of the proceeds would be collected.
Public securities collected by the Treasury would be sold off over a multi-year period to avoid market disruptions, while remitted treasury securities would be extinguished.
Many will find something wrong with this proposal. Conservatives will object to the wealth tax and a 20 percent spending and tax level. Progressives will oppose the cap on spending, the increased defense expenditures and the removal of the printing press to fund deficits. However, without a compromise, we are destined for larger deficits and debt balances that ultimately will have severe consequences. Security, sound money and fiscal responsibility are minimum requirements for an effective government.
Robert Goldberg is the James F. Bender Clinical Professor of Finance at Adelphi University's Robert B. Willumstad School of Business. His research focuses on financial markets, corporate finance and investment management.
Date: |
Topics
-
Top stories - The New York Times
Federal Debt and the Election
National debt may soon exceed G.D.P. We explore the causes — and possible solutions.8 hours ago -
Top stories - CBS News
Why the national debt could rise under both Harris and Trump
According to an analysis from the Committee for a Responsible Federal Budget, both Vice President Kamala Harris' and former President Donald Trump's economic plans could increase the federal ...19 hours ago - Donald Trump -
Top stories - CBS News
Can I get all of my credit card debt forgiven?
Debt forgiveness can offer relief from your credit card debt, but there are limitations to this type of relief.3 hours ago -
Business - CNBC
Taxpayers in 25 states get extra time to file, but not to pay, 2023 federal taxes
The deadline for taxpayers who filed an extension for 2023 taxes is October 15. Natural disasters have given taxpayers more time to file, but not pay, taxes.1 hour ago -
World - Financial Times
Under the influence: exploring Carlsberg’s Copenhagen
The brewing giant’s architectural and cultural legacy is unmissable in the Danish capital — especially in the district where its story began16 hours ago -
Top stories - CBS News
Will credit card debt forgiveness cover my $20,000 debt?
Whether or not credit card debt forgiveness will work for you depends, in part, on the total amount you owe.Yesterday -
Top stories - BBC News
Chelsea and Forest charged for failing to control players
Chelsea and Nottingham Forest are charged by the Football Association for failing to control their players after a mass confrontation.6 hours ago -
Business - CNBC
China stocks poised to reopen with markets fixated on fiscal stimulus
Traders are closely watching for additional policy measures as Beijing has signaled a sense of urgency in bringing its economy back on track.21 hours ago - China -
Business - Financial Times
Chinese stock rally cools after Beijing holds off on fiscal stimulus
Investor disappointment with lack of detailed plans limits gains in CSI 300 and triggers sharp sell-off in Hong Kong5 hours ago - China
More from The Hill
-
Politics - The Hill
Harris, DeSantis trade barbs as Hurricane Milton bears down
Vice President Harris and Florida Gov. Ron DeSantis (R) are trading barbs as Hurricane Milton bears down on the Sunshine State and as election year politics looms over the response to severe ...25 minutes ago - NFL -
Politics - The Hill
Harris aims to help adult caregivers with Medicare benefit expansion
Vice President Harris on Tuesday introduced a new plan to expand Medicare benefits so that the program covers the costs of long-term home care for older Americans. The plan, formally announced on ...42 minutes ago -
Politics - The Hill
'Uncommitted' group says Trump would be worse for Palestinians
The “Uncommitted” National Movement – a pro-Palestinian political group opposing the Biden administration’s support for Israel – encouraged its followers to back Vice President Harris’s ...46 minutes ago - Donald Trump -
Politics - The Hill
Trade group sues FDA over ending Mounjaro/Zepbound shortage
A trade organization representing compounding pharmacies that make unbranded versions of the weight loss drugs Mounjaro and Zepbound has filed a lawsuit against the Food and Drug Administration ...53 minutes ago - FDA -
Politics - The Hill
Gallego holds 10-point lead over Lake in Arizona Senate race survey
Rep. Ruben Gallego (D-Ariz.) has a ten point lead over Republican Kari Lake in the Arizona Senate race according to a Napolitan News Service poll released Monday. Fifty-two percent of voters said ...1 hour ago