Bankruptcy of the West

Official:  The government offers a great life. I get a good salary and very nice retirement benefits, including lifetime healthcare.
10 Year Old:  Dude, whatever.

The West is bankrupt. The solution is to declare bankruptcy. People were stupid to loan resources to their governments, and they will receive the usual reward for their stupidity.

The meaning of government debt is that governments have taken real, current resources and have applied those resources to whatever is now built. Almost all has been wasted, building the wrong things in the wrong places, or building nothing. Politicians have nice houses by lakes and on beautiful hilltops. That is all.

Let the people who bought government bonds take the loss. Sorry, they should have looked into the plans and the planners before entrusting their wealth to those guys. Investing with crooks will always result in losing your wealth, especially when those loans are promoted as "riskless". Their only expectation of repayment was by the use of government force to extract higher taxes from the populace. That expectation was ruthless and immoral.

Bill the children ...

Don't come to me, or my children, or anyone's children and say that the politicians were acting on their behalf, so they must be bond slaves and return the stolen wealth to the oh-so-trusting baby boomers who lent that wealth to the government.

If you say "rule of law" to me, I will reply "rule by liars and thieves", trading wealth for votes to remain in power. The rule of law will recover only when rule by thieves is outlawed in the common mind. Unfortunately, collapse is the only way that the organized theft will stop.

The dictator Idi Amin stole billions from loans to Uganda made by international agencies. Most of this debt was written off as worthless, because no one in good conscience could enslave the people of Uganda to pay off debts extended to a psychopathic criminal who ruled their country.

US politicians do not always show the psycopathology of Idi Amin, but they have been quite effective in stealing the wealth of our society. The willing participants were the bond buyers.

Most of the public collected some of that borrowing and stealing. That wealth cannot be recovered. Possibly there are some nice houses on lakes and hills which can be recovered, houses paid for by malfeasance in office.

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Obamacare Bails Out Medicare

The government is ending the free market in healthcare. Our policy makers have already designed a system of price controls that doesn't work. Their next plan is to cover up this failure by blaming "the market". The market is short for the freedom of people to produce and cooperate among themselves, always delivering value and achieving efficiencies that government cannot match.

That freedom is what the government has taken and is taking away, in favor of higher hidden taxes and rationing. Our leaders have been buying votes with lavish promises of what the government will deliver. Their plan is to put us all in one boat, then make us pay for their promises to prevent the boat from sinking.

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Downgrading the West
03/09/12 - OpenMarket by Matt Patterson

[edited]:  The government has been spending our wealth for decades. First everything we made, then everything we are ever going to make, and now everything our children and their children will ever make.

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The Real Federal Deficit
05/18/12 - USA Today   (via Dinocrat)

[edited]:  The typical American household would have paid 85% of its income in taxes last year to balance the budget, if the government used standard accounting rules.

Standard accounting gives a deficit last year of $42,054 per household, nearly four times the official number. Median income is $49,445.

The official deficit was $1.3 trillion ($1,300 billion). Liabilities (future promises) for Social Security, Medicare, and other retirement programs increased by $3.7 trillion, for a total of $5 trillion.

Standard accounting used by companies, states, and local governments must include retirement commitments. Congress ignores them when reporting the deficit.

The total wealth (Gross Domestic Product) created in the US in 2011 was about $13 trillion ($13,000 billion).   ( A trillion dollars on display. )

In proportion by wealth, if a family earned $50,000, that would be like borrowing and spending $5,000, and also promising to pay an additional $14,250 to the parents when they retire. All in one year.

Do you think that the parent's retirement is secure? Will the children pay?

Family Budget

Bob:  Like the government, I have promised to help out my family members when they retire.

Mike:  Why the grim face? How much did you promise?

Bob:  About $1,500,000 above my after-tax income of $50,000, while I repay $210,000 that I have borrowed.

Mike:  Just break it to them gently.

( This is Version 3 of this post. What changed?After clicking this link, you can come back here with the "Back" button of your browser.  )

Spending Cuts of  1.8%

Republicans have approved cutting $61 billion from government spending of $3,500 billion this year, a 1.8% cut. The government accounting year 2010  (the 2010 fiscal year)  is the 12 months ending September 30, 2011.

The numbers are huge and hard to grasp.

	$2,200   billion	in taxes received
+	$1,300   billion	of borrowing (the deficit)
=	$3,500   billion	in government spending

The government borrows 60% above its income of $2,200 B.
The government spends 1.6 times its income.
The proposed cut is 4.7%  (1/21st)  of the borrowed money.

For your reference,

$1 billion  =	1,000	× $1 million
$3,500 billion  =	3,500,000	× $1 million	=  $3.5 trillion

Family Sized

The numbers above are too big to really understand. Here is what our government's spending and financial situation would be when reduced in proportion to the spending of (say) Bob's family:

Bob has	$50,000	of yearly income to spend after-tax.
He borrows	$29,900	more,  60% of his income.
He spends	$79,900	1.6 times his income, not saving anything.
Proposed cut	$1,400	is 1.8% of Bob's total spending,
		or just 4.7% of Bob's yearly borrowing.
Bob's debt is	$210,350	at 2.2% interest, a low current rate.
Bob pays	$4,550	yearly interest in his spending above.

Democrat Bob responds:  "No way. I can't live with that drastic cut of $1,400. You are threatening my family. Think of my children!"

The proposed cut is only 1/21st of what is needed to balance the current budget and stop increasing U.S. debt.

Super-Sized Promises

Bob is a soft-hearted and generous guy. He has made additional promises to his parents, uncles, and cousins for Social Security, Medicare, Prescription Drugs, Medicaid, and more. He hasn't yet set aside $1,525,650 to provide the complete funding for those promises. Bob does not want to disappoint or worry his family, so he has not fully explained the situation to them.

Bob currently spends everything he earns and borrows. He pays $4,550 for the yearly interest on his debt, but he is not paying down the balance of $210,350. Amazingly, he is borrowing $29,900 more each year.

Read more ...

Contributions From the Family

Some of Bob's family pay to him $20,000 (40%) of his income (Social Security and Medicare contributions). He has promised to invest that money wisely for their support later when they retire or become sick. This year, he spent $33,100 on other family members who are already retired or sick.

Bob is currently meeting his obligations to support some of his family. But, Bob is not saving anything and has not planned how to later support the family members who are now paying in. He treats their $20,000 in contributions as part of his current income and spending.

Social Security Trust Fund

Bob collected money in the past which he did not need to spend immediately on family support. He put it into a trust fund, added it up, and immediately withdrew it to spend on other things. If he had saved that money it would now total $60,100 (in proportion to the Social Security trust fund of $2,600 billion). But, he didn't save it.

Worse, Bob's promises to support his family are far greater than all the amounts he collected, even if he had saved. By now, he would need savings of $182,600 dedicated to support Social Security.  That is 3.6 times his income from all sources. (That is in proportion to the $7,900 billion unfunded liability of Social Security.)

All Promises

Mary Meeker and her team (below) have estimated all of the amounts Bob has promised to spend on Social Security, Medicare, and Medicaid over the next 75 years. They compared this obligation to the payroll taxes that will be collected for those purposes at current tax rates. Bob won't collect nearly enough to meet his promises.

Bob would need $1,525,650 right now in safe investments earning 3% interest to make up the difference. That is Bob's part of the combined "unfunded liability" of Social Security, Medicare, and Medicaid over the next 75 years. This is a way of valuing and comparing today what those promises will cost in the future.

