Plus, college costs in Europe?
I’m Isaac Saul, and this is Tangle: an independent, nonpartisan, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.”
Today's read: 13 minutes.
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- Two elderly Israeli women were released by Hamas, the third and fourth hostages freed in the two weeks since the attack on Israel. (The release)
- House Republicans will have a closed-door meeting today to vote on one of their eight contenders for House Speaker. The nominees are Tom Emmer (MN), Mike Johnson (LA), Jack Bergman (MI), Byron Donalds (FL), Kevin Hern (OK), Gary Palmer (AL), Austin Scott (GA), and Pete Sessions (TX). (The vote)
- An off-duty Alaska airlines pilot who tried to shut down plane engines mid-flight was charged with 83 counts of attempted murder. (The charges)
- The United Auto Workers added a major Stellantis factory to its strike after rejecting a 23% wage increase. (The strike)
- Former Trump lawyer Jenna Ellis pleaded guilty in the Fulton County, Georgia, election fraud case. She is the fourth of 19 defendants to plead guilty in the case, including Sidney Powell and Kenneth Chesebro, who negotiated deals hours before going to trial. (The plea)
The U.S. deficit. In the current fiscal year, the U.S. deficit has effectively doubled from $1 trillion to $2 trillion.
Reminder: The United States regularly spends more money than it collects in revenue each year. This annual shortfall is called the deficit. To cover that shortfall, the government borrows money by issuing government securities, or bonds. Investors lend that cash with the expectation the government will pay them back with interest. Together, those loans comprise the national debt. Our debt is held mostly by the public, and a large portion is owned by foreign governments, the federal reserve, U.S. banks, and state and local governments, among others.
In 2023, the latest Treasury Department figures show an annual $1.7 trillion deficit, up from $1.37 trillion in 2022. However, those numbers are misleading because of the student loan forgiveness program proposed by President Biden last year. Before the program was struck down by the Supreme Court, the Treasury recorded it as a $300 billion cost in 2022, which inflated the deficit. Then in 2023, the Treasury recorded the program’s cancellation as a $300 billion savings. That artificially added $300 billion to 2022’s deficit and removed the same amount from 2023’s. Without that accounting, the deficit actually jumped from roughly $1 trillion to about $2 trillion.
The total national debt has now reached $33 trillion. Budget deficits also rose when former President Trump was in the White House, thanks to tax cuts and increased spending during the pandemic. The interest payments on the nation's debt reached a record $659 billion in 2023, up from $475 billion last year, making it one of the largest expenses in the federal budget. This year, delays in collecting tax revenue, rising interest rates, and the unexpectedly high costs of some federal programs have driven the deficit up.
A solution is elusive, as some of the simplest ways to reduce the deficit — like raising taxes or making cuts to the military, Social Security, or Medicare — are all politically perilous. President Biden has insisted he will leverage the strength of the economy to reduce future deficits by raising taxes on high earners and corporations. A pair of corporate tax cuts Biden signed into law in 2022 did not offset unexpected losses in revenue from the more volatile capital gains taxes, which are accrued after the sale of assets like stocks. Receipts on capital gains were unexpectedly high in 2022, but plunged in 2023.
Meanwhile, Biden now faces decisions about how to continue funding allies like Israel and Ukraine in their respective conflicts, which is expected to draw opposition from fiscal conservatives in Congress. Biden has formally asked Congress for $100 billion for a package of aid to Ukraine and Israel and spending to secure America's southern border. However, dysfunction in the House of Representatives, which is still without a Speaker, means any lasting or far-reaching legislation is unlikely anytime soon.
Today, we're going to break down some arguments about the latest deficit numbers from the left and right, then my take.
What the left is saying.
- The left is concerned about the deficit but doesn’t see a realistic path to significantly reducing it in the short term.
- Some say Biden and Democrats should explore regulatory avenues to address the deficit.
- Others offer unique solutions — like a national sales tax — that could put a dent in the deficit.
In Bloomberg, Matthew Yglesias argued “the federal deficit matters now more than ever.”
“Current unemployment is very low and has been low for a while. Inflation has moderated considerably but remains above the Federal Reserve’s 2% target. And curbing inflation required interest-rate increases that are putting real stress on the markets for housing, renewable energy and other capital-intensive goods. So why the reluctance to talk about the deficit, much less do something about it?” Yglesias asked. “Merely recognizing the significance of the deficit is a big deal. President Joe Biden was a strident deficit hawk for most of his career before pivoting to favor aggressive stimulus in the wake of the pandemic. But his administration sometimes acts as if it doesn’t realize economic circumstances have changed.”
