The United States is grappling with a significant debt crisis. With the federal government’s debt currently standing at a staggering $33 trillion, the situation is becoming increasingly dire. The annual deficits have reached the highest in U.S. history outside of the pandemic years, at nearly $2 trillion. This means we are spending more than we’re taking in, and the long-run growth in our spending is outpacing the growth in our revenue.
Addressing this issue will likely require a combination of spending cuts and tax hikes. However, there’s a third factor that could help alleviate some of the pain involved: economic growth. The faster the economy grows, the less pressure there is to raise taxes and cut spending. With more businesses and workers, the tax base expands, meaning the government can collect more tax revenue without raising rates.
A growing economy brings in more tax revenue, which reduces the relative debt burden. This gives lawmakers some breathing room to address fiscal imbalances. The debt-to-GDP ratio, a measure of how much debt the federal government holds compared to how much it produces in a year, gives valuable insight into the sustainability of a country’s economy. If it gets too high, a country might struggle to pay back its debts, leading to a host of undesirable consequences.
One way policymakers can promote economic growth is through tax policies that encourage people to work, save, and invest. For example, allowing businesses to write off investments in the year they occur rather than over time makes investments more profitable. This, in turn, encourages more investments, which boosts productivity and can lead to more jobs and higher wages.
With much of the 2017 tax reform law expiring in less than two years, Congress will get the chance to rewrite the tax code. Lawmakers should prioritize policies that lower the country’s debt-to-GDP ratio the most. Improving the country’s fiscal situation won’t be comfortable, but economic growth can help cushion the blow.
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Source: Tax Foundation