IT'S SIMPLE MATH

EVERYTHING YOU NEED TO KNOW ABOUT DEBTS AND DEFICITS

This is not my most exciting post, but it is likely the most important.

I’m no mathematician. In fact, I pretty much hated algebra, geometry, trigonometry, and other required math courses but, interestingly, I loved statistics and earned high scores in multiple stats classes. All that to say, the math surrounding the federal debt, budget deficits, and budgets must of necessity be pretty simple for me to understand it, and what I say here will hopefully be straightforward as well.

Let’s start with a few facts:

SPENDING AND BORROWING

• The 2024 federal budget included a $1.3 trillion deficit, meaning dear old Uncle Sam is spending that much more than he is collecting in taxes. The accumulated annual deficits lead to a national debt.

• Budget deficits are covered through borrowing. Over the years the government has borrowed a total of about $35 trillion. Uncle Sam doesn’t go to the local bank or credit union to borrow money to pay the bills because he either issues securities such as treasury bonds, notes, bills, Treasury inflation-protected securities, or he borrows money via “intragovernmental” debt, meaning the government borrows money from itself. Specifically, for example, money may be “borrowed” from agencies that have a separate source of revenue such as Social Security (payroll taxes) or the Postal Service (user fees).

• About 60% of federal spending is considered “mandatory”; that spending covers benefits to which we are entitled either because we have paid into the program or because we meet certain eligibility requirements such as income, disability, military service, etc.

  • Medicaid: $616 billion to 78 million Americans in 2023.

  • Veterans benefits: $299 billion. The budget provides benefits to almost 16 million veterans

  • Social Security: $1.4 trillion per year or 22% of the budget serving more than 67 million citizens (like me).

  • Medicare: $850 billion in 2023 or 14% of the budget.

• The remaining 40% of the budget is considered “discretionary”. However:

  • About half of all federal discretionary spending, 13.3% of the federal budget, goes for defense, consuming $820 billion budgetary dollars in 2023. About 1.3 million Americans serve on active duty in one of our armed forces, and the military employs almost 780,000 civilians serving in supporting roles. So while this budget item is discretionary, it is treated as mandatory in practice.

• If you are interested, click on this chart to see where all your tax dollars are spent.

• MOST IMPORTANTLY: Federal mandatory spending, discretionary military spending, and interest payments on the debt combined account for 86% of the federal budget. That leaves 14% of the budget to cover benefits for farmers, food inspection, environmental protection, courts, infrastructure improvement, national parks, foreign aid, and everything else the federal government provides.

DEBT

• As of Tuesday morning, May 6th, the national debt is $36,214,860,183,500. If you, like I, are confused by all the digits, that is $36 TRILLION and “change”. Every child born in 2024 owes $82,590 toward that debt, as do you and I.

• As with all loans, lenders charge interest on the borrowed money (an average of 3.32%). In 2024 we paid $659 billion in interest on our debt. This expense is unavoidable.

TAXING

• About $4.4 trillion of the $4.5 trillion Uncle Sam collected last year came from taxes; 49% from income tax, 37% from payroll taxes (Social Security and Medicare), and 9% from corporate taxes, with the remainder coming from excise taxes on stuff like alcohol or gasoline, user fees for parks, and other relatively minor revenue sources.

  • The top 5% of earners, those making about $253,000 per year, paid 66% of all federal income taxes and the top 10% (above about $170,000 annual income) paid almost 76% of all income taxes.

  • The bottom 50% of those who filed taxes (about 77 million people) paid only 2.3% of total federal income taxes (in addition to their Social Security payroll taxes, etc.).

So where does that leave us? The ONLY way to balance the budget is through 1) increased revenue, 2) severe spending reductions, or 3) a combination of 1 & 2. When you hear politicians say they will reduce taxes while balancing the budget, they are either more math challenged than am I or they are lying or pandering to you. The only way to fulfill that promise is to cut Social Security, Medicare, and military spending. Cutting USAID, Department of Agriculture funding for farmers and food-related programs, research grants, and other similar programs is like trying to catch a waterfall with a sieve; such cuts might be admirable, but they are also pretty inconsequential because they do little to address the real issues surrounding deficits and the debt.

While campaigning for President Trump last year, Elon Musk said he could “easily” cut $2 trillion from the budget, but he then confronted reality. As I mentioned in previous posts, Musk now claims that he and DOGE have reduced the budget by $135 billion but the DOGE website only lists $58 billion in savings, less than 3% of his promised cuts, and the $58 billion figure itself is questionable. As Musk discovered, cutting the budget isn’t easy.

So what is the solution? I think we all agree that the mounting debt is unsustainable and is an unfair burden on future generations, but balancing the budget and then paying down the debt (or, preferably, paying it OFF) will require either cutting “entitlement” programs such as Social Security and military benefits, severely cutting the military’s budget, or finding additional revenue.

Some combination of the following will be required.

• Raise taxes. Always a popular option, especially for Democrats.

• Expand the tax base by adding taxes on stuff not currently taxed (I can only think of air as the only thing not currently taxed) or eliminate or reduce tax deductions and loopholes. This is probably where I would start because countless deductions only benefit certain groups. Example: 82% of deductions for state and local taxes, mortgage interest, and charitable contributions, the three most frequently claimed federal deductions, primarily benefit those earning over $200,000 per year. Tax breaks will cost the federal government an estimated $2 trillion in 2025.

• Grow the American economy so more taxes may be collected. Encouraging corporations and others to move their operations back to the United States from Mexico and other countries is the goal of President Trump’s tariffs. I’ve previously expressed skepticism regarding tariffs’ efficacy, and any benefit we DO see will likely take decades, and all the while the national debt will continue to grow.

• Do a better job of collecting taxes, so increase the size of the IRS.

• Reform entitlement programs. For example, we pay Social Security payroll taxes on the first $176,100 earned and any income above that is exempt; payroll taxes could be collected on higher incomes. We may also need to consider raising the retirement age; 65 was set as the retirement age in the Social Security Act of 1935 when life expectancy was 63.9 years whereas today’s expectancy is 77.5 years.

• Strategically cut spending and eliminate or reduce fraud and waste. This requires inspectors general with authority to sanction agencies and beneficiaries who abuse our taxes. Each year the government loses between $233 and $521 billion to fraud, and last year 14 agencies alone made $236 billion in improper payments. The biggest offenders were Medicare, Medicaid, the Earned Income Tax Credit, and the Supplemental Nutrition Assistance Program (SNAP).

OK, I’ve bored you with too much detail, but that’s the only way to paint an accurate picture.

In a nutshell:

• America’s taxpayers are more than $36 trillion in debt.

• Our budget deficit is about $1.3 trillion per year.

• About 86% of federal spending is either mandatory or defense spending, both of which are difficult or impossible to cut.

• It will likely be impossible to reduce taxes while also balancing the budget. In truth, additional revenue sources are necessary.

I absolutely favor balancing the federal budget and paying off the debt, but doing so will be painful for every American. DOGE’s current efforts are no more than nibbling around the edges of the budget and often eliminate programs that actually improve Americans’ lives.

Thanks for following along.

David