Custom «Higher Taxes Are in Your Future» Essay Paper

“These road improvements of $241,000,000 were paid for:

86 percent from the Federal Highway Trust Fund

12 percent from state funds

2 percent from local funds.”

Most of you have seen at least one sign similar to this while driving somewhere in the U.S. If you have ever driven anywhere in Europe, you see comparable signs but they usually have a longer list of “contributors.” The parallel, though, is that the “contributors” are government agencies, not you. Now, it would be nice to think that funds for highway improvement projects come from the moon or Mars or even from the bank account of some foreign oil mogul. But they do not.

Those Pesky Budget Constraints

Government does not exist independently of those who live, work, spend, and pay taxes in our society. As an economy, we face a budget constraint. Whatever is spent by government---federal, state, or local---is not and cannot be spent by individual in the nation. Whatever government commands in terms of spending decisions, private individuals do not command. All of those dollars available for spending on final goods and services in the U.S can be controlled either by you, the private citizen, or by government. Otherwise stated, what the government spends, you don’t spend. It is as simple as that, despite the periodic efforts of government (especially at the national level) to conceal the truth of this budget constraint.

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Federal Spending Programs On The Horizon

Throughout the latter weeks of the presidential campaign in 2008, the two candidates offered an increasingly costly and often mind-boggling array of proposed new federal programs. At one point, John McCain said, If elected, he would “help out” 3 million Americans who were at risk of losing their homes. McCain also supported more government help for people in paying for health insurance.

Soon-to-be-elected Barrack Obama argued in favor of even more new government spending. He said that he would create 2 million new jobs by rebuilding our crumbling infrastructure and “laying broadband lines that reach every corner of the country.” He promised to spend $15 billion a year over the next ten years on renewable energy. He had a plan to “make health care affordable and accessible for every American.” He said he would invest in early childhood education and “recruit an army of new teachers.” And in an editorial in the Wall Street Journal the day before the election, he said that he was willing to make a deal with every young American: “If you commit to serving your community or your country, we will make sure you can afford your tuition.”

At the same time that these new government programs were being promised, Congress was separately considering an additional multibillion dollar “economic stimulus” plan. Moreover, many nongovernment organizations had their own ideas for more federal spending. For example, in November 2008, the Campaign for America’s Future organized a convention in which the theme was the creation of a government-funded investment fund for public works projects. Simultaneously, the Center for American Progress released a two year, $100 billion plan for producing renewable energy. The latter group argued that increased government spending should also go to schools, health care, job training, and technology innovation. Another group, Realizing the Dream, Inc., wanted the federal government to commit the necessary funds to reduce poverty by 50 percent in the next ten years.

Even as the chorus of voices in favor of additional federal government spending on new programs was growing, Secretary of the Treasury Henry Paulson was already doling out the hundreds of billions of dollars authorized under the $700 billion “bailout” bill (officially called the Emergency Economic Stabilization Act of 2008). Almost simultaneously, even more federal spending was being pushed hard by Representative Charles Rangel (D.,N.Y.). When asked about the effect these additional programs would have on the deficit, Rangel said that he did not want to hear about that. “For God’s sake,” he said, “don’t ask me where the money will come from. I’m going to the same place Paulson went.”

Where is “the same place Paulson went”?

Increased Spending, Increased Taxes

When Congress passes legislation to spend more, whether it is for bailing out the financial sector, improving education and public infrastructure, or attempting to reduce poverty, there is ultimately only once place it can obtain the resources. That place is you and everyone else who earns income each year in the United States. As we noted in Chapters 13 and 14, having the ability to run a larger federal government deficit (and thus increase the new national debt) does not change the fundamental budget constraint facing our society.

What government spends, the rest of us do not spend. Perhaps without your realizing it, your real tax rate has already gone up in the last several years. Why? Because federal government spending has increased as a percentage of gross domestic product (GDP). Your real tax rate is easily calculated. It is the percentage of GDP controlled by the government. The observed taxes that you pay through automatic withholding of federal income taxes on your wages or salary will eventually catch up. The budget constraint grantees that.

But What About All Those Tax Credits?

