Top Five Myths about Reducing Our $14 Trillion National Debt

1. We Can Use Income Taxes to Reduce the Debt
No less an authority than Erskine Bowles, the co-chair of the President’s Fiscal Commission and chief of staff to former President Clinton, has admitted that the US cannot tax its way out of debt.

Some have suggested that we should raise taxes on the richest Americans, which–using taxes alone–could mean creating a top tax rate as high as 91 percent, according to an analysis by the Tax Policy Center. Although it seems counter-intuitive, a tax rate as high as 91 percent could decrease government revenue, as wealthy Americans choose to work less and find creative ways to bypass the top tax rate. Ask yourself: Would you work hard to earn an extra dollar if politicians required you to give them 91 cents of it in taxes?

That brings up another problem with “soaking the rich:” there aren’t enough of them. One-point-four million Americans make up the top 1 percent of taxpayers in this country; close to 139 million make up the remaining 99 percent. One percent of the country can’t realistically pay for the needs of remaining 99 percent—especially when they’re already paying nearly 40 percent of all income taxes.

If we’re going to pay for our debt through higher taxes, tax rates at all levels will have to increase and those who currently pay no income tax (over 51 million people in 2008, according to the Tax Foundation) may have to pay a modest rate as well.

2. We Can Reduce the Debt Without Reforming Social Security and Medicare
A CBO projection shows that the country is on a path where spending on entitlement programs, like Medicare and Social Security, could eventually consume every dollar of tax revenue that the US brings in. Plainly, a debt-reduction plan that ignores these two programs is no plan at all.

According to the Congressional Budget Office (CBO), the federal government currently spends more money on Social Security than it does on any other single program. Starting in 2016, the Social Security “trust fund” will regularly pay out more money than it takes in, and soon will be completely broke. And spending on health care, which drives the cost of programs like Medicare, has been growing faster than the US economy for many years.

Fortunately, if we act now to make modest changes, we can reform these entitlement programs gradually instead of suddenly. For instance, the President’s deficit commission demonstrated that small and gradual alterations to the Social Security program would not only close the its funding gap—it would also allow us to boost Social Security payments for families in the bottom 20 percent of income earners. And a proposal by former CBO director Alice Rivlin and Congressman Paul Ryan could save the country billions of dollars while maintaining a Medicare benefit for seniors.

3. Repealing the Health Care Law Will Increase the National Debt
The health care law will require over $2 trillion in new spending in its first full decade. The misleading claim that this new entitlement can reduce our national debt—and that repealing it will increase our debt—is supported only by budget gimmicks, unrealistic Medicare cuts, and hundreds of billions in new taxes and fees.

A recent opinion editorial in The Wall Street Journal—authored by the former director and assistant director of the CBO, as well as the former associate director of the Office of Management and Budget—demonstrated the flaws in the economic reasoning of the health care laws’ advocates. Though the law spends billions to provide new health care subsidies, this spending is “offset” on paper by unrealistic new sources of revenue and other spending cuts that will be difficult to implement.

For instance, the spending cuts include trimming over $400 billion from the Medicare program, which even Medicare’s actuary has called “unrealistic” and warned that they could “jeopardize access to care for seniors.” When all gimmicks are accounted for, former director of the CBO Douglas Holtz-Eakin calculated that the health care bill will increase budget deficits by $562 billion in the next ten years—money that the US won’t have to borrow if the legislation is repealed.

4. We Can Solve Our Debt Crisis By Making the Government More Efficient
Reducing our national debt by making the federal government more efficient has a nice ring to it—deficit reduction without the painful sacrifice. In reality, these cuts do almost nothing to address what the CBO has identified as the three long-term drivers of our budget deficits: Social Security, Medicaid, and Medicare.

Our yearly budget deficits are daunting, and our national debt so large, that even seemingly sizable cost savings fail to make a dent. Take one particular reduction in government waste as an example: increased use of teleconferencing technology by the Department of Energy. According to the CBO, if the department’s employees hold fewer meetings in person, it will save taxpayers $10 million over the next few years. That might seem like a lot of money, but it represents only .0003 percent—three ten-thousandths of one percent—of our total projected deficit over that time period.

Fiscal responsibility (even on small items) is always worth applauding, but if it’s done to avoid hard choices on reducing our country’s deficit, then “responsibility” is not the right word to describe it.

5. The US Can Afford Higher Interest Rates
In February of 2010, Treasury Secretary Timothy Geithner confidently predicted that the US would “never” lose its perfect AAA credit rating. Yet in the months since, we’ve been warned numerous times by two credit rating agencies that, without a credible plan to reduce the national debt, we are at risk of losing that rating. The cost—for our government, and for our individual pocketbooks—would be tremendous.

Credit ratings can seem abstract and complex. To put it simply, the loss of our AAA rating signals to investors that we’re less able to pay back our debts. How much could just a one percentage point rise in interest payments cost the US? The Congressional Budget Office estimates that, over the next ten years, that yearly one percentage point rise would cost us an additional $1.033 trillion in interest payments, on top of the $5.079 trillion we’re already paying. That’s an additional $283 million, every day—in addition to the $600 million a day in interest we are currently paying—for the next ten years.

That’s bad news for taxpayers counting on lower taxes, but it could also mean bad news for anyone who owns a home—higher interest rates on our debt could mean larger payments on your home mortgage and other forms of consumer credit.