Bob doesn't have any savings, so those promises will require much more income (much more in taxes). The Social Security Trust Fund will not help, because it only contains more promises. In our analogy, the trust fund is only a promise from Bob to himself to find more income in the future. See Unfunded PromisesAfter clicking this link, you can come back here with the "Back" button of your browser. below for more on this.

We expect that Bob's income will increase by 3% each year. This will not help much, because we also expect almost all of Bob's expenses to increase at that rate.

Taxes  ×  1.76

Here is the additional income Bob would need to pay for all of his promises.

Promise	Amount	Income
Entitlements	$1,525,650	$20,342
SS/Med Income		20,000
SS/Med Payments		-33,100
Federal Debt	210,350	772
Borrowing		29,900
Total Extra		$37,914
Current Income		$50,000
Total Needed		$87,914
Multiple of Income		× 1.76

This means collecting 1.76 times as much tax as at present. That huge amount must come mostly from the middle class. Only part would come from the rich.

You might think that a growing economy will make it easier to pay these promises. But, the official government analysis already assumes 3% yearly growth in the economy and taxes. Bob needs 76% more income (tax collections) today, and his total income and payments must increase yearly by 3%.

You can skip these details without missing much.

$1,525,650 is the lump-sum value, earning 3% per year, needed to pay for unfunded Entitlements over the next 75 years. The first payment, this year, would be 1/75th of that amount, $20,342. This is in addition to the funded portion, $20,000 this year. The funded + unfunded need is $40,342. Bob is paying $33,100 of that. Bob needs to save $7,242 more to meet his promises. All payments increase by 3% each year.

The payment of $772, increasing by 3% yearly, is enough to pay off Bob's proportional part of the national debt of $210,350. We assume that debt does not increase yearly. Interest on that debt is already being paid from other borrowing and taxes.

Is it reasonable to suppose that the national debt will not increase? Yes, because we are calculating here the additional income that Bob needs to pay for his promises, stop borrowing, and pay off the national debt.

Last, Bob must have additional income of $29,900 to stop borrowing each year, increasing by 3% yearly. He needs that income because every dollar of that borrowing is now being used to pay for something.

See the Excel worksheet  FamBudget.xls  for all of the calculations.

Who Will Pay?

In 2006  the the top earning one-quarter of taxpayers paid 86% of all personal income taxes. They paid an average of 16% of their incomes. That is not their top tax rate, but the total part of their adjusted gross income (AGI) paid in income tax. The  figures for 2008  are not much different. I haven't done a detailed analysis for those more recent figures.

They are also paying payroll taxes, state taxes, and sales taxes along with everyone else. To collect an additional 76% from them, they would have to pay 28% of their total income toward income taxes alone, and also increasing payroll taxes as explained below.

The lower-earning three-quarters of taxpayers would also have to come up with 1.76 times their current taxes. This applies to their payroll taxes as well as income taxes. The payroll tax rate would go from about 15.3% of salary up to about 26.9%. This would hurt.

See below You Pay All Payroll TaxesAfter clicking this link, you can come back here with the "Back" button of your browser. for more explanation of this.

The 76% increase on business and "other" taxes (about 20% of tax collections) would discourage investment and raise prices for goods. The general public would pay those increased taxes in an indirect way. The government likes to impose indirect taxes which are hard for the average person to understand.

Taking more tax from the economy and from those who are most productive would lower economic output, and would create unemployment and/or reduced incomes. See also the separate post  The Deadweight Loss of TaxesEO 12/2008 - The deadweight loss caused by increasing tax rates above current levels may exceed $2 per $1 of revenue increase. When the government collects $1 more in taxes, the economy loses at least $2 in production and jobs. .

Maybe taxes can't be raised enough. The government might find that raising tax rates brings in far less money than the simple multiplication above. The reduced take-home pay and high unemployment rate resulting from high taxes may make those taxes politically impossible.

This comparison of our government's finances to Bob's income, spending, and obligations is not perfect. But, the amounts are proportional to Bob's $50,000 of spendable income.

We and Bob are in deep trouble.

Rising Interest Expenses

Every family meets sudden expenses. These can be catastrophic when a family is living on the edge. We can predict a large increase in interest payments.

Our government debt is $9,100 billion (4.2 times total tax receipts). These are loans made to the government by Americans, foreign individuals, and foreign governments, but not including other parts of the government. For example, US savings bonds are loans to the government. Most loans are made by paying cash for US Treasury bonds. These bonds are promises by the government to pay back a fixed amount of cash in the future.

	U.S.	Bob	Income
Debt and Interest	Billions	$	%
Debt	$9,100	$210,350	421%
Interest at  2.15%	196	4,500	9%
Interest at  3.70%	337	7,800	16%

The US currently pays an average of 2.15% interest on its debt, an historic low. The average rate over the last 30 years has been 6.4%.

Analyst Mary Meeker (below) estimates that the average rate on the debt will be 3.7% by 2016, requiring a yearly interest payment of $337 billion, (an increase of $141 billion, 7% of income). That will increase the financial pressure on the government.

The proportional burden on Bob would be $3,300 more in interest payments, 7% of his $50,000 spendable income.

Probable inflation would produce interest rates that are even higher, and government interest expenses that are higher than estimated above.

For more details, see Debt and InterestAfter clicking this link, you can come back here with the "Back" button of your browser. below.

The Data

Mary Meeker is a partner at Kleiner Perkins, a large and respected venture capital fund. Her work is analyzing and investing in businesses.

She has analyzed U.S finances as she might do for a large corporation. Busines Insider talks about her report  A Summary of America's Financial Statements (pdf).  A web "slide show" of some of her report is here. My post uses mostly Meeker's figures.

These are charts of U.S. income and spending from page 9 of the report. "B" indicates billions (1,000 million). "T" indicates trillions (1,000 billion, or one million million).

The Figures

The column for Bob is proportional to the data for the United States. US tax revenue is about 43 million times Bob's after-tax income of $50,000. Bob's numbers are rounded to the nearest $50. You can view or download the Excel 2003 worksheet for these figures.

	U.S.	Bob	% of
Family Budget	$ Billions	$	Income
Income to Spend	2,163	50,000	100%
Borrowing	1,294	29,900	60%
Total Spending	$3,457	$79,900	160%
GOP Cut	61	1,400	2.8%
		Of Spending	1.8%
		Of Borrowing	4.7%

	U.S. Tax	Bob	% of
Income	$ Billions	$	Income
SocSec / Medicare	865	20,000	40%
Individual Tax	899	20,800	42%
Other Tax	208	4,800	10%
Corporate Tax	191	4,400	9%
Total Income	$2,163	$50,000	100%
Exclude SSec/Med	$1,298	$30,000	60%

	U.S.	Bob	Multiple of
Promises	$ Billions	$	Income
Social Security	7,900	182,600	3.7
Medicare	22,800	527,050	10.5
Medicaid	35,300	816,000	16.3
Total Unfunded	66,000	1,525,650	30.5
Federal Debt	9,100	210,350	4.2
Federal Pensions	2,100	48,550	1.0
Veteran Benefits	3,700	85,550	1.7
All Other	1,600	37,000	0.7
Total Benefits	7,400	171,100	3.4
Total Promises	$82,500	$1,907,100	38.1

	U.S.	Bob	% of
Spending	$ Billions	$	Income
Defense	694	16,050	32%
Non-Defense	431	9,950	20%
Tarp, Bailouts	152	3,500	7%
Total Discretionary	1,277	29,500	59%
Interest on Debt	196	4,550	9%
Social Security	707	16,350	33%
Medicare + Medicaid	724	16,750	33%
Unemploy't, Other	553	12,800	26%
Total Entitlements	2,180	50,400	101%
Total Spending	$3,457	$79,900	160%

Unfunded Promises

The above "Total Unfunded" Promises are the major promises of our government above any current income from taxes. Repayment of the National Debt is required by legal contract; the others are government programs continued from year to year by Congress. All payments to these programs come from current taxes and borrowing. There are no assets or savings set aside to pay for any of these promises.

