The increasing government debt is an issue for the US economy and policy makers in Washington have different views on how to deal with this problem.
The following charts show total federal spending and tax revenues respectively (Please see this link for 2017 numbers – this infographic is available for 2017 budget but our current budget will look similar – https://www.cbo.gov/publication/53624 ). Notice that more than half of the government spending goes to social security and Medicare. Medicare and Social Security spending is expected to increase due to the increased cost of Medicare and aging population in the future.
Budget deficit is defined as the difference between government spending and tax revenues. As President Clinton once stated, dealing with the budget deficit is simple “arithmetic”. We need to cut government spending and increase tax revenues to lower the deficit.
- If you were one of the policy makers determined to control the federal budget, which federal spending item(s) would you cut? How likely would that budget cut be approved by the government?
- How would you change the tax policy to increase revenue? Would you increase the tax rate or decrease it to increase tax revenue (review the Laffer curve and comment on the relationship between the tax rate and and tax revenue)? Who should have the burden of tax?
We have a new tax law effective from 2018. Please also comment on if the current tax law can reduce the budget deficit and help reduce the increase in national debt. Below are two short videos on the new tax law. The first one is for the new tax plan (Arthur Laffer) and the second one is against the new tax law. Please feel free to use other sources and cite your references.
Tax cuts will spark growth and employment (Laffer) https://finance.yahoo.com/video/tax-cuts-spark-growth-employment-151308450.html
Six things we’ll regret about Trump tax cuts https://finance.yahoo.com/video/6-things-well-regret-trump-223446534.html