“Tax Rates – They’re Going Up”

Sydney M. Williams

Thought of the Day

“Tax Rates – They’re Going Up”

January 18, 2013

Not too long ago, I thought common sense would prevail, that a balanced approach toward reduced spending and a more equitable and progressive tax would be found. The Bowles-Simpson gave credence to such thoughts. That no longer seems probable. It may still happen, but certainly not until after the 2016 elections. While defense expenditures will be reduced, there is not much else in the budget that Mr. Obama has any interest in cutting. Even when Washington talks of reducing spending they speak only in terms of reductions in the rate of increase, not in absolute numbers. Entitlements remain a “third rail.” Spending will continue; trillion dollar deficits will remain and our nation’s debt will continue to soar. Taxes will rise for everyone.

In a more rational world, bond vigilantes (creditors) would rein in spending. But the Federal Reserve has removed, at least temporarily, that risk. The two to three trillion dollar increase in their balance sheet represent bonds that neither individuals nor foreigners would have found attractive at current rates. There has been no interest on the part of the Administration in reducing spending, other than to take credit for a natural reduction in military spending associated with winding down the wars in Iraq and Afghanistan.

The only means of reducing deficits will have to be higher taxes, which, perversely, may be a good thing. When everyone’s taxes go up and the economy does not leap forward, attention may be paid to the crux of the problem – we have created a welfare state that is unaffordable. Additionally, artificially low interest rates have masked the true damage done to our economy through mismanagement.

The President is an expert in telling voters what they want to hear – that programs like Social Security, Medicare and Medicaid are sacrosanct, as will be ObamaCare, and that they will be paid for by the “rich.” Well, he has raised taxes on the wealthy and before allowing for behavioral changes, those increases will raise an extra $62 billion a year for ten years, accounting for about 6% of today’s annual deficits. Even should, miraculously, tax receipts return to their pre-crisis level of 18% of GDP that would mean continuing annual deficits of $400 billion. The Congressional Budget Office (CBO) has determined that, under the terms of the fiscal cliff deal, our debt of $16.4 trillion will increase by $4 trillion over the next ten years, and they do not allow for changes in behavior that higher taxes will cause, nor the effect of an increase in money supply on inflation. The only way to pay for the government Mr. Obama wants is to increase taxes on middle income earners. That will happen. Taxes will also rise on investments, which is counter productive when further investment is needed to boost economic growth. And lastly, there will be a VAT. The latter is particularly offensive, in that it is both clandestine and regressive. It is stealth-like, and it hurts the middleclass more than the rich. All of these taxes will principally affect the middleclass and retirees. The Buffett’s of the world, large corporations and green energy concerns will be largely unaffected.

Mathematically, we cannot continue as we have been. Entitlements will not be touched under Mr. Obama. In fact, because of Obamacare, they have increased. It is certainly possible that when middle income earners are faced with higher taxes, as they will be, there could be a revolt. Let us hope so.

Politicians, including the President, realize that the revenues necessary to operate the size government they desire cannot be paid for by the wealthy alone. As the Wall Street Journal noted Tuesday, if the government taxed 100% of those earning more than $500,000, the IRS would take in $1.29 trillion, “a little more than 2012’s deficit.” Despite the President’s promises to the contrary, it is middle income earners who will have to pay for the government he wants.

The real debates, which this President would prefer to avoid, are: what programs do people want, and how much are they willing to pay? The first is discussed ad infinitum; the second, though, not at all. The Sandy bill was a microcosm of what will become future Congressional debates. The government should always be there to pay for natural devastations, such as last fall’s hurricane. But in order to pay for them, shouldn’t spending be cut somewhere else, or should not a surtax be deployed? Unfortunately we have created a culture in which federal funds are considered by government as free money. It is not. Either it must be generated through taxes, or it must be borrowed.

Over the past few decades, federal income tax has averaged about 18% of GDP. In 2011, with $2.3 trillion collected, the average was about 15.4% of $15.1 trillion in GDP that year. The difference between the historical annual average and the current rate amounts to $400 billion. The annual increase of taxes on the wealthy, coupled with increases in taxes on investment income and taxes associated with paying for ObamaCare amount to approximately $60 billion. Obviously the least painful and most productive way of increasing government’s tax receipts would be faster economic growth. Governor Bobby Jindal of Louisiana understands that, while governors like Jerry Brown of California do not. Mr. Jindal has proposed eliminating the state income tax, while Mr. Brown has proposed raising the one in California, which will now become the highest in the nation. The exodus that began a few years ago will persist. Mr. Jindal, in contrast, has taken the more progressive approach, which over time will bear fruit.

Tax reform and simplifying the 4 million words that comprise the tax code make the most sense, but there is too much self-interest and cronyism to expect meaningful reform. Consider the beneficiaries of our tax code – lawyers, accountants, tax preparation firms, farmers, exporters, both old and new energy firms, drug companies, real estate firms, homeowners, Hollywood, eleemosynary institutions and myriad other organizations. There isn’t much of a chance for meaningful change. Since 2001, according to Investor’s Business Daily, there have been 5000 changes, or more than one a day. Complexity will persist.

Unfortunately, as long as Mr. Obama is President, government will consume an ever-increasing share of the nation’s GDP. Consequently, taxes are going to have to go up, and the middleclass will have to bear the brunt of the burden, for that is where the money is. To believe otherwise is to misunderstand the man we have elected President.