According to a recent Associated Press report about 47% of US households will pay no federal income tax in 2009. The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. The top 10 percent of earners -- households making an average of $366,400 in 2006 -- paid about 73 percent of the income taxes collected by the federal government.
Let's do a simple example. Ten people all go to a restaurant and can order whatever they want. The total bill comes out to be $1000. One guy gets to pay
$730. One guy gets to pay nothing. Four people actually get paid money for showing up. The other four people get to split the remaining $270 but not equally. One guy pays $200 and the remaining three split the final $70. If what and where to eat were decided by a simple majority vote would you expect the bottom
five who pay nothing or less than nothing to vote for McDonald's or Ruth's Criss? Would it be hard to convince the sixth guy who only pays about 2% of the
bill to go for the expensive dinner? How in the world would the two guys at the top who pay 93% of the bill convince the others to not order two steaks
and six cocktails?
This is the situation America finds itself in right now. The top 20% of earners paying 93% of the federal income taxes and the middle class
paying for rest. The "poor" in America making as much as $50,000 a year pay nothing into the system. Why should they care about the massive
debt we are accumulating? Why not repave good roads, build new parks and give refunds for trading in old cars? They don't have to pay for any
of it. The only way they'll have to pay for any of it is if they become successful. So why try to be successful when all it means is you are
now the one stuck with the bill.
No matter what your opinion is of how much taxes people at various income levels should pay federal tax revenue cannot exceed a certain
percentage total economic output. No matter how high you raise tax rates on income or sales their is a limit to how much money you can extract
from the system. This is important to understand. Politicians are making the case that we can fix our budget deficits with higher taxes but
I will prove to you beyond a shadow of a doubt that it cannot be done.
Taken from the Heritage Foundation: The historical average of federal tax burden to GDP is 18.4% and the maximum value ever recorded is 20.6%.
If you were to look at periods of time were the burden was low you would find the economy grew quickly in those periods and conversely when the
burden was high the economy grew slowly or there was negative growth.
If you look at the chart below you can see a consistent pattern. The tax burden is always at its low point near the end of a recession. As the
recession ends and the economy begins to grow the government begins to slowly raise taxes until the tax burden become large enough to send the
economy back into recession. The politicians then cut taxes to thwart the recession and the process starts all over again.
Take 1994-2000 for example. In 1994 we were just coming out of a recession and entering one of the greatest boom periods in our history. Over that
period the tax burden increased from well below average to the highest level in history. Not surprisingly we went into a recession during the year 2000.
George W Bush was elected and cut taxes in 2001 and 2003 plunging the tax burden and leading to the economic growth we had until 2007.
But the point I'm trying to make is not about the merits of a high or low tax burden. The tax burden right now is below historical averages and
as the chart indicates is set to rise rapidly. The point I'm trying to get across is that we cannot expect the tax burden to increase much above
the 20.6% maximum value ever recorded in the next few decades.
Understanding this I will prove using very simple common sense math how we cannot tax our way out of our crushing deficit problem.
Our current GDP for 2010 is estimated to be nearly 12 trillion and could grow to almost 14 trillion by 2014. When averaged over a period
of decades GDP growth tends to be around 3%.
If you look at the historical maximum tax burden of about 20% and assume we can stay at that rate and still grow GDP by 3% every year
what you will find is that it will take decades for our GDP to grow large enough to pay for our current annual federal budget. It's really
pretty simple. Our current federal budget is about 3.7 trillion for 2010. In order to get 3.7 trillion in tax revenue by taking 20% of GDP
then our GDP must be at least 18.7 trillion. If you start at 12 trillion in 2010 and add 3% growth every year it will take 13 years to
reach that point.
There are two enormous problems with this situation. The first is that this assumes that the budget will stay at 3.7 trillion for the next
13 years. Federal spending has increased every year since 1965 at a pace much faster than the 3% growth of GDP. No amount of GDP growth can
make up for a continual increase in federal spending. The second problem is that right now the tax burden is only around 15% and we are
still not seeing much economic growth. Raising the tax burden from 15 to 20% is sure to slow future growth and send us back into recession. The
chart below show how far above our current 3.7 trillion the budget will be.
We are rapidly approaching the point were the ability of our government to borrow the money it needs to pay for the budget is becoming
questionable. We are borrowing about 100 billion a month which is more than the entire economies of many countries to finance our federal
budget. We are borrowing similarly large amounts to finance our state and local government's budgets. The interest rate on this debt has
begun to rise and will continue to rise as more and more money is borrowed.
The day will come were we will not be able to borrow any more money no matter how much interest we offer to pay. Who exactly is the
government borrowing this money from? American citizens, American corporations and foreign countries. Foreigners have already started pulling
back from buying out debt. American citizens only have so much money to invest in Treasury and Municipal bonds so at some point they
simply will be unable to sell any more bonds. Once that happens their is only one outcome, parts of the government will be forced to shut down.
Think back to the restaurant example. When the four guys who always pay the bill don't show up to dinner that night and the restaurant tells
them they can't eat if they can't pay what do you think will happen. Have you seen the riots in Greece and France demanding jobs and protesting
the governments attempts to cut benefits. Consider these the coming attractions to a show coming to a country near you.
The only solution mathematically possible is to cut government spending at all levels of government. The types of changes that have been proposed
simply cut the rate of increase in spending or freeze spending on a small portion of the budget. This simply will not work.
What will work is a plan to reduce the size of government rapidly by 25-50% until our budget falls in line with our revenue. Our politicians know
this but will never admit it to you. Simply put, the people we have elected are spineless liars who are preparing themselves for what lies ahead
while they tell you they have all the answers.
So what should you do with this information? What can you do to get yourself prepared for this crisis?
If you are in debt or dependent of the government you need to do whatever it takes to get out of debt and become self reliant.
Knowing that interest rates will rise significantly in the coming years if you have variable rate debt you need to get rid of it
as fast as possible. If you work for a government agency or for a business that depends on sales to the government you should be worried
about the stability of that job.
If I'm wrong and through some magic pill the economy recovers, the government continues on with business as usual and the deficit just
evaporates then what have you lost? Either way you'll be out of debt and self sufficient. Prepare for the worst and hope for the best is the way
to look at this.