Many people believe that trust fund "savings" are set aside for the Social Security program and for Medicare. Actually, those trust funds hold only special US Treasury Bonds. These bonds are promises by the government to pay back cash in the future.

Taxes collected for Social Security are first used to pay current Social Security checks. Remaining amounts have bought those special US Treasury bonds and went into the US Treasury. Those amounts plus borrowing have been spent each year on government activities. The situation for Medicare is similar.

This year, payroll tax collections for Social Security are less than the amounts paid out. The government is "cashing in" some of those accumulated bonds. In reality, the government must now find some more real tax revenues (or more borrowing) to write Social Security checks in full.

No Real Assets

There is no gold, corporate stock, or anything of independent value set aside. There is only a promise from the government to repay to itself the money owed to future retirees. Only higher taxes on the public or our children can supply that value.

This is like an insane person saving up for his child's college education. He puts $100 each Friday into his savings account. Each Monday he withdraws that $100 and spends it on wine and entertainment, but he carefully records in his "college trust fund" what he has taken out. He increases the fake-reality of the fund by adding 3% as interest each year to the total on paper.

When his child is 18, he tells him that he saved $50,000 over the years, plus interest. He only has to pay back what he took out, with the help of his child to supply the money.

Amazingly, this is exactly like the government accounting of the Social Security (and Medicare) trust funds. The funds hold only promises from the government, in the form of special Treasury bonds. The government duly issues additional bonds as interest each year, adding more to the total.

CBO:  Trust Funds Are Only Promises

Some people argue that these bonds are real assets, as good as any Treasury bond owned by the public. They indeed would be, if the taxing power of the entire government were not in doubt. The promises of the government are so large that all of its bonds may lose some or all of their value, including the bonds in the Social Security and other accounts. The bonds represent a part of the promise, but they don't help to pay for the promise.

Don't take my word for it. Here is the written statement of the Congressional Budget Office - October 2002 [edited from the Summary]:

The money that the government owes to itself has no impact on the economy because it represents debt owed from one Treasury account to another, mostly held in federal trust funds.

Trust fund holdings are not assets of the government and do not represent money owed to program recipients individually. Payments to Social Security recipients (like other social insurance programs) are based on rules set by law unrelated to trust fund holdings.

A federal trust fund is an accounting device that measures the difference between the income designated for a program and the expenditures made to its beneficiaries. The accumulated balance often represents the future "spending authority" for the program, but it is not a reserve of money for making payments.

The National Debt

Meeker reports the National Debt as $9,100 billion. The usual figure in the news is $14,500 billion.   $9,100 billion is the "debt held by the public", the amount of Treasury bonds sold to people outside of the US government.

The higher figure includes "inter-governmental debt", the amount of bonds sitting in trust funds within the government as an accounting device.

$9,100 billion is held by people with a legal, formal right to sue the government for payment. The other $5,400 billion is held by government agencies which are a part of the government. The government can not effectively sue itself.

The $5,400 billion of trust fund debt causes confusion. It totals money collected in the past and long since spent on government activities, without any saving. Including this as part of the National Debt is mostly a bad thing. The fixed, definite quality of that figure gives the impression that "this is what we owe". But, government's promises are not much related to that amount.

Government spokesmen point to that relatively small $5,400 billion, but the unfunded promises are approximately $66,000 billion, 12 times as much, according to Meeker's accounting. Other sources calculate the unfunded promises as $86 trillionConcord Coalition - Stop 2011.org - p.18 to $106 trillionNational Center for Policy Analysis - Figure II

This video clip estimates the unfunded promises of the US at $120 trillion, 8 years of total US production.

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Why Do We Take Politicians Seriously?
02/22/11 - Cafe Hayek by Professor of economics Don Boudreaux

[edited]  The Social Security “trust fund” is indeed filled with ample quantities of interest-bearing U.S. treasuries. But, who pays the principal and interest to Uncle Sam when the treasuries are cashed in? Answer: Uncle Sam, who must raise taxes on flesh-and-blood people to get the dollars that he pays to himself, so that he can then pay out promised Social Security benefits.

Promises written to yourself are not assets. They are only pathetic reminders of gross financial irresponsibility.

Government Accounting
An XTraNormal video (2:12) by Prof. Boudreaux.

Fred:  You loaned me $10,000. I have $10,000 in bonds in my desk drawer to guarantee that I can repay you.

Mary:  What institution wrote the bonds? Are they good for the money?

Fred:  I wrote the bonds. I will pay $10,000 to myself when they come due.

Mary:  You are an idiot. That is not proper accounting.

Fred:  No? It is the accounting our government uses for Social Security.

Obamacare Bails Out Medicare
  09/2009 - EasyOpinions
Obama's healthcare reform is a huge increase in taxes combined with rationed medical services.

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Who Pays Payroll Taxes?

Why do I say above that your Social Security taxes would rise from 15.3% to 26.9%  ?

The Social Security tax is described as 6.2% and the Medicare tax as 1.45% paid by each of the employee and employer. This description suggests that you are paying 7.65% of your income and that your employer is paying an equal amount.

Actually, you generate all of the wealth that pays your salary and the taxes associated with your employment. The employer writes the check, but you earned that money, and it would be part of your take-home pay if the burden did not exist on your employer. Competition for skills sets salary levels and arranges the maximum you can negotiate as your pay.

Here is a rough example. What would happen if the government charged employers an additional $10,000 per employee as a "social benefits" tax?

If your take-home pay was $50,000, employers would quickly shift to offering you only $40,000. Whatever value you were creating would have to support that extra $10,000 expense. You would get less salary because that extra expense would immediately make you less valuable to the company.

Similarly, your value to your company is currently supporting all of the taxes and expenses associated with your employment. The following is how your employer sees it.

Bob's Yearly Production	$110,000
For the Employer	-30,000
Expense managing Bob	-10,000
Human Resources	-1,000
Medical Plan	-8,000
Payroll Taxes	-4,051	(1)
Bob's Gross Salary	56,949
Bob Pays to Medical Plan	-4,000
Social Security Wages	52,949
Payroll Taxes 7.65%	-4,051	(1)
Bob's Cash Salary	$48,898

The lines marked (1) are the payroll taxes for Bob and his employer. Both of those payments reduce what Bob receives as a cash wage. They are both subtracted from Bob's total production, which has to pay for everything associated with his employment and also for a profit to his employer.

That is how Bob pays for all of his payroll taxes, even though his employer writes a check for him. If payroll taxes go up, Bob's salary will go down to pay for almost all of that tax, including the "employer's part".

See The Economics of Tax Incidence for a more detailed discussion.

