TMFDeej (99.47)

Taxes are headed higher, a lot higher

June 10, 2009 – Comments (6)

The only thing that gets me more irritated than talking about taxes is talking about the money that I throw away on Social Security.  Needless to say, I got good and annoyed when I came across the following CNN/Money article on the ballooning national debt this morning:

The next great crisis: America's debt

The U.S. budget deficit for 2009 will be an estimated $1.8 trillion, which amounts to around or 13.1% of GDP according to the nonpartisan Congressional Budget Office.  This is more than double the highest post war record of a deficit of 6% (1983).  As if the current deficit wasn't bad enough, even using what are likely overly optimistic assumptions, the CBO estimates that the deficit in 2019 will still be $1.2 trillion.  And that's before the problems with Social Security and Medicare are addressed.  Of course, no politician has the courage to do what that needs to be done with these programs.

Not only is the U.S. borrowing a lot of money, but a lot of it is in the form of short-term bonds.  I believe that the average maturity of Treasuries is five point something years (I'd love to know the specific number of anyone has it).  So in essence we're taking out short-term loans when interest rates are low and we'll eventually have to roll them over into higher rate loans.  The U.S. government's debt is almost like the ARMs (adjustable rate mortgages) that have caused so many problems in the housing industry.

The CBO estimates that just a decade from now $1 out of every $6 that the U.S. government spends will go to cover the interest on debt, compared with $1 in $12 last year (which is wasteful enough).  According to estimates by the Government Accountability Office, if no meaningful changes are made to Social Security or Medicare, by the year 2040 interest will absorb nearly a third of all tax revenue and entitlements will eat up the other two-thirds with nothing left over.

The gist of the article is that the United States has so much debt and it is spending money so rapidly that taxes on just about everyone, including those who make less than $250,000 per year, are likely going to end up being much higher in the near future.

Here are the section of the article that I found particularly disturbing:

The bill is far too big for only the rich to pick up. There aren't enough of them. America will have to lean on citizens far below the $250,000 income threshold: nurses, electricians, secretaries, and factory workers. Within a decade the average household that pays income tax will owe the equivalent of $155,000 in federal debt, about $90,000 more than last year. What the Obama administration isn't telling Americans is that the only practical solution is a giant tax increase aimed squarely at the middle class. The alternative, big cuts in spending, aren't part of the President's agenda. To keep the debt from wrecking the economy, the U.S. would need to raise annual federal income taxes an average of $11,000 in 2019 for all families that pay them, an increase of about 55%. "The revenues needed are far too big to raise from high earners," says Alan Auerbach, an economist at the University of California at Berkeley. "The government will have to go where the money is, to the middle class." The most likely levy: a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals.

Higher taxes alone will lead to slower economic growth going forward than what we have become accustomed to.  However, if the massive amount of debt that the U.S. has causes foreigners to lose their appetite for Treasuries, interest rates will likely head higher as well.  We are already seeing evidence of this happening as the yield on the 10-year approaches 4.0% despite the Federal Reserve's quantitative easing.  Higher interest rates will serve to slow growth even more.

The economy is in the process of bottoming, but do not expect growth to be robust going forward.

Deej