“Even if Biden has no realistic way to enact large-scale deficit reduction, he has a lot of freedom on regulatory matters. It’s important for both the administration and its progressive allies to understand the significance of this point,” Yglesias said. For Democrats, “it would be a big mistake to put forward in 2025 an agenda designed for the economic circumstances of 2021. It’s all well and good to say that deficit reduction is unlikely to be achieved right now because Republicans won’t agree to raise taxes — but if Democrats win, they get to decide for themselves what’s politically realistic.”
In the New York Times, Paul Krugman wrote about “why we should, but won’t, reduce the budget deficit.”
“In a better world we’d be taking action to bring interest rates down in a sustainable way. In particular, now would be a good time to rein in budget deficits. However, the chances of serious action on the deficit anytime soon are near zero,” Krugman said. The deficit is “very high for an economy close to full employment,” and “there’s a big difference between obsessing over the budget deficit in, say, early 2013 and believing that we could use a lower deficit now. Back then, the interest rate on bonds protected against inflation risk was negative, so that investors were in effect paying the federal government to take their money. Now that rate is 2.4 percent. So it makes much more sense to be worried about borrowing now.”
“While we needn’t panic over budget deficits, a lower deficit would really help with economic management right now. But it isn’t going to happen. Why not? If you listen to Republican politicians, you might think that major deficit reduction is easy: Just cut out wasteful government spending (a category that MAGA types think includes aid to Ukraine in fighting Russia’s invasion). And a majority of voters say that the government spends too much in general. But ask voters about specific spending, and there’s almost nothing they want to cut. The fundamental point, as always, is that the federal government is essentially an insurance company with an army.”
In the Washington Post, Fareed Zakaria made the case that the U.S. “needs a national sales tax” to address the deficit.
“For almost a generation, policymakers have been able to avoid seriously confronting deficits because interest rates were so low and financing debt was easy. But with interest rates where they are now, the party might be over. Fortunately, there is a simple solution staring us in the face — however, both parties refuse to accept it: Adopt a national sales tax, like every other advanced economy in the world,” Zakaria said. “According to the Congressional Budget Office, a broad 5 percent tax of this kind could raise $3 trillion over the next decade, massively reducing the United States’ fiscal hole.”
“It has become a bipartisan article of faith in the United States that most of the federal budget cannot be cut and that the taxes of 98 percent of income earners cannot be raised. This is why we are on an unsustainable path. We need to both cut some spending and raise some taxes, and future tax increases cannot come from the one source from which most new revenue has come in the past few decades — high-income earners. It distorts the economic and political system and makes people feel that they have less of an investment in the federal government.”
What the right is saying.
- The right is sounding the alarm about the deficit and thinks substantial spending reforms are needed to tackle the issue.
- Some criticize lawmakers on both sides for failing to meaningfully address the deficit even as the problem has worsened.
- Others say straightforward initiatives, like a push to collect unpaid taxes, would help to reduce the deficit.
In The Dispatch, Brian Riedl said it’s a mistake to “shrug off” the historic deficit.
“This year’s budget deficit is the largest in American history, equaling 7.7 percent of GDP. Those earlier emergency-driven deficits could each be justified as an unavoidable yet temporary one-time cost that a growing economy could absorb gradually.” However, today’s deficits are structural. “Simply put, never before has Washington run such large deficits during relative peace and prosperity,” Riedl wrote. “The culprits should be well known by now… Social Security costs rose by 11 percent last year, and Medicare spending (adjusted for timing shifts) leaped by 18 percent. And that is just the beginning.”
“Politicians are pandering to the large majority of voters who have responded to trillion-dollar deficits by demanding that Congress expand Social Security and Medicare—as well as hike spending on education, broader health care, infrastructure, poverty relief, border security, and child care. And yet polls also show that a strong majority of voters refuse to accept paying even one dollar in new taxes to close the deficit or finance their exorbitant spending demands. To put it gently, these demands are untethered from reality. Therefore, it was no surprise that last month’s initial reports of a staggering $2 trillion budget deficit elicited a collective shrug from the White House, Congress, and voters.”
In Fox News, Wesley Hunt wrote “it's time to save the American Dream” by addressing the deficit.
“It’s become clear to me that if Congress does not rein in spending, move towards a more balanced budget, and adopt a tradition of single subject spending bills, then your children and mine will be condemned to a lifetime of inflation, debt, and economic ruin. We have an obligation to make sure that does not happen. Without a solution to the $33 trillion federal budget deficit, massive tax increases, skyrocketing inflation, increasing unemployment, and soaring interest rates will all be consequences our children will have to confront,” Hunt said.
“For the past 30 years, Congress has been addicted to passing continuing resolutions that have funded the entire government in one up or down vote. Congress was not designed to function in this way and that’s precisely why we’ve gone from budget surpluses in the 1990s to federal budget deficits not imaginable decades ago. The only path forward is to consider and pass 12 individual appropriations bills each year that are focused on the health and prosperity of our nation and not humanitarian pet projects in places most Americans can’t find on a map.”
