Many people in the United States think we are overtaxed. By pretty much any measure we aren't. In 2015 our tax as a percent of GDP was 26% well below the average of 34% for other developed countries.
Tax by Country
I'm sure taxes are complained about everywhere, and there is no political capital to be gained by proposing to raise them, however, if growth and reduced spending aren't going to eliminate the deficit, the only thing left to do is to raise taxes.
However, besides the political consequences there will also be economic ones. The Government doesn't collect taxes or borrow money to sit on it, it is used for many purposes all of which, except interest on the national debt, end up increasing our GDP.
Whether the money is used to pay for a fighter plane, a federal salary, a social security check or food stamps it enters the economy and circulates.
Since the deficit is so high, we are borrowing over a trillion dollars in 2018 which is stimulating the economy.
Its not much different with people who take out loans or credit card debt to buy things today with the promise of paying the loan back in the future.
So were we to stop borrowing for current costs and instead increase taxes, we would see that amount disappear from the economy, not because of the taxes, that money would be spent, but because we wouldn't have that loan stimulus every year.
I want to make sure it is clear that eliminating the deficit would not eliminate the National Debt. It would take many years of surplus income to do that.
The increase would be in the order of an extra 25% based on 2019 projections where revenue is projected at $3.42 trillion while expenses are estimated at $4.41 trillion. No one is proposing raising taxes that much, in fact, you see very little action related to this issue.
In the best case scenario we see spending go down and tax receipts go up because of economic growth. In a much more troubling scenario we see spending go up and revenue go down because of a recession.
If nothing is done about the debt, at some point we won't be able to borrow enough to fund it and that will lead to any of a number of bad scenarios, such as runaway inflation, widespread unemployment, recession, devaluation of the American dollar.
None of it is good.
Showing posts with label deficit. Show all posts
Showing posts with label deficit. Show all posts
Saturday, December 8, 2018
Friday, December 7, 2018
National Spending
If you want to reduce or reverse the deficit the concept is simple, income has to exceed spending.
Enough economic growth could do both those things, but as discussed yesterday the likelihood of that happening is next to nothing, based on current economic conditions. If it was to happen it would be great, but it isn't happening.
So why not just reduce spending enough to eliminate the deficit? It would work if it was possible, but Government spending isn't a bunch of wild and reckless extravagance. Most of it is tied into three areas, Defense, Entitlements or Debt service.
I include both Social Security and Medicare under entitlements although for some reason people don't want to, equating entitlements to "give-aways". Since we contribute to those programs we have earned them, and we have meaning we are entitled to them.
To get enough reduction to meaningfully impact the deficit you need to consider the big contributors. Of course the other areas need to be efficient but the numbers, even at zero don't work, and those programs are not about to be zeroed out any tie soon.
Interest on the National Debt is a large expenditure and it is growing as the debt increases and as interest rates climb. This is not optional spending and the only way to reduce it would be to reduce the debt and/or the interest rates. Interest rates have been at historic lows and they are starting to rise. There is little we can do about this area without addressing the other areas.
Entitlement spending is the favorite area to cut except for the fact that the programs included are extremely popular with the public. Some changes to social security and Medicare are probably needed,, but any change is going to face stiff opposition. Other entitlement programs include popular things as well and while there is a general belief that we are giving away billions of dollars to people who don't deserve it, each program has survived multiple years of unfriendly scrutiny by hostile congressmen, so while some waste and abuse will exist, the programs themselves are not overly generous handouts.
Of course there is a factor that has led to some of the waste and abuse as we have reduced the federal workforce who would be charged with enforcement. There is no desire to greatly increase that workforce so enforcement is reliant upon less and less cops on the beat.
Without a significant change to popular programs that would reduce spending significantly, there is simply no way entitlement programs can be reduced enough to eliminate the deficit. In fact the deficit is over a trillion dollars and spending reductions are never going to fix that, although they could contribute.
The last significant area is national defense which is, to some extent, a sacred cow. Expenditures here are increasing as we see little interest in balancing the spending against our budget situation. There is certainly some opportunities for reduction here, but people serving in our military should not be hurt. Defense programs are a double edged sword, since because they are American based they are economic boons for the areas where weapons are manufactured and they create jobs. Reducing our overseas commitments is possible but delicate and not probably in the best interests of our national defense.
Spending, although a popular area to attack is simply not going to eliminate the deficit without sacrifices we aren't willing to accept. In fact we have large spending needs related to infrastructure and border security that will increase spending as well as increases in the areas mentioned above.
That leaves only income as a possible solution.
Enough economic growth could do both those things, but as discussed yesterday the likelihood of that happening is next to nothing, based on current economic conditions. If it was to happen it would be great, but it isn't happening.