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Interest on the National Debt

Our National Debt is $9,100 billion (4.2 times total tax receipts). These are loans made to the government by Americans, foreign individuals, and foreign governments, and not including other parts of the government. For example, US savings bonds are loans to the government. Most loans are made by paying cash for US Treasury bonds. These bonds are promises by the government to pay back a fixed amount in the future.

The US currently pays an average of 2.2% interest on this debt, about $196 billion per year (9% of tax receipts). This interest rate is at an historic low. The average rate over the last 30 years has been 6.4%. Analyst Mary Meeker (below) estimates that the average rate will be 3.7% by 2016, and the yearly interest payments would be $337 billion.

The goverment will pay $141 billion more (7% of income), and Bob would pay $3,300 more in proportion from his $50,000 of spendable income. That will increase the financial pressure on the government and Bob.

The interest rate is not set by the government. It comes from the market price for US government debt at an auction. Yes, the government borrows money by asking a crowd, "What will anyone offer for these Treasury bonds, which will pay back $100,000 in (say) 2 years?". For convenience and efficiency, only certain companies are allowed to buy at these auctions, and the auctions are done electronically. Most bonds are bought for clients.

When there is low inflation, and depending on the world economy, buyers will pay about $96,000 for a $100,000 bond due in 2 years. That is our current situation. This gives the buyer a $4,000 profit in two years, about 2% interest on his investment.

These days, bond buyers see the US government borrowing huge amounts, collecting less tax, having high unemployement, and putting money into the economy as "stimulus".  Analysts fear that there will not be enough tax revenue to pay back the huge debt. They expect the value of money to fall as the government prints more money to pay back what it borrowed. So, they want more profit from Treasury bonds to replace the declining value of the dollars they will receive in 2, 5, or 10 years.

When buyers offer only $88,000 for a 2-year, $100,000 bond, the interest rate is about 6%, $12,000 over two years.

Government debt is made up of bonds that come due over time periods from a few months to 10 years or more. The government must pay back the short-term bonds first, and must borrow more to continue (refinance) the debt. As the interest rate increases, short-term debt will first be refinanced at the higher rates. In the following years, all of the debt will be refinanced at higher rates. The average cost of maintaining the National Debt will increase greatly over time.

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Meeker's Report

I used the following parts of  Mary Meeker's financial report in this post. Page numbers are to the document, not the PDF display pagination.

 9.  Pie charts showing income, spending, and entitlements (promises).

71.  The effective interest rate on Treasury debt is 2.2% in 2010.

76.  There is no economic value in the Social Security trust funds.

77.  08/2004 - Statement by the Congressional Budget Office (CBO): "The Trust funds are basically an accounting device. Their balances provide no resources to the government for meeting future funding commitments, even if they are "invested" in Treasury securities.

82.  Definition of the unfunded liabilities of Social Security, Medicare, and Medicaid.

107.  Overview of healthcare spending.

143.  Effective interest rates are at an historic low of 2.2% in 2010, vs. the 30-year average of 6.4%. The rate will rise with the federal funds target rate and long-term Treasury yield as our economy recovers. Long-term debt (10+ year bonds) in 2010 is only 10% of total debt. The average interest rate on US debt will change quickly following changes in interest rates.

166.  Effective interest rates are 2.2% in 2010, and will be 3.7% in 2016.

465.  Appendix

Links

Federal Hospital and Medical Insurance Trust Funds
8/5/2010 - 2010 Annual Report of the Board of Trustees

Tax Burden of Top 1% Exceeds Bottom 95%
7/29/09 - Tax Foundation - 2007 figures

Income tax paid by AGI threshold
National Taxpayers Union - Tax years 1999 to 2008

Normal Interest Rates Would be a Disaster for U.S. Debt
  03/14/11 - LesJones.com
The US currently pays about 2%. If rates were to return simply to that historical average, it would involve an increase to our overall interest bill of $640 billion — to be paid immediately. “An impossible situation,” in US Sen. Coburn’s words.

Social Security and Medicare Liabilities
  06/11/09 - National Center for Policy Analysis - NCPA
The estimated Social Security and Medicare liability as of 2009 is $17.5 trillion.

Social Security Administration Trust Fund Assets
  01/31/11 - Social Security Administration On-Line
The Social Security trust fund holds $2,600 billion in special US government bonds.

The 2010 Budget (pdf) - By the Concord Coalition
Many clear charts explaining the US budget, showing debt and spending in 2010, and estimates for the future.

FamBudget.xls - 03/2011 - Excel 2003 worksheet.
The calculations for this post. You are welcome to open or download it.

2006 Tax Comparisons - 04/2009 - Easy Opinions
Analysis of who pays taxes based, on income slices, from the US 2006 tax data.

The Economics of Tax Incidence
  08/2010 - Economists View
The government makes businesses pay taxes, but where does the money really come from? Almost all of it comes from offering lower salaries or charging higher prices. The working public pays those taxes, one way or another, and their real prosperity suffers.

The Deadweight Loss of Taxes - 12/2008 - Easy Opinions
The deadweight loss caused by increasing tax rates above current levels may exceed $2 per $1 of revenue increase. When the government collects $1 more in taxes, the economy loses at least $2 in production and jobs.

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Version 3 - What Changed?

• The GOP in Congress settled on a $61 billion proposed spending cut, rather than the $70 billion used in Version 2.
• Version 2 calculated a need for 2.6 times current tax revenue to pay for all promises. This post calculates 1.76 times current tax revenue.

  This post uses a consistent "3% interpretation". It calculates what tax revenues would need to be today, increasing at 3% yearly, to pay the unfunded promises of the next 75 years. The government and independent analysts use this same interpretation (a 3% discount rate) to calculate the lump-sum amount today that represents government promises in the future.

  A payment that increases at 3% yearly over 75 years can start at much less than a fixed payment (like a mortgage payment) that pays off the same amounts in the future.

• This post eliminates some double-counting of future unfunded liabilites. Unfunded liabilities in Social Security and Medicare are estimated above the current revenues from dedicated payroll taxes.

  The government is currently paying more for Social Security and Medicare than is collected. So, I assume that the overage is currently applied toward some part of the unfunded amount estimated by analysists. This reduces the remaining unfunded liability which will require increased tax revenue.

• More of the numbers are easier to read and compare in charts, along with general editing, additional sections, and a list of links and referencees.

Edit History
02/21/11 - V1 Posted
03/03/11 - V2 Expanded without change in figures
03/28/11 - V3 Expanded, new figures as described above

Stimulus Produces Stagnation

Treasury Official:  The Fed Bank will print lots of money for us to spend.
Assistant:  We will construct more federal buildings, and the people will feel rich. Then what?
Treasury Official:  We will collect all of that money back in higher taxes.
Assistant:  Will that dampen their enthusiasm?

A Deficit-Financed Stimulus Leads Only to Stagnation
09/29/10 - Investors.com by Jerry L. Jordan
- Via Cafe Hayek

Mr. Jordan is a past president of the Federal Reserve Bank of Cleveland and a member of President Reagan's Council of Economic Advisers.

Soviet Realism

Leonid Brezhnev was General Secretary of the Communist Party and leader of the Soviet Union from 1964 until his death in 1982. He spoke at the Soviet Union Communist Party Congress in 1972:

The fundamental problem we face is that we can only distribute and consume what is actually produced.