In Bloomberg, Karl W. Smith said the U.S. “should figure out how to get its hands on the almost $700 billion it’s owed but hasn’t been paid.”
“The latest Internal Revenue Service estimates are that almost $700 billion in taxes went unpaid in 2021… This estimate, however, is based on outdated assumptions about how the economy runs. Former IRS Commissioner Charles Rettig puts the true tax gap at more than $1 trillion, which is more than half of what the US needs to close the budget deficit,” Smith wrote. About half this “tax gap” comes from “pass-through entities, such as sole proprietorships, partnerships and LLCs,” and “the reasons probably range from outright cheating to issues related to complexity in filling out returns.”
“The Biden administration has passed legislation that gives the IRS increased funding for audits and the technology necessary to catch tax cheats. But that’s like applying a Band-Aid to a gushing wound. By plugging the pass-through leakage and embracing the simplicity of automatic filing, the US government could transform the taxpaying experience, making it less, well, taxing while shrinking the deficit.”
Reminder: "My take" is a section where I give myself space to share my own personal opinion. If you have feedback, criticism, or compliments, don't unsubscribe. Write in by replying to this email, or leave a comment.
- There are only two ways out: Collect more tax revenue or reform huge social programs.
- We can (and should) both get better at collecting tax revenue and start to reform Social Security.
- For that to happen, we need Congress to start functioning again.
In some ways this whole thing is pretty simple. But that doesn’t mean it’s easy.
There are only two ways to reduce the deficit: Raise taxes or cut programs. While politicians like to squabble over a few hundred million dollars here or there, our budget is so large that meaningful change requires saving hundreds of billions of dollars each year. Given the current state of world affairs, there is a precisely zero percent chance any military funding cuts happen. Which might be a good thing. Perhaps in lieu of that, we could force the Pentagon to reckon with its massive waste problem. Either way, the fact is we won’t be cutting military spending, which reduces the options to cutting or reforming Medicare or Social Security, or raising more revenue in taxes.
I want to be crystal clear that, at the end of the day, these really are the only two ways out. I've written about the need to reform Social Security and will re-emphasize again here what I've said before: Anyone who is willing to engage honestly on the issue can see both Social Security and Medicare are barrelling toward insolvency, which would result in the drastic cuts both sides of the aisle say they want to prevent. If we don't want to have to lop those programs down the road when the money runs out, we need to reform them incrementally now. There are plenty of options for how to do this, and any action we choose would also help address the deficit.
The other piece — tax revenue — is a little more complicated, for two reasons: 1) Raising taxes can take many different forms, and 2) We may not actually need to raise taxes, but instead just get better at collecting the tax revenue that is actually owed. Again: Much like cutting military spending, I see almost zero chance that we raise taxes anytime soon. Even in normal times it is one of the least politically popular things to do, but right now we are heading into election season and already in an era of inflation and high interest rates. Biden is going to continue to try to find ways to get more tax revenue from the ultra wealthy and corporations, but I don't see any way Congress (particularly this Congress) moves on a bill to increase taxes on your more typical earners.
Which brings me to collecting more revenue. As Karl Smith wrote (under "What the right is saying") the latest Internal Revenue Service estimates conclude that we missed $700 billion in taxes in 2021. We have good reason to believe that number is now closer to $1 trillion, which would be enough to wipe away nearly half of the deficit. The fact that we are not properly collecting taxes in the year 2023 is a little hard to fathom — but it remains true. Biden has tried to address this by beefing up funding for the IRS, which is a policy proposal I had mixed feelings about but one I'm warming up to given the current state of affairs.
So, if I'm in charge, those are two areas I'm focusing on: Beefing up tax collection (before raising more taxes that we can’t seem to properly collect) and finding a way to reform Social Security and Medicare that prevents them from going insolvent.
At the same time, there’s some nuance in these latest numbers that's worth acknowledging. Jim Tankersley has examined the Treasury Department’s data, and his reporting has been some of the most illuminating that I've read. Tankersley noted that federal tax receipts in fiscal year 2022 actually fell, despite economic growth, which is a historical anomaly. The reason? There was a surge in claims for pandemic-era tax credits, a surge in fraud (the magnitude of which we still don’t know), and a major delay in tax filing deadlines thanks to natural disasters which pushed many tax payments into the next fiscal year. All of that makes the numbers pretty noisy, but the fundamental issue remains the same: We are spending way more money every year than we bring in through tax revenue.
This is not sustainable. It's nice to see the right and left coming to some consensus on that, but now it's up to the government to actually, finally, make some difficult choices and do something about it.
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Your questions, answered.
Q: One question that is never asked or answered is how other Western countries finance college for their citizens? What countries offer free higher education for their students, how do they select those students, what institutions provide the education, how are those institutions financed, and how do other countries that do not provide free higher education finance (or not) it for their citizens?
