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Why Your Taxes Will Go Up

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March 05, 2010 – Comments (2)

We all know that the government promises too much and puts it on our collective credit card, which will ultimately result in higher taxes. But it's helpful (and disheartening) to see the numbers. Burce Bartlett provides some math for thought in his article "How Much Does the National Debt Matter?"

First up, benefits payments:

"[I]n addition to the national debt, the federal government owes $5.3 trillion to veterans and federal employees. But the really big debts are those owed by Social Security and Medicare: Over the next 75 years, the federal government has promised benefits for these two programs in excess of anticipated payroll tax revenues equal to $7.7 trillion and $38 trillion, respectively.... With federal revenues estimated to be about 19% of GDP in the long run under current law, taxes would have to rise by about one-third to pay all the promises that have been made for just these two programs."

Would lower taxes spur growth that will make the debt more manageable? Not likely, says Bartlett: 

"Some Pollyannas, like my friend Larry Kudlow, think we can just grow our way out of the debt by cutting taxes. But this is not really possible given the magnitude of our problem. First, increasing real growth doesn't have as much effect on the debt as one might imagine. According to OMB, raising the rate of productivity, the basic component of real GDP growth, by 0.5% per year over the next 75 years only reduces the long-run fiscal gap by 17%.... Lastly, it's highly unlikely that further tax cuts will do much to increase growth when they will add to the deficit and taxes are already at their lowest level as a share of GDP in almost 60 years--more than 3% of GDP below the postwar average. In any case, the biggest problem businesses have today is a lack of customers, not high taxes."

Then we'll just inflate our way out it, right? Also not likely:

"The problem with that belief is that it assumes that the debt is largely composed of long-term bonds with fixed interest rates.... Unfortunately the portion of the national debt held in the form of long-term securities has fallen over time, and the percentage in short-term securities has grown. As of Sept. 30, 2009, three-fourths of the privately held public debt matures in less than five years. This debt can't be inflated away because investors will demand higher interest rates to compensate for inflation when it rolls over, which will raise federal spending on interest payments. Also a growing portion of the debt is now indexed to inflation. Known as Treasury inflation-protected securities, more than $500 billion have been issued. Insofar as the additional spending for interest is borrowed, the real value of the debt won't fall very much."

Bartlett's conclusion: Get ready to pay more and get less. 

"In the end the debt must be paid, and we will have to raise taxes and cut spending to make sure it is."

Note: One of the reasons I like Bartlett is that he rightly blames both political parties. So for all you partisans, before you start blaming the other party, take some time to think about whether the people you voted for did anything alleviate this problem, or whether they made it worse. 

2 Comments – Post Your Own

#1) On March 05, 2010 at 11:44 PM, rd80 (98.18) wrote:

"In the end the debt must be paid,...

Bartlett forgets that default is an option.  Maybe not a good option, but it is an option.

The assumption that higher tax rates will generate higher revenues isn't necesarily a good one. Deficits went up under Bush because spending increased; revenues went up following the tax cuts, but spending went up faster.  It's very possible undoing those tax cuts will decrease revenues. 

If Bartlett's assumtions and analysis are correct, and if higher taxes don't raise revenue substantially, we're left with big spending cuts or default.

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#2) On March 06, 2010 at 12:14 AM, AvianFlu (32.65) wrote:

You are full of baloney!
My taxes will not be going up.
I know it is true because Mr. Obama made that promise to me while he was campaigning for the presidency.

And inflation, which also reduces my ability to purchase things similarly to taxation, will not be happening either, I'm sure. Obama's budget forecast plans for 1.5 percent inflation. I am completely confident of the accuracy of his forecast. The 175% increase in monetary base in the last 18 months will have absolutely no effect.

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