Part V:  Stranglehold – Taxation, Spending and Debt

The United States of America’s fiscal situation is dire:  We’re broke.  As broke as we are, we’re going to get a whole lot broker in the next few decades.  Why?  Because our esteemed Congress insists on spending like drunken sailors with the major difference being (as President Reagan so pithily pointed out)  that drunken sailors are spending their own damn money.

To bracket the problem, there are a few things that have to be clearly understood.

First:  There is an upper limit to the tax revenues that the various levels of government can squeeze out of the economy; that limit is about 18-19% of GDP.  That’s too much, but there it is – historically that has been all the blood that can be squeezed from the stone, regardless of what tax rates are inflicted.  “Soaking the rich” doesn’t work; asking upper-income people to pay a little more of what some pol thinks is “their fair share” won’t change this fundamental limit.

Second, the Laffer Curve is a real thing.  It’s a simple enough concept.  Postulate a tax system with only one rate.  If that tax rate is zero, obviously tax revenues will be zero.  If that tax rate is one hundred percent, revenues will also be zero, or so close as to make no difference; there will be no incentive for anyone, anywhere, to generate any economic activity.  Somewhere in between those points is a tax rate that will maximize revenues.  The problem:  That rate might change in reaction to outside pressures, like global markets.

Third, a nation’s economy is not a pie that has to be divvied up into shares.  It grows and shrinks.  Wealth is not distributed, it is created and earned.  And tax policy affects incentives – people alter their economic behavior when that behavior is exposed to taxation.

Our tax system as it exists today is a disaster.  No one understands it; an entire industry of attorneys, accountants, lobbyists and consultants has grown up around the  necessity of interpreting and tweaking the tax code.  So, what should the tax system do?

• Raise only that revenue that is required for essential government operation.  (See Part I.)
• Tax consumption, not production.  See the FairTax plan for the ideal way to do this.
• Honestly tax citizens.  Corporations do not pay taxes; they collect them.  Corporate taxes represent a back-door way to apply additional taxes to the citizenry.
• Eliminate double taxation.  The best example of this is the capital-gains tax; this tax not only taxes return on investments made with money that has (in most cases) already been taxed once, it also reduces incentive to put money to work.

The other side of this coin is spending, and the debt that results in the Imperial Federal government’s propensity for irresponsibly, recklessly spending far more than it takes in.  In the last few years, Federal spending and debt has skyrocketed.  Some figures from the Heritage Foundation:

Overall Budget Trends

• Over the past 20 years, federal spending grew 71 percent faster than inflation.
• Entitlement spending more than doubled over the past 20 years, growing by 110 percent (after adjusting for inflation). Discretionary spending grew by 60 percent.
• Deficits have pushed up the debt each year since 2002 as federal spending exceeded revenue. Fiscal year 2012 marked the fourth consecutive year of $1 trillion deficits.
• Although debt held by the public surged from 33.6 percent of gross domestic product in 2002 to 73 percent in 2012, net interest costs have held below 2 percent of GDP because interest rates have fallen to all-time lows.
• In 1962, defense spending was nearly half the total federal budget (49 percent); Social Security and other mandatory programs were less than one-third of the budget (31 percent). Two major entitlement programs, Medicaid and Medicare, were signed into law by President Johnson in 1965.
• In 2012 entitlements were nearly 62 percent of total spending, while defense dropped to less than one-fifth (18.7 percent) of the budget.

Overall Spending Trends

• Federal spending per household reached $29,691 in 2012, a 29 percent increase (adjusted for inflation) from $23,010 in 2002. The government collected $20,293 per household in taxes in 2012.
• The excess of spending over taxes produced a budget deficit of $9,398 per household in 2012.
• For every $6.80 the federal government collected in taxes in 2012, it spent $10. Consequently, $3.20 out of every $10 spent was borrowed.
• Major entitlements (Social Security, Medicare, Medicaid, Children’s Health Insurance Program, Obamacare) will increase from 44 percent of federal spending in 2012 to 57 percent in 2022.
• Entitlement programs and net interest costs will reach 67 percent of federal spending in 2022, crowding out spending on national defense and all other programs.

Where the Money Goes

• Total federal spending has grown 43 percent faster than inflation in just the past 10 years.
• Some of the largest growth in federal spending has been in K–12 education, a state and local priority.
• Food stamps and other nutrition programs also have more than doubled in the past 10 years. Food stamp participation rates also more than doubled, growing from 19.096 million recipients in 2002 to 44.709 million by 2011.
• In 1993, Social Security surpassed national defense as the largest federal spending category, and remains first today.
• Federal energy spending has increased steadily over the past decade with the government increasingly subsidizing activities like energy efficiency, energy supply, and technology commercialization. An unprecedented $42 billion was spent in 2009 as part of the stimulus, a nine-fold increase over the 2008 spending level.
• Interest on the debt is the fifth largest federal spending category, even at today’s low interest rates.

See the article linked above for the complete (bleak) picture.

The entire picture of tax and fiscal policy, such as it is, by our Imperial Federal Government is an unmitigated multi-generational disaster; it is a cluster-fuck of cosmic proportions, the overarching, transcendent issue of our time.  Runaway government spending and debt is the single greatest threat to the Republic today; greater than Islamic terrorism, greater than competition from Chinese manufacturing, greater than any environmental crisis.  And this crisis can only be addressed in one of two ways; we can inflate our way out of it, or we can grow our way out of it.  We should be doing the latter, but seem to be doing the former; the purchasing power of the American dollar is almost perfectly paralleling the decline of the Roman denarius during the decline of the Empire.

Things may well be past the point of no return.  Neither party seems to have the political will to address the problem; one party seems to show some slight concern about low economic growth and the ridiculous tax system, while the other party intends to continue doubling down on bad policies.  That’s not a comforting thought.

We have demagogued away our grandchildren’s future, and history will (rightly) damn us for it.