Imagine the grandeur of the event. Communist Party leaders from throughout the Soviet Union were seated before Brezhnev in a large convention hall. This was similar to a US national political convention, but somber and powerful. The Party controlled all aspects of Soviet life. They listened in deep respect to every word of their totalitarian ruler.

Brezhnev made the above statement. It was the equivalent of saying with heavy meaning, "Gentlemen, the fundamental problem we face is that
2 + 2 = 4".

Imagine the country-wide failure which required an all-powerful leader to emphasize such a simple fact. The simple fact that you can eat a hamburger which is on the plate in front of you, but that you cannot eat a picture of a hamburger, and you cannot benefit from the promise of a hamburger unless you can exchange that promise for a real hamburger on the grill.

I think Brezhnev faced the problem that we face now in the US. The wierd economic ideas followed by the Soviet government were not working and had produced a crisis. Brezhnev had to reset policy. The Soviet Union had to face simple reality, rather than follow abstract theory. And, that is what we must do in the US.

The article which I link above provides an economic description of simple reality, nicely written. I think you will understand a reasonable economic explanation when you see one. You should be skeptical of any economic statements that are superficial or disconnected. Be especially wary of appeals to elite authority such as, "My program has the support of all the economists who I respect and who I have talked to."

Remember that entire nations can be misled, to such an extent that the rulers need a reminder of the simplest facts.

Summary of the article and other links ...

Summary of the Article

This is a summary of Mr. Jordan's three page article, with some added explanation. The article is worth reading in full.

Permanent Income

Households must decide what goods they can enjoy today and how much they must save or invest for the future. They estimate their long-term "permanent" income, and decide to consume (spend) some part of it. They don't spend all of a temporary windfall (eg. a bonus), and they don't cut back by the full amount of a temporary loss (eg. losing work for a short time).

Estimates of permanent income are relatively steady, but long-term changes in the overall economy will raise or lower those estimates over time.

Prosperity

Long periods of steady employment, increasing salary, and steady investment gains (eg. increasing values in 401K plans and house prices) may convince people that they are permanently more wealthy, and can afford to spend more now and in the future.

People will borrow against a plush future, to immediately enjoy such things as a bigger home or a vacation. This produces a low or negative savings rate. This is rational, and not a problem to be changed by government economic policy.

Businesses see opportunities and want to use current resources to meet the needs of a prosperous future. Real interest rates rise as individuals borrow for current enjoyment and businesses borrow to build more production capacity.

Higher interest rates direct borrowing away from low-yield projects, keeping those resources available for more profitable (more desireable) projects. Higher rates allocate resources to the best uses in the competitive markets of a healthy economy. This is also not a problem to be changed by government policy.

Recession

Decreasing employment, lower investment income, and falling housing prices produce an estimate of lower permanent income. Unfunded government pensions, large budget deficits, and growing government debt all promise higher taxes and lower after-tax personal income.

Government budgets are always balanced in real terms. The true burden of taxation is whatever the government spends. Citizens will pay for that spending, either now or later, either through explicit taxes or the effects of inflation (see below).

Future paychecks will be smaller or they will buy less. After higher taxes and/or inflation, people expect to be less well off.

A lower estimate of permanent income prompts people to consume less, to pay down current debts, and not acquire new debt. They doubt that they will have enough future income to both pay off their debts and spend as much as before. People want to avoid ruining their credit rating in the future. Paying down debt and keeping more cash in savings accounts increases the national savings rate.

The prospect of higher taxes and increased regulation lower the expected real, after-tax returns from new business projects. Fewer projects can return the needed minimum, real profit. Lower numbers of projects require fewer workers, affecting the least skilled workers the most. The lowered demand for both personal and business borrowing lowers real interest rates.

AMG: Low interest rates are not usually a sign of opportunity. Government interference to lower rates does not spark a recovery. People and business reduce borrowing because of their rational view of the future, not because already low rates are not low enough.

Government efforts to stimulate the economy by deficit spending are utterly useless. Government spending maintains some employment. But, businessmen know that tax increases (or inflation) will be used to pay back higher government debt and interest. They estimate their future customers will have lower real income to spend. So, they cut back on new projects, investment, and employment. This rational response of business and individuals cancels out any positive effects of that government spending.

 

Taxes, Deficits, and Inflation

There are three choices.

• Tax Now. Limit government spending to the taxes being collected now, or raise taxes to cover increased spending. The US government for 40 years has almost always spent more than it has collected in taxes in any year.
• Deficit Spending. Borrow the money needed to support spending above the amount of current tax collections (the additional deficit). The government sells US Treasury bonds to raise the money needed. Those bonds are promises to pay back that money after say 1, 5, 10, or more years, depending on the bond. The government pays interest to the bondholders as the cost of borrowing the money.

  The government sells bonds every month to support new spending and to pay off older bonds that have come due. Taxes must be increased to pay interest on the bonds, and to eventually pay off the debt.

  Every bond sold by the government is a loan to the government by someone with cash looking to make an investment. The government gets to use (or misuse) those resources, instead of a business receiving those funds for startup or expansion. This is called "crowding out" private investments. Ironically, huge government borrowing creates the risky business outlook which encourages investment in the supposedly riskless government bonds.

• Inflation. The Federal Reserve Banks (the US central banks) create money by buying US Treasury bonds. This is a last resort by government to acquire more money to spend. This is typically done when the government does not want to pay increasing interest rates on the bonds it might sell to the public, or to avoid increases in those interest rates.

  This is a hidden tax. The government acquires real resources by being the first spender of that new money. Later spenders find that prices for everything rise slowly as the new money is traded for an unchanged supply of real goods. The last people to spend are those who have money in bank savings accounts. They find that their money buys less real goods when they eventually use that money to buy things, such as buying their food in retirement.

- -
Why Spending Stimulus Plans Fail
11/2008 - Easy Opinions

The money isn't free. It is taken from the people who plan and invest in productive organizations. This destroys jobs and lowers everyone's income. The money is then given to government agencies which increase budgets. This is a form of government consumption. Investment is turned into consumption, and job expansion is killed.

- -
A Tested Stimulus Plan
02/2009 - Easy Opinions

The economic crisis is the result of a giant six year stimulus provided by housing loans. As we now know, it worked for a while and ended in disaster. What will the current stimulus plans produce when the money runs out? We know the answer: an economy like the current one, but somewhat worse.

- -
Stimulus Does Not Cure a Recession
11/2008 - Easy Opinions

Jobs change when people change what they want to buy or can afford. It is possible to keep people at their low-value or unneeded jobs for a bit longer, only by wasting the savings that should be financing a real recovery.

- -
Daniel J. Mitchell  reports on a few cases where governments realize that stimulus doesn't work.

04/26/12

-   Switzerland caps spending

04/15/12

-   Sweden shifts to the right on spending

11/02/12

-   Germany decides not to be Keynesian

04/24/12

-   Portugal declares that stimulus didn't work

Myth of the Clinton Surplus

The Myth of the Clinton Surplus
10/31/07 - Craig Steiner US

This is one of multiple links that reveal these facts (Google: Clinton's Surplus). This shows how deceptive are the Democrats and big media. The Clinton Surplus is repeated endlessly as a biased and untrue talking point, in an attempt to prove the effectiveness and thriftyness of Democratic administrations.

