OPINION:
Santa Claus does not exist. Just about everyone older than 12 understands that. Yet both Republican and Democratic politicians argue, almost daily, that Santa Claus is real, except his actual name is Uncle Sam.
The Democratic version of this story is that, notwithstanding the federal government’s dire fiscal situation, the government can hand out even more benefits and create more spending programs if only we would increase taxes on the rich and corporations so that they pay their “fair share.”
The problem with this narrative is that the top half of taxpayers already pay 97% of income taxes. Moreover, the federal government could confiscate every dollar of income not already taxed away from those earning $200,000 or more annually, and it would barely eliminate the annual federal deficit for one year, let alone pay for trillions of dollars in new spending.
Of course, this would be a one-time windfall because hardly anyone would continue to work or invest if subjected to a 100% flat tax.
Such a policy would have an unparalleled negative impact on the economy. The truth is that if you want a European-style welfare and administrative state, as most liberals do, it must be paid for by imposing crushing taxes on the middle class, which would result in stagnant economies. There is a good reason the typical American has a much higher standard of living than the typical European.
The Republican version of this story is that we can right the federal fiscal ship, without doing anything particularly painful or controversial, by eliminating “waste, fraud and abuse.” There is, of course, a massive amount of waste and fraud in the federal government that needs to be addressed ($160 billion to $240 billion annually, according to the Government Accountability Office).
The federal government has an annual deficit of roughly 10 times that, $1.8 trillion in fiscal year 2025, and spends $7 trillion each year.
Thus, both these narratives are easily disproved. Yet through sheer repetition by our deeply unserious political class, many Americans, perhaps most, have come to believe them.
The federal debt owed to the public is $31 trillion and growing by $2 trillion annually. To put this in perspective, the value of all goods and services produced in the U.S. each year is about $31 trillion. The present discounted value of Social Security’s unfunded liabilities is $26 trillion, and that of Medicare’s is $60 trillion.
These three liabilities alone total $117 trillion. This amounts to $868,000 in debt for each of the 135 million households in the U.S., a massive and unprecedented burden, particularly on young people.
Unless our fiscally incontinent political class makes a dramatic course correction, the U.S. will experience the worst financial crisis in its history, probably in about a decade. It will happen when those lending to the federal government realize they will be repaid in highly devalued dollars and demand compensation in the form of dramatically higher interest rates.
Unemployment, inflation and financial losses will cause untold misery. Soon, it will be too late to avoid gut-wrenching economic fallout that will affect everyone.
The federal government now spends more on net interest expense than on national defense. Even if Congress abolished every federal agency, including the Pentagon, it would barely eliminate the deficit. That is because of the $7 trillion spent annually by the federal government, $1 trillion is net interest expense, and $4.2 trillion is on entitlements such as Social Security, Medicare, Medicaid, Obamacare and various poverty programs.
The primary economic effect of Social Security, Medicare and Obamacare is the transfer of massive amounts of money each year from relatively low-income, young working people and families to relatively affluent seniors. Obamacare accomplishes this in a hidden manner through community rating or age-band restrictions that prevent older people’s health insurance premiums from exceeding three times those of younger people.
In addition to almost $700 billion in federal spending, Medicaid accounts for nearly 30% of state government spending. Social Security and Medicare alone already contribute $562 billion to the federal deficit, and Social Security will be officially insolvent by 2033 (using intermediate assumptions).
Medicare, Medicaid and Obamacare are the major reasons the U.S. spends twice the Organization for Economic Co-operation and Development average on health care (17.2% of gross domestic product compared with the developed-country average of 9.3%), yet it does not have better outcomes. A health care system that is twice as expensive but delivers similar outcomes is monstrously bad and needs radical reform.
To control spending and prevent a crushing financial crisis, Congress must focus on reducing the $4.2 trillion annual entitlement budget. That’s where the real money is. That is where massive amounts of waste are. Much of the money is flowing to higher-income, higher-net-worth individuals.
These reforms need to be substantial and occur rapidly. If they do not, then the American people will suffer immensely, courtesy of two political parties that are simply lying about reality. Reality always eventually intrudes on delusional narratives.
• David Burton is a senior fellow in economic policy at Advancing American Freedom.
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