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Jan 13, 2009

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.

[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

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.

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.

See also: Other posts about taxes

1 comment :

Frank Butterman said...

Just a brief word. I discovered your blog via a comment on Cafe Hayek. It has been an excellent read.

Thank you,
Lee Kelly

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