At the end of fiscal year 2015, the federal budget deficit stood at nearly $500 billion dollars (Congressional Budget Office, 2015). The enormous amount of dollars in the red being discussed makes a lot of people nervous, especially conservatives who feel that any negative spending isn’t beneficial for a healthy economy (Rickards, 2012). However, many economists feel that in order to have a healthy economy, deficits are inevitable from time to time in the cycle of capitalism.
It can be said that the United States has operated in a series of surpluses and budget deficits for much of its history. The Revolutionary War was costly, and government officials decided to raise money through government bonds, which were loans from France and the Netherlands (Wright, 2008). While the United States returned to the black at the end of the 18th century, Thomas Jefferson’s purchase of the Louisiana Territory from France in the early part of the 19th century put the country back into deficit. In the 19th century, the United States operated at a surplus until a series of wars, beginning with the Mexican War and culminating with the Civil War (Wright, 2008). Both the 20th and 21st centuries have continued this cycle; years of surplus followed by years of debt. During the last 100 years, deficits have occurred during times of major wars or crisis, such as the Great Depression (as depicted in the Grapes of Wrath) and the Oil Crisis (Bohn & Inman, 1996).
Although many critics discuss that budget deficits are never a good idea, others suggest that having a budget deficit is both necessary and normal. Cynamon and Fazzari discuss that government programs that benefit individuals historically must run, at least for a time, at a deficit. For example, many of the programs that Roosevelt advocated during the 1930s ran the country into a deficit that it did not emerge from until after World War II (2010). Many people who advocate for a budget deficit follow the work of Keynes, who believed that recessions grow into depressions because when the economy is failing, people save more, and restrict the flow of money, which is contrary to what needs to happen for an economy to remain healthy. According to Keynes, healthy economies rely on a circular flow of money from consumers to producers in order to remain healthy (Cynamon & Fazzari, 2010). Governmental spending removes restrictions placed by consumer fears on the economies, and allows for the cycles of obtaining and spending to resume Harvey (2012). Experts believe that a healthy government will always run a deficit, and the only real questions are for how long a government can continue to run a budget deficit, and how large the deficit should become before it becomes a drag on the economy (Harvey, 2012).
The United States currently employs what is known as a progressive tax on its population. Progressive taxes allow individuals to be taxed based on their income. For example, the Internal Revenue Service has several tiers of taxation based on income. Citizens who earn less than $10,000 per year are taxed 10 percent of their annual income, while citizens earning over $400,000 per year are taxed at nearly 40 percent of their annual income (Internal Revenue Service, 2015). Many countries in Europe have higher tax rates, because they pay for services that the United States government does not: universal education through college, universal free health care, and paid vacations are examples of services provided in some European countries (Carter, 2014).
Some economists and politicians would vote to favor a flat tax rather than a progressive tax. Instituting a flat tax would mean that all taxpayers would pay the same tax percentage regardless of income. According to the Internal Revenue Service, this would place a larger burden of taxation on the poorest members of the economy (Internal Revenue Service, 2015). There are several versions of the flat tax perspective. Some flat tax perspectives call for a tax on income and spending, but not investment income. Others call for a tax on consumption only, which would mean that citizens would not be taxed at all on their income, but would pay an increased tax rate on what they spend. For some proponents, a reduced flax tax would be used on essentials such as groceries and clothing, but a higher flat tax would be levied on other goods, such as cars and boats. Another type of flat tax would place a small tax on goods and services at each stage of production (Pomerleau, 2015). One of the advantages of the flat tax system according to proponents is that it will reduce the amount of time, manpower, and paperwork the IRS will use to ensure each American pays their fair share. However, it is unclear at this time if a flat tax system would work in this country. Currently, many countries in the former Soviet bloc use the flat tax with some success, but they are much smaller countries than the United States (The Economist, 2005)
It would seem that the United States has rarely been without a budget deficit, and if the United States is going to continue to employ a market-based economy, it appears running a budget deficit is inevitable. However, the larger questions remain that if we are going to continue to run a deficit, how large should the deficit be, and how long should we continue to have one? In addition, a progressive tax at the moment seems inevitable as well, but a different solution should be considered, as the tax code is large, unwieldy and at times, unclear.
Bohn, H., & Inman, R.P. (1996). Balanced-budget rules and public deficits: Evidence from the U.S. States. Carnegie-Rochester Conference Series on Public Policy, 45(Dec 1996), 13-
Carter, B. (2014, Feb 25). Which country has the highest tax rate? BBC News. Retrieved from http://www.bbc.com/news/magazine-26327114.
Cynamon, B.Z., & Fazzari, S.I. (2010). No need to panic about U.S. government deficits. In Duillien, S., E. Hein, A. Truger, and T van Treeck, eds. The World Economy in Crisis—The Return of Keynesianism, 25-53. Marburg, Germany: Metropolis-Verlag.
Harvey, J.T. (2012, Jul 18). Why you should love government deficits. Forbes. Retrieved from http://www.forbes.com/sites/johntharvey/2012/07/18/why-you-should-love-government-deficits/.
Outlook for the budget and the economy. (2015). Congressional Budget Office. Retrieved from https://www.cbo.gov/topics/budget/outlook-budget-and-economy.
Pomerleau, K. (2015). What are flat taxes? Tax Foundation. Retrieved from http://taxfoundation.org/blog/what-are-flat-taxes.
Rickards, J. (2012). Currency wars: The making of the next global crisis. London: Portfolio Publishing.
The case for flat taxes. (2005, Apr 14). The Economist. Retrieved from http://www.economist.com/node/3860731.
United States Department of Treasury, Internal Revenue Service. (2015). Understanding Taxes. Retrieved from https://apps.irs.gov/app/understandingTaxes/student/whys_thm03_les03.jsp
United States Department of Treasury, Internal Revenue Service. (2015). Comparing progressive, regressive and proportional taxes. Retrieved fromhttps://apps.irs.gov/app/understandingTaxes/whys/thm03/les05/media/ws_ans_thm03_les 05.pdf
Wright, R.E. (2008). One nation under debt: Hamilton, Jefferson, and the history of what we owe. New York City, NY: McGraw Hill Professional.