During the heat of the 2008 presidential campaign, Barrack Obama said he wanted to give tax relief to 95 percent of all households. Let’s look at these numbers. Currently , only about 60 percent of American households pay federal income taxes (down from about 80 percent in 1984). Almost 59 million tax filers do not pay any federal income taxes. So how can the government reduce income taxes for an individual or a household that does not pay any? It can (and does) do this by what is known as a tax credit, or a refundable tax credit, as it is known at the IRS. Under a tax credit, people who pay no federal income taxes effectively get a check from the federal government, which they can use to pay other federal, taxes they might owe (such as Social Security) or to pay other federal taxes liabilities, should they arise. And if there no current or likely future tax liabilities, well, they get to keep the cash. Consider some of the proposed tax credits that might already be in place by the time you read this:

• A $500 refund to low and middle income workers to offset Social Security taxes
• A tax credit covering 50 percent of child care expenses up to $6000 a year
• A $4000 tax credit for college students paying tuition if they perform “community service”
• A refundable 10 percent mortgage-interest tax credit for taxpayers who fill out the simplified tax form (Form 1040A)
• A $3000 tax credit for businesses that hire new workers in 2009 and 2010

So, you might be asking, if so many Americans are going to get tax credits, what is the basis for our prediction that taxes will nonetheless increase? The answer goes back to the first paragraph of this chapter. No government obtains funding from the moon or from Mars. Every single penny that government spends, someone in the private sector does not spend. We already saw in 2009 and 2009 an increase in federal government spending of trillions of dollars “bailing out” the economy and “stimulating” the economy. If we add to those expenditures additional ones creating more renewable energy, reducing poverty subsidizing for college attendance, and more, the share of government spending as a percentage of total annual national spending will continue to rise. Thus total taxes must rise.

If, in addition, 95 percent of taxpayers see “tax relief” as Obama promised during the 2008 campaign, the remaining 5 percent of taxpayers will receive a bill for much more than they are currently paying in federal income taxes. Yet higher taxes on the very richest Americans are not going to be sufficient to pay for all of the increased government spending, especially if other people are going their taxes cut. The highest 5 percent of income earners in the United States already pay over 60 percent of all federal income taxes. As you will read about in the following chapter, sending them a bill for a larger proportion of a larger total tax bill is likely to cause them to change their behavior in ways that will reduce the growth of total income and possibly even reduce the level of total tax receipts.

Is Argentina Showing the Way?

Argentina was one of the ten riches countries in the world a hundred years ago. It has since slipped to about seventieth on that list. Over the same period of time, government spending (and taxes) in Argentina has been growing relative to the overall size of the economy. Most recently, Argentine president Cristina Kirchner announced that the nation’s private pension system was being taken over by the national government. While she claimed that it was for the “good of the people,” because the market was too risky for retirement savings, in fact President Kirchner wanted to use those assets to fund more government spending. Technically, the government will “borrow” from the retirement system. But because the Argentine government has a track record of defaulting on its borrowings, many people expect that they  will get back few, if any, of their hard-earned retirement pesos.

As you might expect, contribution into the private pension plan plummeted as soon as the government announced its plan. Some Argentine citizens quietly began moving other assets out of the country, hoping to protect them from similar confiscation. Still others began making plans for moving themselves out of the country, on the grounds that emigration was the ultimate form of protection.

The Argentine government’s nationalization of the private pension system is simply a once and for all increase in taxes. While it is unlikely that the U.S. government would seek to take control of private pension plan here, the Argentine story illustrates the key point of this chapter. What the government spends, we must pay for. Sometimes the government must be creative in making that happen, but happen it will. Hence our prediction: Higher taxes are in your future.

For Critical Analysis

1. The government now owns shares of stock and warrants in many banks, insurance companies, some auto companies, and in other sectors of the economy. (Warrants are rights to own future shares of stock.) If the value of the shares owned by the federal government increases because the market price per share rises, in what way could this increase actually permit a reduction in future taxes? Explain.
2. If you are a lower-income-earning individual and receive enough tax credits so that you pay no income taxes, should you care about tax increases for other individuals? Explain.
3. Is it possible that in, say, ten years, the real tax rate paid by U.S. residents will be lower than it is today? What circumstances would have to change to make this occur? Explain.