Budget Busting & Taxes

The Democrats and Republicans have apparently come to a compromise over federal spending in the next two years, compromise meaning lifting the debt ceiling and incurring an even larger deficit, by an estimated additional $200 billion or more annually, with the result being a total annual deficit in excess of $1.2 trillion… and that’s if we don’t have a recession.

Neither party wants to cut spending nor to increase taxes, and the future result will either be high inflation or slow growth, if not both, and those are the best of the possible scenarios.

Everyone talks about taxes, and most of that talk centers on federal income taxes, but what people should think about isn’t just federal income taxes, but the total of all taxes that people pay. And, surprise of surprises, when you do that, it turns out that the taxes paid, both in dollars and as a percentage of income, have gone up for everyone – except for the top one percent or so of taxpayers, whose taxes have decreased significantly.

That’s because the combination of federal payroll taxes [Social Security and Medicare], state sales and income taxes, and local and county taxes increase every year. While most state income taxes are flat rate or reach a capped rate at moderate income levels, with each pay raise a worker gets, the government takes more. The same is true of Social Security taxes, at least until you make more than $128,000 [$132,000 next year], while Medicare taxes are applied to your full income, no matter how much or little one makes.

Because government measures of inflation don’t keep up with actual inflation, the vast majority of Americans actually end up with less spendable income every year, and under those circumstances, it’s understandable why they don’t want to pay higher federal income taxes.

As for the rich, even though their taxes, on average, have gone down significantly, they’re still complaining that they’re overtaxed. So the Republicans listen to the rich, and the Democrats to the average American, and they decide that they won’t raise taxes now… and that means that everyone’s children and grandchildren will pay a whole lot more, both in money and economic chaos.

2 thoughts on “Budget Busting & Taxes”

  1. Frank says:

    Not being an economist, I am somewhat confused as to the possible “cure/s” for our debt position. I do believe that this is caused, over simplistically, because we spend more than we collect and the “National Debt” discussion, IMO, obscures the obvious assessment, i.e. that we need to either spend less and/or collect more…produce a surplus and apply it towards the debt (over and over).

    I have a question: would monetizing the debt be worse/better/the same in your view? I would think it would bring on an instant devaluation of all of the US currency, but it would “stop the interest,” if that is the correct term. I ask because I see nothing on the horizon that could claim to be even the beginning of the answer (and the beginning of some fiscal responsibility).

    1. Effectively, for the past several years the Federal Reserve has been monetizing the debt by buying Treasury bonds. The question isn’t whether the Fed is monetizing the debt but how much of the existing and future debt will be monetized and at what rate. It’s my opinion, but only mine, that massive monetization would cause higher inflation, but the Japanese experience with high levels of monetization has caused little inflation, but also a very slow rate of GNP growth.

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