A fight in Congress over whether and how much to raise the government debt limit can cause market upset. If Treasury interest payments on the national debt were interrupted, shock waves would roil markets around the world.
This is anything but a black swan since we can see it coming well in advance.
Although this topic is inherently political, restrict any responses to Macroeconomic and market effects. Political posts will be removed.
U.S. Congress could be in for bruising debt-ceiling fight after midterms
By Richard Cowan and David Morgan, Reuters, October 13, 2022
Sometime in the first quarter of 2023 the nation’s line of credit is likely to be exhausted, said Shai Akabas, director of economic policy at the Bipartisan Policy Center.
The Treasury Department can take “extraordinary” steps to stave-off a default until the summer or even longer, depending on revenues and the economy…
The protracted 2011 standoff in Congress prompted Standard & Poor’s to downgrade the U.S. credit rating for the first time, sending financial markets reeling…[end quote]
1Q23 is likely to see a recession starting due to the Federal Reserve raising interest rates to try to control inflation. That would be a bad time to overlay market problems due to a debt limit fight or “extraordinary” actions by Treasury such as temporarily disinvesting securities held in federal employee retirement funds to raise cash to pay obligations.
As explained by the GAO:
The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred. While debates surrounding the debt limit may raise awareness about the federal government’s current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory, the ability to have an immediate effect on debt levels is limited. This is because the debt reflects previously enacted tax and spending policies. Delays in raising the debt limit create debt and cash management challenges for the Treasury, and these challenges have been exacerbated in recent years by a large growth in debt. [end quote]
METARs, be aware that the next 6 months could be even more volatile than we expected.
I have not boned up on the tax revenues increase this year.
I have not seen the affects of the IRA tax hikes on revenue next year.
With demand side econ this is much less of an issue going forward. Unless we cut taxes on the wealthy. One plan is to raise taxes of people making around minimum wage to an automatic $1000 per year with no deductions. I have not seen how that will affect the deficits.
Because demand side econ builds the industrial base the nation will be enriched. With supply side econ we got a false promise that tax cuts would build the nation, we got much poorer as a nation.
Currently, people making the Federal minimum wage who work 8 hours a day, 5 days a week with no vacation earn ($7.25 X 8 x 5 x 52 = $15,080 per year. The standard deduction is $12,950 for single filers. $12,950 for married couples filing separately. $19,400 for heads of households. $25,900 for married couples filing jointly.
If this was a single filer, the taxable income would be $2130. However, if the filer had a child (Head of Household) or was married filing jointly there would be no taxable income.
Single filers are taxed 10% on taxable earnings up to $10,275. Under the current law, a single filer earning minimum wage would pay $213 in tax.
However, workers can get the Earned Income Tax Credit if they earn under $16,480 even if they don’t have children.
I am a volunteer Tax Aide counselor. One of the greatest pleasures of this gig is to get an EITC of several hundred dollars for a working person who didn’t realize they qualified. They thank me as if I was the one giving them this unexpected gift.
If the standard deduction is eliminated for the working poor it would have to be eliminated for all taxpayers. That would really p!$$ off a LOT of people, not only working poor.
The original idea is a non-starter. Won’t happen. Political suicide for anyone who supports it.
We’ve seen this before, the pol’s play a game of chicken with the economy. Just withhold Americans Social Security checks and the initiators of that action will come under heavy fire. Might be what is needed to get voters to wake up, though.
I used to think that there was no way the pol’s would ever follow thru on it, but there are enough radicals holding office now that the odds seem a whole lot higher than ever before that they will follow thru on it. I still think it’ll be political suicide to do it, though.
Hard for me to make an investing decision based on the pol’s actually following thru on this, I don’t think they have the guts. But these are some crazy times, there are some dimwitted people holding office, they just might risk it.
Medicare payroll taxes are not capped by income, but Social Security payroll taxes are (at $147K). It would seem to me that those making that amount of money wouldn’t miss the income sacrificed by removing the cap in order to save the system.
That is a good point, the constituents making $147K+ and that are on SS should easily be able to handle life without the SS check ( depending upon where they live, of course ). And those high(er) income voters are exactly the ones that the pol’s who play chicken with the debt ceiling care about. The voters who are on SS and have annual income of $30-$40K would be seriously hurt by missing SS checks. And a fair percentage of these lower income retirees are voting for the pol’s who want to play chicken with the economy. Could be a very harsh awakening for these lower income folks.
There are at least 3 obvious ways to bring more money into the Social Security system.
Raise the payroll tax limit, which has been done before. At the very least, link it to inflation. The taxable wage cap is already subject to an automatic adjustment each year based on increases in the national average wage index (not the inflation rate), calculated annually by the SSA. In 2023, the wage cap is $160,200. 2023 Social Security Wage Cap Jumps to $160,200 for Payroll Taxes
Tax Social Security benefits at 100% for higher-income taxpayers. Currently, you must pay taxes on up to 85% of your Social Security benefits if you file a: Federal tax return as an “individual” and your “combined income” exceeds $25,000. Joint return, and you and your spouse have “combined income” of more than $32,000. That’s already a pretty high tax with a very low threshold but it could be higher. I’m sure that most recipients don’t realize this. It isn’t as sensitive politically to raise the tax as it would be to withhold the benefit. https://faq.ssa.gov/en-us/Topic/article/KA-02471
Begin a tax on assets, like they do in Europe. All taxes in the U.S. are on income, not assets. That would radically change the balance of power since only a few people have significant assets. People like intercst, who deliberately hold most of their assets in low-income investments, would no longer escape taxation like they do now.
As for Social Security, I forget where I have rolled out Plan Steve before:
1: Eliminate the old age pension benefit for able bodied people. People who are too feeble to work draw SS disability benefits. Everyone else is either forced to take the burger flipping jobs that are going begging, or do without the SS pension they paid for.
2: Take a page from Michigan’s attempt at a work requirement for Medicaid: require able bodied geezers to work to receive the Medicare benefit they paid for.
3: with millions of people from their 60s, into their 80s forced back into the work force, and paying into the system, instead of drawing benefits, the system’s cash flow is far into the black, so repeal the employer’s share of the payroll tax, so the “JCs” can stuff that money in their pocket, along with the money from the employer paid pension and retirement medical they took away from their employees thirty years ago.
4: the (L&Ses) pat themselves on the back for “saving Social Security”, “securing the social safety net”, “solving the employee shortage”, and “helping the job creators”, all at the same time.
Think this is a fever dream? Remember when a POTUS, several years ago, spoke glowingly about some farmer who was over 90, but supposedly rises at dawn every day and works his farm? The local media here had an equally glowing report of a salesman at a car dealership in metro Detroit, who is well into his 80s and goes to work every day. How many times have we been lectured about “the dignity of work”? How many times have we been lectured about “personal responsibility”? I remember some blowhard on TV, decades ago, saying “in a perfect world, people would die the day they receive their last paycheck”. The narrative has been around for a long time that there should be no retirement for working people.