Knowledge Base
What does it matter if we add to the federal debt?
The federal debt is a risk to our future. Over the long term, out-of-control debt threatens to destabilize the economy and destroy future economic opportunities. As fiscal obligations rise, the United States is more at risk of a crisis where lenders to the federal government become unwilling to finance the debt. Simultaneously, as the debt grows, government borrowing becomes more expensive.
In a worst-case scenario, the government has so much trouble borrowing money that interest rates rise dramatically. Lenders might begin to worry about the government’s ability to pay back the debt or might be concerned that the government will devalue the dollar to lower its real obligations.
When the federal government borrows more, it also becomes more expensive for businesses and entrepreneurs to invest. This “crowds out” private investment, which ultimately means lower wages and fewer opportunities.
Can’t we just raise taxes to pay for stimulus payments?
This solution might sound attractive, particularly if the tax increases would apply only to wealthy Americans. However, this strategy isn’t guaranteed to raise much revenue. High taxes lead people to change their behavior in ways that reduce taxable income. And any large tax increase would come with significant economic downsides.
Limiting tax increases to high-income earners would require incredibly high marginal tax rates that would discourage work and investment. The middle class would likely bear most of the tax burden. The ultimate result is that the economy would be smaller, and the revenue gains would fall far short of what is needed.