This is a clear and interesting analysis. Here are edited excerpts:

You will often read the claim that President Clinton balanced the budget and even ran a surplus. This is then used to underline the irresponsibility of the Bush administration. [Bush ran deficits also, but he wasn't a sinner following a saint. -ag]

Clinton claimed surpluses of $69, $123, and $230 billion for FY1998-2000. Clinton claimed that the national debt had been reduced by $360 billion (interestingly, not the $422B sum of the yearly claims).

There was never a surplus. In fact, the total national debt increased by $281 billion during those years. How can this be? The Public Debt and yearly deficits were paid down by borrowing money from the Social Security fund, rather than borrowing directly from the public. Clinton did not achieve a surplus and he did not leave President Bush with a surplus. Actually, growing deficits began with a $133 billion deficit in the last Clinton budget, not in the first budget of the Bush administration.

Analogy: Dad has a college fund for the kids (accumulated money from Social Security taxes) and a credit card (Public Debt). Dad spends more than he earns, and borrows from the college fund to cover the excess. Then he goes further, and borrows $281 more from the college fund to pay off some of the credit card. Dad talks to Mom: "We're doing great dear. Look, I have paid down some of the credit card." Dad doesn't tell her that the kids aren't going to college.

Craig Steiner is evenhanded. He explains the myth as being a biased report of statistics, but not an intentional scam by Clinton.

This result most likely was not a conscious decision by Clinton. The Social Security Administration is required to buy U.S. Government securities with its surplus. This automatically borrows from Social Security, labeled "intergovernmental holdings" in the national accounts.

People were earning a lot during the dot-com bubble and paying a lot into Social Security. The government was running deficits, but the money from Social Security taxes was larger than those deficits. The amount borrowed from the public went down, while the money borrowed from Social Security went up by much more.

-----
The Real Tax Burden
Jan 2009 - EasyOpinions by Andrew Garland

The real tax burden is what government spends, not just the deficit.

Top Ten Political Statements

Statements 1-9 are political messages from no particular source, as satire. Statement 10 is quoted from early remarks by President Obama about the mass murder at Fort Hood, TX.

-----

1   There is nothing strange about my policies. The incompetent former occupant of this office did many of the same things I have, but for selfish and stupid reasons.

2   I would not say that we lied. Sophisticated people know that politicians must find compromise between groups. This is much easier when those groups don't understand the details. So, we don't lie; we just aren't detailed. And, sometimes those details differ in suprising ways from our general statements.

3   Critics claim that I have changed my policy. In fact, my views have been quite consistent. If my policies seem different now, it is only because the facts have changed. I am smart to change my policy to incorporate different facts. You ask, "What were the facts in the past?". Well, they were different.

See statements 4 to 10 ...

4   I know the public is concerned about deficit spending. Our deficits may be bigger, but the other guys started it. We inherited huge problems, so we have to quickly spend huge money. We haven't spent most of it yet, but we will. Give us time. We are being thoughtful about this.

Deficits are not a problem. Thousands of deserving people have government jobs exactly because we are spending the money that causes deficits. I can say with certainty that there would be no unemployment if the government hired everyone. We are working on it.

5   Our plans are carefully researched to provide more services with less money. If they don't work out that way, we will fix them, no matter how long it takes or how much it costs.

6   We predicted 8% unemployment if we did nothing, and now unemployment is 10% after enacting a $787 billion (with a "b") stimulus package. My opponents blame us for not meeting our earlier estimates. But, if we really knew, we wouldn't call them estimates. Estimates of the future are the most difficult because we don't have the data yet. We estimate that unemployment would now be 18.35% if we had done nothing. So, we are celebrating.

7   Our policies for spending, taxing, deficits, and reviving the economy were based on sophisticated, tested, econometric models, constructed and refined by the best minds in government. Despite this, we have been surprised by the underperformance of the economy. We are not worried. There are plenty of econometric models out there, and we are switching to better ones right now.   (Stimulus jobs) [edited] Congressional Democrats are disgusted with the phony accounting of jobs created by the stimulus plan.
  David Obey is the House Appropriations Committee Chairman. He lambasted the government's flawed data "showing" that $160 billion in stimulus spending has created or saved at least 640,000 jobs.
  The administration has been forced to delete 60,000 jobs from its list, and had claimed 30 jobs in a non-existent congressional district.
  David Obey: [edited] "The inaccuracies are outrageous and the administration owes itself, the Congress and every American a commitment to correct the ludicrous mistakes. Whether the numbers are good news or bad news, I want the honest numbers, and I want them now."

8   The stimulus package we put in place is working just fine. Thousands of government jobs have been created, or stabilized with higher salaries. This assures that government workers will be loyal and at their desks through any economic difficulties to come.

9   Our policies of stimulus and bank bailouts have led to a rising stock market, for which we are proud. Remember that employment is a lagging indicator. Overall employment will increase after fat-cat stockholders have been made rich enough. Of course, we will tax away most of their ill-gotten capital gains.

10   President Obama spoke on 11/05/09 at the Tribal Nations Conference of Native American Leaders, organized by the Department of the Interior. President Obama or his speechwriters are better at satire than I am.

¹ Let me, first of all, just thank Ken and the entire Department of the Interior staff for organizing just an extraordinary conference. I want to thank my cabinet members and senior administration officials who participated today.

I hear that Dr. Joe Medicine Crow was around, and so I want to give a shout out to that Congressional Medal of Honor winner. Good to see you!

My understanding is that you had an extremely productive conference. I want to thank all of you for coming, and for your efforts, and I want to give you my solemn guarantee that this is not the end of a process, but a beginning of a process, and that we are going to follow up. Every single member of my team understands that this is a top priority for us.

I want you to know that, as I said this morning, this is not something that we just give lip service to. And, we are going to keep on working with you to make sure that the first Americans get the best possible chances in life, in a way that's consistent with your extraordinary traditions, and culture, and values.

Now, I have to say, though, that beyond that, I had planned to make some broader remarks about the challenges that lay ahead for Native Americans as well as collaboration with our administration.

² But, as some of you might have heard, there has been a tragic shooting at the Fort Hood Army Base in Texas.

We don’t yet know all the details at this moment. We will share them as we get them. What we do know is that a number of American soldiers have been killed and even more have been wounded in a horrific outburst of violence.

My immediate thoughts and prayers are with the wounded, and with the families of the fallen, and those who live and serve at Ft. Hood.

These are men and women who have made the selfless and courageous decision to risk, and at times give their lives to protect the rest of us on a daily basis. It’s difficult enough when we lose these brave Americans in battles overseas. It is horrifying that they should come under fire at an army base on American soil.

[further remarks omitted]

¹ President speaks about Fort Hood shootings
11/05/09 - youtube - Video from Fox News
My transcription of the beginning of Obama's speech.

² President Obama Speaks About Fort Hood Tragedy
11/05/09 - blogs.abcnews.com by Jake Tapper and Sunlen Miller
Continuation of Obama's speech as reported here, slightly edited.

-----
Jumping to Conclusions
11/06/09 - Powerline Blog by John Hinderaker
About President Obama's understanding of the Fort Hood mass murder.

-----
A Political Speech: Troubling Times
Easy Opinions (satire)

My fellow Americans. May I first say that all of you are the most intelligent, beautiful, clear thinking, generous, patriotic, and deserving people that I have met, along with all of the other great people of your town, city, and state.

I am sorry to bring you bad news, and I hope you don't shoot the messenger (smiles). We live in troubling and difficult times.

