Eliminating the U.S. government's debt is a Herculean task that could take decades. In addition to obvious steps, such as hiking taxes and slashing spending, the government could take a number of other approaches, some of them unorthodox and even controversial. Below are some of these options.
Key Takeaways
- There are a number of methods to reduce the U.S. national debt that go beyond raising taxes and cutting discretionary spending.
- One of the most controversial is to open the nation's borders to more immigration, kick-starting entrepreneurship and consumption.
- Raising the Social Security retirement age is a frequently suggested option.
- A national sales tax, such as seen in Canada and Japan, could also help.
Open the Borders
This is highly controversial considering the growing opposition to illegal and even legal immigration. However, immigrants start businesses at twice the rate of native-born U.S. citizens. So it has been argued that opening the borders to willing workers and would-be entrepreneurs from all over the world would accelerate the creation of businesses that pay the taxes that are desperately needed to reduce the national debt.
A faster-growing population fueled by immigration could also create more demand for everything from housing to cars to dishwashers. This could result in a stronger economy that can help pay down the debt.
Importantly, more individual wage earners would help finance Social Security and other safety-net programs for decades to come.
Raise the Retirement Age
Making the full amount of Social Security retirement benefits available to Americans in their 70s instead of their 60s could help reduce the national debt. It could increase the amount that people pay into Social Security and reduce the time that they rely on payments from the program.
The original Social Security retirement age was 65. Due to advances in health care and a focus on healthier lifestyles, people are able to work and live much longer than when the Social Security program was founded in the 1930s. In 1983, Congress raised the retirement age for the first time. As a result, those born in 1960 or later must wait until age 67 to collect their full benefits. Some have argued it should be raised again to 70 or even higher.
Implement a National Sales Tax
Lots of other countries have found ways to reduce their debt, and some of their methods could help the U.S. Canada, for example, has a 5% national sales tax on most goods and services—a consumption levy that some economists prefer to higher taxes on income or investments since those discourage work and saving.
Heavily indebted Japan is another country that turned to a sales tax. It raised its national sales tax to 10% in 2019; although the International Monetary Fund urged the Japanese government to double it to 20%, Japan has not yet implemented such a hike.
Revamp the Tax Code
There has been a lot of talk over the years about fully revamping the U.S. tax code. In 2011, a group of six Democratic and Republican senators who were dubbed "the gang of six" looked at options during a standoff over the U.S. debt ceiling.
They came close to reaching an agreement on a deficit-reduction plan that would have saved $3.7 trillion over 10 years. This included slashing discretionary spending as well as reforming the tax code to eliminate loopholes. But negotiations broke down and no broad action was taken.
How Much Is the National Debt?
According to the U.S. Treasury, the national debt is $33.15 trillion.
What Is the National Debt?
It's the amount of money that the U.S. government has borrowed (plus interest on those borrowings) to cover the outstanding costs it has incurred and which tax revenues aren't enough to pay off. The government borrows money to pay obligations by issuing Treasury bonds, notes, bills, and other marketable securities.
Why Is the U.S. Debt So High?
Essentially, because the government repeatedly spends more money than it receives in tax revenue. Many point to tax cuts passed by Congress as the major culprit for decreasing this income. Others point to out-of-control, politically-driven spending as the reason.
The Bottom Line
In any year, when the U.S. government spends more money than it takes in, a deficit results. The government then borrows to pay for outstanding costs. Those borrowings and the associated interest owed represent the U.S. debt.
Coming up with solutions to reduce that debt is challenging because the options are rarely popular. Of course, just as with an individual or family, cutting spending and increasing revenue are smart first steps. Beyond that, the government considers things like new taxes, a higher retirement age, removing loopholes from the tax code, and more to reduce annual deficits and the national debt.
FAQs
The National Debt Explained
money from federal income tax), a budget deficit results. To pay for this deficit, the federal government borrows money by selling marketable securities such as Treasury bonds , bills , notes , floating rate notes , and Treasury inflation-protected securities (TIPS) .
How does the US deal with debt? ›
The National Debt Explained
money from federal income tax), a budget deficit results. To pay for this deficit, the federal government borrows money by selling marketable securities such as Treasury bonds , bills , notes , floating rate notes , and Treasury inflation-protected securities (TIPS) .
Has the US ever paid off its national debt? ›
By January of 1835, for the first and only time, all of the government's interest-bearing debt was paid off. Congress distributed the surplus to the states (many of which were heavily in debt). The Jackson administration ended with the country almost completely out of debt!
What happens if US debt gets too high? ›
A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth. It also increases expectations of higher rates of inflation and erosion of confidence in the U.S. dollar.
What would happen if the US paid off its debt? ›
Answer and Explanation:
If the U.S. was to pay off their debt ultimately, there is not much that would happen. Paying off the debt implies that the government will now focus on using the revenue collected primarily from taxes to fund its activities.
How could the US get out of debt? ›
Interest Rates. Maintaining interest rates at low levels can help stimulate the economy, generate tax revenue, and, ultimately, reduce the national debt. Lower interest rates make it easier for individuals and businesses to borrow money for goods and services, which creates jobs and increases tax revenues.
Why doesn't the US pay off its debt? ›
One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues.
Who does the US owe all its debt to? ›
Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
How much does China owe the US? ›
The United States pays interest on approximately $850 billion in debt held by the People's Republic of China. China, however, is currently in default on its sovereign debt held by American bondholders.
Who does the US owe 34 trillion to? ›
The national debt is the total amount of money the U.S. owes its creditors, which includes “the public” (individual investors, businesses, commercial banks, pension funds, mutual funds, state and local governments, the Federal Reserve System and foreign governments) as well as other parts of the federal government, ...
Extraordinarily low interest rates allow the U.S. to shoulder a heavier debt burden, but the debt is on an unsustainable course and its size may limit the government's ability or willingness to continue to fight the economic ill effects of the pandemic or future economic downturns.
Will US debt ever go down? ›
MYTH NO.
Under current law, the Congressional Budget Office projects that federal debt will rise from about 78 percent of gross domestic product (GDP) now to more than 150 percent by 2048 and will continue to increase afterward.
What happens when US go broke? ›
Businesses will close resulting in increased unemployment. If people are unemployed and their savings are almost worthless, they will not be able to afford even the necessities of life.
Who owns the U.S. debt? ›
There are two basic categories of debt owners: 1) the public, which includes foreign investors and domestic investors and, 2) federal accounts, also known as "intragovernmental holdings." Each category is explained below.
When was the last time the United States was out of debt? ›
On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.
Who does the US owe their debt to? ›
Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
How does the US own its own debt? ›
Who owns the U.S. debt? There are two basic categories of debt owners: 1) the public, which includes foreign investors and domestic investors and, 2) federal accounts, also known as "intragovernmental holdings." Each category is explained below.
How does the US collect debt? ›
Treasury collects delinquent (overdue) nontax federal debt on behalf of federal agencies. Federal agencies generally must refer delinquent nontax debt to Treasury for collection and report those debts to credit bureaus.
How long would it take for the US to pay off its debt? ›
It's 22% higher than the U.S. gross national product as of June 30 (about $27 trillion). It's six times the U.S. debt figure in 2000 ($5.6 trillion). Paid back interest-free at the rate of $1 million an hour, $33 trillion would take more than 3,750 years.