— Jane from Clarksdale, Mississippi
Tangle: That’s a good question — actually, it’s a handful of questions, but I’ll just focus on how European colleges are funded and who gets in. As a preface, if you’re curious, U.S. News and World Report has a good breakdown on how universities in Europe differ from those in the United States. The upshot is that there are some differences in what you’re paying for between the two countries, with European schools offering more structured degree programs, generally less centralized campuses, and fewer cultural traditions like major sports and social clubs.
Most applicably, however, schools in Europe tend to offer three-year programs (as opposed to the standard of four years in the U.S.) and fewer services, like professional development, health services, or dining hall options. This all goes into the cost of college being generally lower in Europe, even when it isn’t offered for free (as it often is not for Americans looking abroad for school). Furthermore, a larger percentage of American students enroll in college education after high school than Europeans. Both the number of services offered and lower demand help to keep costs down.
But the elephant in the room is the publicly funded, free colleges in Europe. As you may know, member nations in the E.U. offer free college to their citizens, and typically extend that privilege to citizens of all E.U. countries. And the simple answer for how the government gets its funding is higher taxes.
That’s not to throw in one way or another on taxation — on one hand, a government that can provide extra services is a huge boon, but on the other, the freedom of choice you give up on your own dollars can be galling. It is, however, a statement of fact. In France, a person making 85,000 USD gives 41% of their income to taxes. That’s about the same rate in the UK, and about the same in Finland (when you include a separate tax for the EU). In the U.S., it’s 22%.
Lastly, there is some controversy over why college costs in Europe are lower. According to a 2019 report from the Heritage Foundation, the European funding model is exactly what results in lower services and less participation in college. At the very least that relationship is somewhat bidirectional — and of course it will vary from country to country.
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Under the radar.
The Biden administration is proposing a major rule change to the H-1B visa program for high-skilled foreign professionals. Currently, the system works by allowing applicants with an eligible job offer to submit an entry into a lottery where 85,000 recipients are selected at random at the end of an entry window. But the government found some companies were colluding with individual applicants, funding as many as 10 entries into the lottery to increase their chances of winning. This drove the number of entries in each lottery up from 270,000 three years ago to 780,000 this year. Under the new proposal, each person applying will be weighed equally no matter how many entries they submit. WSJ has the story (paywall).
- $1.2 trillion. The amount of money spent on Social Security in fiscal year 2022.
- $5.8 trillion. The amount of money spent by Congress in fiscal year 2022.
- $2.3 trillion. The estimated cost of Social Security in 2033, according to a Congressional Budget Office estimate.
- $1 trillion. The amount of money the former IRS Commissioner Charles Rettig said the agency fails to collect every year.
- $877 billion. The amount of money spent on defense in the United States, the most in the world.
- $849 billion. The amount of money spent on defense by China, Russia, India, Saudi Arabia, the United Kingdom, Germany, France, South Korea, Japan and Ukraine, combined.
- Zero. The number of financial audits the Pentagon has passed since they were first attempted in 2017.
- One year ago today we again didn't have a newsletter, and had just released a subscribers-only interview with Ivan Moore about ranked-choice voting.
- The most clicked link in yesterday's newsletter was the flightless kestrel in Vermont that learned how to paint.
- Play by the rules: 782 Tangle readers responded to our poll asking about the gag orders against former president Trump, with 54% saying they support gag orders generally and support the ones used against Trump. 20% oppose gag orders generally and these specifically, 10% support them generally but oppose these specifically, and 9% oppose them generally but support these specifically. 7% were unsure or had no opinion. "No one is allowed to harass or incriminate defendants, Trump needs to play by the legal rules of any legal case," one respondent said.
- Nothing to do with politics: Earth just received an 8 billion-year-old radio frequency blast.
- Take the poll. What do you think the U.S. should do about the Federal Deficit? Let us know!
Have a nice day.
Many people know the late great Steve Irwin as “the crocodile hunter,” but he was beloved for his interest in all kinds of animals. A rare species of freshwater turtle, the Elseya irwini (or Irwin’s turtle), takes its name from the famous Australian zookeeper and media personality, who discovered the species while on a boating trip with his father and fellow naturalist, Bob Irwin. The appreciation for nature runs deep in the Irwin family. Steve’s son, Robert (19), continues the Irwin legacy as a naturalist and TV personality who is also active on social media. This past Saturday, Robert shared an emotional video of himself at the Australia Zoo, where they became the first to breed and hatch a baby Irwin’s turtle. “I think Dad would be pretty proud that we’ve become the first to successfully breed the turtle that he discovered,” Robert wrote. “A rare and unique species under threat in the wild has just been given a second chance.” The Independent has the story.
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