Who's Afraid of the National Debt?: No Need to Fear Tax Cuts
Contact: Misty Woodruff, 972-874-5139 or misty@ipi.org
Dallas, TX: Anti-tax cut advocates are trying to scare Americans into believing that tax cuts hurt the economy and lead to deficits and debt. But there’s no reason for Americans to fear government debt as long as it gets no higher than about one-third of national income. Prudently managing debt can be better financially for our economy than balancing the budget, according to the Institute for Policy Innovation (IPI).
For example, if you could borrow money at 6 percent interest and then invest it for a 10 percent return, wouldn't you do it? It's no different for the government. In fact, it's better for the economy.
Financial backers are willing to lend to the U.S. government at the lowest interest rates because it’s the safest investment in the world. The U.S. government isn’t going to go out of business or declare bankruptcy. If Americans can put that money to work and earn more than the interest payment, the country is better off.
"Debt is neither intrinsically good nor bad," says Larry Hunter, co-author of "Who's Afraid of the National Debt?" and Chief Economist at Empower America. "Sound borrowing generally produces steady long-term growth, greater security, and a higher standard of living than does rushing to pay off the debt at the expense of other more beneficial endeavors."
While there are conservatives and liberals who are eager to pay off the national debt, they don't understand that retiring it does not eliminate interest burden, increase saving, or lower interest rates.
To ensure prudent debt servicing, all Congress would need to do would be to adopt procedures requiring tax rate reductions when the debt-to-GDP ratio falls below bounds (unless increased government spending is demonstrably more productive that leaving the resources in the private sector).
Adds co-author Steve Conover: "Borrowing money for good investments is sound financial practice—ask any banker—and it’s not just the private sector doing the investing. National security is a good investment; so is a tax policy that fosters private sector job creation and income growth. What’s wrong with our government borrowing prudently to help make those investments? Absolutely nothing—political rhetoric notwithstanding.”
It's an ambitious goal, but it's the economically rational thing to do.
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