Debt Debate for Dummies: Six Keys to Understanding the Issue

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The debate in Washington is over how to bring the situation into control, like a family cutting back spending or getting a raise to pay off its debts, or at least keep their debt at a manageable level.

The difference over the next 10 years between what the government expects to pay out, $45.7 trillion, and what it expects to bring in, $39 trillion, is approximately $6.7 trillion. Lawmakers and the administration are working to cut about $4 trillion from that potential $6.7 trillion in borrowing.

To accomplish this, the U.S. will likely have to cut its spending, raise taxes on much of the population, and cut back on the promises it makes to the elderly for Medicare and Social Security to bring the budget into balance. A family, to continue the analogy, might cut cable, spend less on groceries, look for a higher paying job and defer payments into their retirement account.

What happens if the government defaults?

This is a subject of some debate. Many Republicans have argued that if the government goes beyond Aug. 2 without raising the debt ceiling, Treasury will simply have to continue paying its creditors and stop funding other programs. But others argue that going past the Aug. 2 deadline would send a bad signal to global markets, put the U.S. credit rating in jeopardy, lead to higher interest rates, and kick off a worldwide recession.

David Walker, the former Comptroller General of the U.S. who is now a cut-the-deficit evangelist, said Thursday that people who own bonds will get their money. But there will be a $4 billion daily gap that the Treasury Secretary must close. Federal workers and contractors might not get paid. Watch his interview with ABC.

Others are less alarmist. Sen. Jeff Sessions, the top Republican on the Senate Budget Committee, vowed recently that the U.S. government, even after Aug. 2, will pay its bills to creditors. The question then becomes, however, What will it not pay and whether paying creditors but not government employees or businesses that work with the government might be considered a default?

"Choices won't be about, Do we means-test retirement for the wealthiest, but do we make dramatic cuts in vital programs?" said Ryan McConaghy of the centrist Third Way. Read their paper, Dominoes of Default.

Why not just raise taxes on the rich?

Economists agree that there is no silver bullet to solve the problem of the debt. You can't just raise taxes and make it go away.

According to McConaghy, if the government taxed every dollar that every American made over his or her first $250,000 in income, it still would not solve the problem.

There is some indication that policymakers want to use this opportunity to simplify the tax code. Americans pay a high tax rate, but enjoy breaks for everything from having children to charitable donations to interest they pay on their mortgage. The tax rate could be lowered if those loopholes were removed. But more people making less money might have to pay taxes.

The same works for companies. They benefit from loopholes for research and development, certain investments and more. Removing those loopholes is perhaps more likely, but it will not solve the problem of the debt. Add to this the unity of Republicans against any tax hikes.

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