The Coming Inflation Tax
Board: Berkshire Hathaway
Okay, let's just say Obama and Buffett get what they want: current tax rates for the 98% remaining where they are today and the remaining 2% get the tax increases Obama and Buffett believe is "fair."
In Buffett's own words, he says this tax on the "rich" would amount to about 1% of GDP per year or roughly 55-60 billion annually in new taxes, also known as government revenue. So the $1 trillion plus in deficit spending over the last 4 years, and assuming 2% GDP growth next year and no huge market drawdowns, is reduced by $60 billion + increase in other tax revenue (2% GDP growth should equate to slightly higher tax revenues as well).
So we're still talking MASSIVE deficits--$900 billion plus at least--as Buffett has been very forthright with--"tax on rich doesn't solve defict gap but it's a start."
Then let's say the Republicans get exactly the spending cuts they want in the current discussions--that lops off another $65 billion annually. Okay, with me so far: everyone is playing along nicely and compromising. So we still have at least an $850 billion dollar deficit hole: and according to Buffett's own article in The Greenback Effect the printing presses will STILL have to work overtime in the Marriles Ecceles building based on these numbers.
I realize Buffett knows these aren't enough cuts even if both parties agree with what's on the slate at the moment (he's mentioned many times spending needs to be around 21% of GDP with tax revenues around 18%). The point is even if both parties perfectly concede to one another's wishes--we'll still have a ways to go on reducing the deficit to a 3% gap.
And so with the printing presses sure to run next year, it's really no wonder Buffett remains a constant buyer of stocks (not bonds, unlike the general public). Inflation is a mandatory side-effect of our current system which is of course a no duh, but for things to be held together I think this has never been more true: total credit market debt needs to skyrocket to maintain our current standards of living: no easy feat given lack of income growth.
As I said in the thread subject line, they might as well call the current plan the Inflation Tax on the 98% (which Buffett has another article on which should instead be called something like "How Inflation Will Rob from the 98%--especially those with little in the way of assets."
I think no matter the outcome, the standard of living will continue to go down for the middle class: as it has since 2000. Inflation in all the things we need will most certainly not help them. And if interest rates get out of control at some point....forget about these cuts, they'll mean diddly squat. Every 1% rise in interest rates equate to roughly $150 billion more in costs to service the U.S. debts outstanding.
As the Chinese proverb goes, "may you live in interesting times." Yes, it's going to get more interesting all right.
Good luck all.