Let's say hypothetically that the U.S. Congress fails to raise the debt limit by next month. Will refunds from the IRS immediately stop being issued? I would think so, but then most refunds are really just the taxpayers own money coming back to them (notably excepting refundable credits for kids, education, etc), so maybe it's more like a trust fund -- I don't know. I remember a while back here in California when the state (which cannot print money out of thin air like the feds) ran out of money and issued IOUs (vouchers) for tax refunds (but I'd have to look up the details to be sure). I believe they were all honored reasonably soon.
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"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard -
There will still be tax money coming in. It's up to Treasury how they want to allocate that money. I think last time this came up they had priorities as interest, SS and MC, active duty military and then I don't remember what was priority after that.
Refundable credits are not a trust fund. They also do not show as decreased revenue on financial statements but rather as an expense of the Treasury Department.
This is all a bunch of political posturing. We very much need to get a handle on the increasing debt, but it's going to take the serious people in both parties to agree to a long term plan. I don't see than happening as they are all more interested in who gets blamed rather than fixing the problem. It won't be in my lifetime, but unless they do something there will come a time when tax revenues won't be enough to cover interest on debt and the country will implode.
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