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We Can’t Tax Our Way Out of Debt Problem

  • We Can’t Tax Our Way Out of Debt Problem

  • 27 November 2011 by 0 Comments

We Can’t Tax Our Way Out of Debt Problem

By Richard Larsen

Published – Idaho State Journal, 11/27/11

Black Friday occurs the day after Thanksgiving, and signifies the day when most retailers go into the “black,” or profitability, for the year. For understandable reasons, it’s a day highly anticipated by retailers, and by consumers, for there are typically “killer deals” offered to draw traffic into the stores.

If national governments weren’t so dysfunctional, every nation would have a Black Friday equivalent, when revenue would catch up with expenditures, and there would be no budgetary deficit. European countries right now have to be wishing they could celebrate such a day, as several European countries are currently undergoing the equivalent of a fiscal colonoscopy by exogenous institutions, the European Union and the European Central Bank, because they cannot get a handle on government spending. Many European nations have expenditures far outpacing their tax revenue, but the most pressing to the EU now are Greece and Italy. Their appetite for spending has pressed the EU to the verge of collapse.

Here at home, we find our own country sprinting toward the precipice of fiscal collapse with yearly spending at $3.7 trillion exceeding tax receipts of $2.2 trillion by 60%. We’re just $500 billion short of spending twice as much as we receive in tax revenues. In July, congress infamously raised the debt ceiling from $14 trillion, and in just four months, we’ve already surpassed $15 trillion. Anyone with any cognitive capacity can clearly see this is unsustainable. At what point such debt causes financial implosion is unclear.

But we may be getting the signals that we’re not that far away. China is the number one buyer of U.S. debt, in the form of bonds, notes, and bills. This week, after the “Super Committee” of twelve congressmen and senators was unable to reach any compromise on reducing spending, Xinhua, the official state news source had some unusually harsh words for our lawmakers. “Washington’s political elites … are obligated to muster the courage to defuse the ticking debt bomb and start to show the world they have the wisdom and determination not to further jeopardize the fragile global economic recovery,” Xinhua said.  I’m inclined to think they chose their words carefully, especially in reference to “the ticking debt bomb.” Implosion could well occur when the Chinese are no longer willing to take the risk associated with buying our debt.

And no wonder they’re so concerned. Just four years ago our total debt (not counting unfunded entitlements) was at $7.2 trillion, with a budget of $2.5 trillion and a deficit of $252 billion. Even while fighting two wars, the projections indicated the deficit would be erased by 2011. Now, at $15 trillion of debt, a yearly budget of $3.7, and a deficit of $1.4 trillion, our “leaders” have dug a fiscal hole so deep it is questionable if we can ever climb out of it.

Just since 2008, the five largest growth areas in spending have added significantly to the total debt and the yearly deficit.  Spending has increased by 30% in federal pensions; 50% in health care; 30% in national defense; 60% in federal welfare; and 50% in discretionary spending. And we should not forget that former Speaker Nancy Pelosi failed to even pass a budget for two years, as required by law. That’s like giving a spend-thrift spouse a no-limit credit card and telling her or him to go buy all the influence and power a limitless credit line can buy!

Yet with all that spending, the super committee couldn’t come up with $1.2 trillion savings over the next ten years. The Congressional Budget Office projects from 2012-2021 government spending will total $46.05 trillion. That means they couldn’t agree on a nickels worth of spending cuts!

Tax increases are economically unviable in our present condition. Peer reviewed research by former head of Obama’s Council of Economic Advisors, Christina Romer, illustrates how an exogenous tax increase of 1% of GDP reduces real GDP by 2-3%. With our real GDP at under 3%, we can’t afford tax increases to reduce economic growth any more. We need jobs more than anything, and a contracting economy is decimating to job growth.

According to IRS data, 1.93% of Americans make over $250K per year. If we taxed 100% of their income, we could generate $1.41 trillion, which would be enough to cover the deficit. But that would be fiscal suicide, for that revenue would be nonexistent for all future years.

It wasn’t lack of revenue that got us into the problem we’re now in, it was a lack of discipline on spending. If the country is fiscally salvageable, it will come from a serious attempt to unwind some of the recent spending increases, and then look at potential revenue “enhancements” to make up some of the difference if necessary. We cannot tax our way out of the problem without destroying job growth, but we can, with discipline and some backbone, cut our way out of it.

AP award winning columnist Richard Larsen is President of Larsen Financial, a brokerage and financial planning firm in Pocatello, and is a graduate of Idaho State University with a BA in Political Science and History and former member of the Idaho State Journal Editorial Board.  He can be reached at rlarsenen@cableone.net.

 

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More than anything, I want my readers to think. We're told what to think by the education establishment, which is then parroted by politicians from the left, and then reinforced by the mainstream media. Steeped in classical liberalism, my ideological roots are based in the Constitution and our founding documents. Armed with facts, data, and correct principles, today's conservatives can see through the liberal haze and bring clarity to any political discussion.

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