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
Most include a combination of deep spending cuts and tax increases to bend the debt curve. Cutting spending. Most comprehensive proposals to rein in the debt include major cuts to spending on entitlement programs and defense.
How will America get out of debt? ›
Most include a combination of deep spending cuts and tax increases to bend the debt curve. Cutting spending. Most comprehensive proposals to rein in the debt include major cuts to spending on entitlement programs and defense.
How is the US debt broken down? ›
At the end of September 2023, domestic creditors held 77 percent of the outstanding debt held by the public. Foreign creditors held the remaining 23 percent. The Federal Reserve typically accounts for a significant proportion of debt held by the public owned by domestic investors.
Who does the US owe the most money to? ›
Nearly half of all US foreign-owned debt comes from five countries.
| Country/territory | US foreign-owned debt (January 2023) |
|---|
| Japan | $1,104,400,000,000 |
| China | $859,400,000,000 |
| United Kingdom | $668,300,000,000 |
| Belgium | $331,100,000,000 |
6 more rowsIf a government wants to reduce the real value of its debt, it may intentionally create inflation by adopting expansionary monetary policies. These policies could involve increasing the money supply, lowering interest rates, or engaging in quantitative easing (buying government bonds or other assets from the market).
Why can'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.
Why is the US so heavily in debt? ›
Nearly every year, the government spends more than it collects in taxes and other revenue, resulting in a deficit. (The debt ceiling, set by Congress, caps how much the U.S. can borrow to pay for its remaining bills.) The national debt, now at a historic high, is the buildup of its deficits over time.
What country has the highest debt? ›
At the top is Japan, whose national debt has remained above 100% of its GDP for two decades, reaching 255% in 2023.
How much is the US actually in debt? ›
15, 2023, and $32 trillion on June 15, 2023, hitting this accelerated pace. Before that, the $1 trillion move higher from $31 trillion took about eight months. U.S. debt, which is the amount of money the federal government borrows to cover operating expenses, now stands at nearly $34.4 trillion, as of Wednesday.
How much does China owe 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.
1) Switzerland
Switzerland is a country that, in practically all economic and social metrics, is an example to follow. With a population of almost 9 million people, Switzerland has no natural resources of its own, no access to the sea, and virtually no public debt.
Does the US owe money to themselves? ›
The $34 trillion gross federal debt includes debt held by the public as well as debt held by federal trust funds and other government accounts. In very basic terms, this can be thought of as debt that the government owes to others plus debt that it owes to itself.
How can the US fix its economy? ›
Option 1: Increase Taxes on High Income
- Raise the top income rate on ordinary income from 37% to 45%.
- Tax capital gains and dividends at ordinary rates and tax gains at death. ...
- Expand the base of employment taxes to cover all pass-through income. ...
- Reduce the estate tax exemption from $12.9 million to $3.9 million.
“Governments should borrow and spend carefully during wars, recessions, crises.” But if the debt gets too big, Cochrane cautioned, the government might not be able to respond so decisively next time. The money might be slower to come, and the government might not be able to raise as much.
What happens if US gets too much debt? ›
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 will happen if the US debt keeps rising? ›
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.
How much debt will the US be in 2050? ›
Without changes in fiscal policy, we project that the debt-to-GDP ratio will grow from 100 percent in 2024 to 190 percent in 2050. Contrary to conventional thinking, there exists a wide range of policy options that can reduce the growth of debt while growing the economy.
What would happen if the US printed enough money to cover all the debts? ›
Printing more money is a non-starter because it'd break our economy. “It would take care of the debt but at a price that's far too high to pay,” Snaith says.
How much does China owe 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.
