The Trillion-Dollar Bill, Part II

People who have dug themselves out of serious debt have done so by drastically changing their spending habits, making difficult decisions about which beneficial goods and services to sacrifice for the sake of financial freedom. Similarly, paying off our $12.8 trillion national debt will require a significant reduction in government spending. The only alternative is for the government to pay down the debt with increased tax revenue, but this approach is unreliable.

The government cannot guarantee consistently higher tax revenue — they can only control the tax rates. This is because tax revenue is the tax rate multiplied by the pool of taxable money, and that pool shrinks when the tax rate increases. For example, if the government were to raise everyone's income tax rate to 100%, nearly everyone would stop working, which would leave the government with barely any income tax revenue. In a free society where people act to avoid taxation, raising tax rates even slightly can lower tax revenue; however, lowering tax rates can also lower tax revenue if there isn't enough additional taxable activity. A complex society of millions of individuals acting in their own changing self-interests makes it very difficult to predict how tax revenue will change as a result of tax rate adjustments. As a result, relying on significantly increased tax revenue to pay down the debt isn't a very sound approach.

Even if the government were able to generate consistently higher tax revenue, politicians would be inclined to spend the additional money on popular, vote-getting services rather than using it to pay down the debt. If you were a politician looking to get reelected, and you had a pile of new money to play with, would you use it to make a dent in the debt problem that seems abstract to the voters? Or would you rather stage a press conference announcing a brand-new benefit that you are giving to the electorate? The natural incentives of politicians make it highly unlikely that increased tax revenue would be consistently used to tackle the debt.

Instead of seeking increased tax revenue, our government should find ways to significantly reduce spending without pulling the rug out from under the people who rely on that spending. Congressman Paul Ryan's Roadmap for America's Future is a plan to do just that — gradually reforming unsustainable government programs while adding simple new measures to force these programs to control their spending.

One aspect of Congressman Ryan's plan is to reform Medicare and Medicaid, which together account for 22% of the federal budget (more than national defense) and are the main contributors to projected deficits in the years ahead.¹ A major problem with these programs today is that doctors are reimbursed by the government for any medical care given to Medicare/Medicaid recipients, and the government's poor track record of properly reimbursing doctors has resulted in over half of doctors choosing not to see Medicare/Medicaid patients. The lack of available doctors has forced many recipients to go to the emergency room even for basic care, resulting in heavily inflated costs to the federal government. Congressman Ryan's plan would replace the government reimbursement system by giving recipients health-related expense accounts to cover the costs of medical care. Doctors would no longer avoid Medicare/Medicaid patients, and more available doctors would mean lower emergency room costs. In addition, ownership of the financing would force recipients to economize their health-related expenses instead of having recipients ignore medical costs altogether.

With our national debt projected to double over the next decade,² we need leaders with the foresight and fortitude to reign in runaway spending.

1. The Budget Committee Republicans. A Roadmap for America's Future.
2. The Congressional Budget Office's analysis of President Obama's 2011 budget indicates that our national debt will increase by $12.8 trillion over the next ten years.