A Political Speech: Coming Together
Easy Opinions (satire)

My administration will reach across the aisle to both parties, and especially to the opposing and obstinate party, to gain agreement and smooth the operation of government. We will smile rather than argue.

A Political Speech: My Policies
Easy Opinions (satire)

I want you to know where I stand on the issues. I believe in Prosperity, and I always will.

More Healthcare Spending - More Taxes

CBO report: New taxes will pay for Senate health care bill
10/08/09 - OpenMarket by Fran Smith

[edited] The Congressional Budget Office reports that the Baucus healthcare bill in the Senate would reduce federal budget deficits by $81 billion during 2010-2019. Supporters were ecstatic.

The government and most news reports emphasize deficits. But, it is the SPENDING that matters. This healthcare bill gigantically increases spending. It reduces the deficit by increasing taxes and fees by more than the increased spending. Further, past healthcare programs have been 5 to 10 times more expensive than estimated at the time they were enacted.

A clearer statement would be:
"Healthcare legislation will raise government spending by at least $829 billion. But don't worry, it will raise taxes and fees by $910 billion, providing an extra $81 billion to the Treasury."

Read more ...

The major problem for the Baucus healthcare bill has been to hide the massive tax increases on people. It pretends these taxes are on businesses and insurers. But, all of these "business taxes" will be passed on to the people, at all levels of income.

The savings included in the bill are unrealistic. They are there only to get a good score from the Congressional Budget Office. The CBO must assume that those savings will be there, because the bill says they will be there.

Businesses organize work. They aren't a magic piggy bank. Taxes on private health insurance companies must be paid by charging more for insurance. So, the company writes the check, but the customers pay those taxes.

Taxes on employement must be paid out of the total productivity of the employees. Employee salaries are what is left over. The government wants to charge companies 8% of salaries to support government health insurance. That 8% actually would be paid by employees as a reduction in salaries.

----------
The truth about the Baucus bill - Part Two
10/12/09 - Washington Examiner Editorial

[edited excerpts] The Baucus bill generates revenue or shifts costs in many ways:

• Cuts to Medicare and Medicare Advantage - $426 billion
• Fines imposed on those who do not purchase insurance - $4 billion
• Levies on health insurance companies providing high-end health insurance plans - $201 billion
• New taxes on medical devices and drugs - $180 billion
• New income taxes on individuals - $83 billion
• New taxes on employers - $25 billion
• Reductions in Medicare reimbursements to hospitals, which will require more cost shifting from such facilities to their patients

Price Waterhouse Coopers has released a study done for the health insurance industry.

• Average family health insurance is now $12,300.
  This will be $18,400 by 2016 doing nothing.
  Baucus will make it $21,300.
• Individuals average $4,600.
  This will be $6,900 by 2016 doing nothing.
  Baucus will make it $7,900.
• Obamacare advocates say that higher costs will be largely offset by tax credits for lower-income families. But, tax credits only shift the burden of payment from Peter to Paul [from the middle class to the poor].

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Memo - Health Plan Deficit Reduction
09/2008 - EasyOpinions Outlink

A (fictional) memo has surfaced revealing the thought guiding healthcare policy.

Excerpt: "The estimated deficit for our health reorganization plan is causing us trouble in the press. President Obama has promised not to raise taxes on the middle class, and not to increase the deficit. Unfortunately, we have to live with this until the plan passes Congress."

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The Real Tax Burden
01/2009 - EasyOpinions

The real tax burden is current government spending. Government borrowing and delayed taxes are merely finance. It won't be just "the other guy" who will pay. The middle class and rich will pay in dollars. Poorer citizens will lose employment.

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Company Paid Health Insurance is Part of Your Salary
12/2008 - EasyOpinions

You generate all of the wealth that pays your salary and the taxes associated with your employment. The employer writes the check, but you earned that money, and it would be part of your take-home pay if the burden did not exist on the employer. Competition for skills would arrange that outcome.

In the same way, when a company pays for your health insurance, it is merely writing the check with part of your earnings, earnings that you never see, but could control yourself.

Memo - Health Plan Deficit Reduction

From:   Chairman [redacted] of the [redacted] Committee
To:        Healthcare Reform Drafting Group II
Re:        Finessing the Health Plan Deficit

( This is a Class I rice-paper memo. )

The estimated deficit for our health reorganization plan is causing us trouble in the press. President Obama has promised not to raise taxes on the middle class, and not to increase the deficit. Unfortunately, we have to live with this until the plan passes Congress.

After passage, we will spend what it takes, just like the last times.

Please hold off on more complexity. I asked for enough boards, committees, commissions, and regulators to confuse things and distract our opponents. You went overboard, but that is not a big problem. Just don't add more.

(Jim, that advisory commission on do-it-yourself birthing is out. I know it would save money, but it is out for now.)

Here is how we will handle the cost. Pick a big cost to convince people that we are serious. Too small looks like we might be hiding things. (If they only knew.) Keep it under $1 trillion over 10 years. That seems to be the right psychological price point for the public.

Now, this is how we will "pay for it". Assign whatever fees (not taxes!) you want against insurance companies, big businesses, and "private" doctors. Make the fees big enough to cover the entire added cost of the plan. Yes, even if you think we can't raise that much money from those fees.

The Congressional Budget Office will score the plan based on the fees we say we will raise. They will find that the plan is covered, and that is all we care about. We have convinced the public that only deficits matter, not the actual cost.

Our opponents will express doubt that we can collect all of the money we say we will. But, that is just their opinion, and the CBO will go along with us.

So, we will have a plan that does not increase the deficit, and there are no taxes on the middle class, only fees on evil companies and rich doctors.

To Fred: Yes, the fees will be passed through, and effectively would be a tax on employees and patients. I appreciate your insight. Forget about it. We will be rearranging everything in any event, after the bill is in effect for a while.

Good work everyone. Just a few more all-nighters, and we will get this thing passed. Remember that there are enough boards, committees, commissions, and regulators to provide plum assignments for all of you.

__________
This is a rice-paper memo, distributed on edible paper and written in edible ink (raspberry). Please eat this memo after reading.

Nutrition Label: Fat 0g   Protein 0g   Carbohydrate 4g
Dietary Fiber 1g.  Free of gluten and tree nuts.

US Printing Office G5-034 236 Washington D.C.

==========
The Real Tax Burden
The amount of tax that a government imposes is the amount it spends. The timing and amount of tax collections is merely finance.

Econ 201: The Myth of the Economic Multiplier
Government spending doesn't multiply anything. It takes resources from taxpayers and applies them to government projects. You get a bridge or some paperwork, that is it.

A Budget to Infinity, and Beyond

Obama Victory on 2010 Budget
04/29/09 - MarketWatch by Robert Schroeder

Democrats have repealed Obama's middle class tax cut, effective just after the November 2010 elections.

[quotes are edited]

The budget resolution preserves Obama's domestic priorities and cuts the yearly federal budget deficit (yearly borrowing) by almost two-thirds in five years.

While it would cut the deficit in the short term, the budget would also increase deficits over the next 10 years by more than $2 trillion ($2,000 billion).

"More than $2,000 billion" is an error. The deficit will increase by that much just in 2009. The actual figure is about $10,700 billion over the next 11 years, from CBO estimates of past and future deficits graphed below. That is $10.7 trillion, 75% of the $14.3 trillion total US production in 2008.

The 2007 deficit was $168 billion under Bush. The 2008 deficit was about $500 billion (3 times larger), in part due to a Bush stimulus package. Did you notice the improvement from that stimulus? There was not much improvement, but the money did disappear.

