Debt Digest | Dollar Dominance and Your Tax Receipt
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Biden’s ‘deficit and inflation reduction bill’ will increase deficits and inflation. The Joint Committee on Taxation rescored the Inflation Reduction Act’s (IRA) green energy tax credits at $570 billion over 10 years, double its original estimate. As the Tax Foundation explains, that means the Inflation Reduction Act does not reduce deficits after all. House Speaker McCarthy’s debt ceiling bill would eliminate the IRA’s green energy credits. “Because most of the credits are uncapped, the costs can increase significantly if eligibility rules are interpreted broadly and if consumer demand for the subsidized products is higher than anticipated,” writes Cato’s Adam Michel. Boccia wrote about what's in the McCarthy debt ceiling bill, which passed the House this week, here.
High inflation impacts American earnings. “According to the Bureau of Labor Statistics, average weekly earnings are up 9% since Biden took office, but consumer prices have risen 14.9% over the same time,” writes EJ Antoni of the Heritage Foundation. “[T]he average American family has lost the equivalent of more than $7,000 in annual income.” High and rising debt will likely result in higher future interest rates and could impose yet greater economic hardship. Read more about how debt hurts growth and elevates the risk of fiscal crisis here.
Medicare and Medicaid drive deficits. “The combined cost of [Medicare’s Supplementary Medical Insurance trust fund’s] annual general fund subsidy and total Medicaid expenses grew from 0.5 percent of GDP in 1970 to 4.1 percent in 2022…total federal debt grew from 27 percent of GDP to 97 percent over this same period,” writes American Enterprise Institutes James C. Capretta. “With funding that is not constrained by the reluctance of taxpayers to part with their personal resources, Medicare and Medicaid have been given fuel to continue growing on a nearly uninterrupted basis for a half-century.” Read Boccia’s analysis on the unsustainability of Medicare and Social Security, the two largest federal programs, here.
Understanding where your taxes go. The National Priorities Project Tax Receipt illustrates how the federal government spends the money you paid in income taxes. The federal government spends the most on transfer programs which redistribute money from one group to another. As Boccia explains, “major entitlements comprise 46 percent of outlays for FY 2022.”
Bad fiscal policy erodes dollar dominance. The Hoover Institution’s Niall Ferguson argues that “rumors of the death of the US currency are as exaggerated as they are frequently repeated.” See the graph below for historical context on the US dollar as the world’s reserve currency. Over the long run, however, significantly higher federal deficits can erode the US dollar. “The 2021-23 surge of US inflation cannot be explained without reference to major errors of fiscal and monetary policy. If the US intends to preserve its global monetary dominance, it is concealing that intention very well.”