The 2009 deficit was crafted by Democrats in control of Congress, and is now vastly increased by Obama's policies. The 2009 deficit is going to be about $1,850 billion ($1.85 trillion), 3.7 times the 2008 Bush deficit, and 11 times the 2007 Bush deficit.

The following graph from the Washington Post presents Congressional Budget Office (CBO) data on past and projected deficits. The Heritage Foundation compares this spending by Bush and Obama.

Read more ...

After 5 years of accumulating debt, a two-thirds reduction would make the yearly deficit $615 billion. Private estimates are higher. That is a "reduction" to a yearly level that is more than Bush's splurge. Then, the yearly deficit increases even according to Obama's estimates.

The tax burden goes up with all government spending. A deficit represents a delay in collecting that tax, like spending on a credit card. The things that government buys today are taken out of what you can buy tomorrow.

Bush spent to "save the economy". That splurge of spending in each of two years is being multiplied 3.7 times in 2009, and the future "cut" is from this level of $1,850 billion.

The bill pares back some of Obama's initiatives. For example, it allows his $400/worker  ($800/couple) tax cuts to expire at the end of 2010.

Obama's "tax cut for 95% of Americans" is ending, after a run of two years, just after the 2010 elections. Obama's priorities make that tax rebate unsustainable. It was sustainable only as a promise before election.

House Republican Leader John Boehner correctly sums it up:

This bill spends an awful lot of money, it raises a lot of taxes, and it puts all of this debt on the backs of our kids and our grandkids.

Don't worry, you will get a chance to pay off some of this debt. It won't all go to your children. (smile)

The House resolution includes a "pay as you go" requirement for four bills later this year, about the alternative minimum tax, Medicare payments to doctors, adjusting the estate tax, and extending middle-class tax cuts.

"Pay as you go" means that Congress is promising now to raise taxes to pay for any new spending. The "rich" top 5% (above $150,000 incomes) paid $613 billion in 2006 federal income taxes. Will they be made to pay 2.6 times that amount, or will the middle class also pay for these dramatic spending increases? I have faith in the middle class. (smile)

+ + + + +

2006 Tax Comparisons
See what you, your neighbor, and the rich guy are already paying in income tax.

The Real Tax Burden
The amount of tax that a government imposes is the amount it spends. The timing and amount of tax collections is merely finance.

Econ 201: The Myth of the Economic Multiplier
Government spending doesn't multiply anything. It takes resources from taxpayers and applies them to government projects. You get a bridge or some paperwork, that is it.

The Real Tax Burden

Watching government at work is like watching four magicians on stage. Now you see it, now you don't, and there is too much to watch. There are plans for higher taxes, surcharges, lower taxes, tax rebates, guarantees, bailouts, "investments", subsidies, fees, loans, borrowings, and just printing more money. Mind boggling.

So, what is the government taking from the society, from the people who work to generate wealth or invest to create jobs? I quote the observations of economists Milton Friedman, and of Russell Roberts at CafeHayek "When a tax cut isn't a tax cut".

The amount of tax that a government imposes is the amount it spends. The timing and amount of tax collections is merely finance.

Read more ...

[edited] If the government cuts rates or gives rebates, but also increases the size of government, then real taxes are higher. Government is taking a bigger share of the economic pie leaving less for private use or investment.

Milton Friedman pointed out that the burden on the private sector is bigger when the government grows as a percentage of the economy. Focus on government spending, not on how government is financed, whether it's out of current taxes or future taxes.

Deficit Spending

A "deficit" is the amount of planned or promised spending that has no source of current funding. It is the amount that must be borrowed to pay for the project. A deficit is a red flag because the government is going to borrow the money, but has no plan for paying it back, other than raising taxes in the future.

For example, say Fred has saved $20,000. One day, he decides to buy a $30,000 boat by borrowing $10,000. That $10,000 is his deficit spending. He better have a plan for paying off that loan, or he is going to lose the boat, usually at a great loss.

That $10,000 is a red flag that Fred may be spending into disaster. But, would everything be OK if Fred buys just a $20,000 boat? Now there is no deficit, and he is not under pressure to find more income. With or without a deficit, buying the boat is a disaster if Fred needs the money for his kids or to repair the roof on his house.

The big question: Is it wise to spend that money, deficit or not? News stories concentrate on government deficits, which are only the underfunding of its projects. Those projects use the resources of citizens, deficit or not. It is no consolation that a wasteful project is fully funded by taking money from the people.

Worse, the government will claim unrealistic future savings or tax collections. It is like Fred claiming that he will save $10,000 on groceries to pay for the $30,000 boat. It makes the estimated deficit disappear, but it doesn't change the amount that Fred is spending. It is no consolation for the government to say: There is no deficit on this project, because we are going to take more money from you in the future to pay for it.

Spending Costs Resources Now

Government spending directs real effort and resources, right now. Most resources disappear in mountains of paperwork and rules. Some resources build useful things, like roads and buildings, but at high cost, and not usually the most useful things. A small fraction goes to absolutely necessary activities such as courts, police, fire, and national defense.

The taxes that support this spending are collected noisily as more taxes, or quietly as inflation. Tax collections are merely a "fairer" way to impose the tax burden than allowing inflation. Inflation is also disruptive, destroying production beyond the amount of government deficit spending.

Obama's Plans

Obama's spending plans are a massive tax increase. The government will have to collect taxes to fund this spending, either now or in the future. If it borrows the money, the taxes will include increased interest payments on that debt. If it merely prints the money, there will be inflation along with devaluation of the dollar.

Obama can try to make the top 5% of taxpayers finance spending increases. It is a brilliant redistribution plan that uses the current progressive tax system, plus "a bit more", to soak the rich in a way not seen since 1960. At that time, tax rates were 91%, and politics was about creating tax loopholes to keep the economy going. There is no doubt; the tax loopholes will be created again.

Obama will avoid saying that he is taxing the lower 95% or 70%. Instead, he will freely implement taxes on business and employment. These taxes must be silently passed along to people in the form of reduced wages and reduced employment.

I think we are going to see:

• Misdirected public spending and "investment".
• Reduced private investment and production.
• Much higher marginal tax rates on "the rich", the people who organize and create jobs and production.
• Higher unemployment.
• Inflation and stagflation

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The Problem Is Spending, not Deficits
12/15/09 - Cato at Liberty by Daniel J. Mitchell (video 6 min)

Politicians fixate on the deficit to pull a bait and switch. They claim that they can raise taxes to solve the problem. That only replaces debt-financed spending with tax-financed spending. That takes a different route to the wrong destination. The likely result is that the required tax increases will weaken the economy and make us all poorer.

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Tax Relief, Obama Style
04/16/10 - TheBigQuestions by Steve Landesburg
Via Cafe Hayek

[edited] Obama figures that your tax burden is what you are paying right this moment as opposed to what you are obligated to pay in the future.

The reality is that President Obama, like President Bush before him, has dramatically raised government spending, and therefore has raised your taxes. To say otherwise is like saying you got your new swimming pool for free because you put it on your credit card.

When the money is spent, the bill must eventually come due, and the taxpayers must pay it. We are locked into higher current spending and therefore locked into higher future taxes.

The president has not lowered taxes; he has raised and then deferred them. To say otherwise is a flat-out lie, to be blunt.

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See also: Other posts about taxes