So why not just reduce spending enough to eliminate the deficit? It would work if it was possible, but Government spending isn't a bunch of wild and reckless extravagance. Most of it is tied into three areas, Defense, Entitlements or Debt service.
I include both Social Security and Medicare under entitlements although for some reason people don't want to, equating entitlements to "give-aways". Since we contribute to those programs we have earned them, and we have meaning we are entitled to them.
To get enough reduction to meaningfully impact the deficit you need to consider the big contributors. Of course the other areas need to be efficient but the numbers, even at zero don't work, and those programs are not about to be zeroed out any tie soon.
Interest on the National Debt is a large expenditure and it is growing as the debt increases and as interest rates climb. This is not optional spending and the only way to reduce it would be to reduce the debt and/or the interest rates. Interest rates have been at historic lows and they are starting to rise. There is little we can do about this area without addressing the other areas.
Entitlement spending is the favorite area to cut except for the fact that the programs included are extremely popular with the public. Some changes to social security and Medicare are probably needed,, but any change is going to face stiff opposition. Other entitlement programs include popular things as well and while there is a general belief that we are giving away billions of dollars to people who don't deserve it, each program has survived multiple years of unfriendly scrutiny by hostile congressmen, so while some waste and abuse will exist, the programs themselves are not overly generous handouts.
Of course there is a factor that has led to some of the waste and abuse as we have reduced the federal workforce who would be charged with enforcement. There is no desire to greatly increase that workforce so enforcement is reliant upon less and less cops on the beat.
Without a significant change to popular programs that would reduce spending significantly, there is simply no way entitlement programs can be reduced enough to eliminate the deficit. In fact the deficit is over a trillion dollars and spending reductions are never going to fix that, although they could contribute.
The last significant area is national defense which is, to some extent, a sacred cow. Expenditures here are increasing as we see little interest in balancing the spending against our budget situation. There is certainly some opportunities for reduction here, but people serving in our military should not be hurt. Defense programs are a double edged sword, since because they are American based they are economic boons for the areas where weapons are manufactured and they create jobs. Reducing our overseas commitments is possible but delicate and not probably in the best interests of our national defense.
Spending, although a popular area to attack is simply not going to eliminate the deficit without sacrifices we aren't willing to accept. In fact we have large spending needs related to infrastructure and border security that will increase spending as well as increases in the areas mentioned above.
That leaves only income as a possible solution.
Monday, November 26, 2018
Increase Spending, Reduce Taxes, Deficit?
It seems the current administration has a problem with math. If you reduce income and increase spending it turns our you have less money, not more.
Of course the fuzzy logic was that the growth rate was going to explode and increase revenue even with the reduced tax rates.
Problem with this was the country was already well into the recovery and growth could at best be tweaked.
If we had had a large number of unemployed, we might have seen users turning into contributors but we already had low unemployment. The bigger issue was that many of the jobs were low paying service jobs as opposed to high paying manufacturing jobs.
Those jobs aren't coming back in the numbers that would be required and in fact, more and more of them will fall victim to automation.
The well paid jobs require skills or at least an entrepreneurial spirit.
However, being employed but making minimum wage or something close to it, does not solve the deficit problem since it doesn't result in much in taxes, and may keep you on some benefit programs.
When you consider the tax reductions mostly ended up in the pockets of wealthy individuals who didn't increase anything that would create jobs, the fuzzy math gets fuzzier.
Meanwhile the spending on mandatory programs like Social Security and Medicare as well as increased spending on defense, border security and infrastructure with a increase in the cost of money has led to a skyrocketing deficit.
It is of course a mathematical certainty, but not to this group.
If they were asked to do a math problem with one train traveling east and the other train traveling west, the answer would be the trains colliding.
Of course the fuzzy logic was that the growth rate was going to explode and increase revenue even with the reduced tax rates.
Problem with this was the country was already well into the recovery and growth could at best be tweaked.
If we had had a large number of unemployed, we might have seen users turning into contributors but we already had low unemployment. The bigger issue was that many of the jobs were low paying service jobs as opposed to high paying manufacturing jobs.
Those jobs aren't coming back in the numbers that would be required and in fact, more and more of them will fall victim to automation.
The well paid jobs require skills or at least an entrepreneurial spirit.
However, being employed but making minimum wage or something close to it, does not solve the deficit problem since it doesn't result in much in taxes, and may keep you on some benefit programs.
When you consider the tax reductions mostly ended up in the pockets of wealthy individuals who didn't increase anything that would create jobs, the fuzzy math gets fuzzier.
Meanwhile the spending on mandatory programs like Social Security and Medicare as well as increased spending on defense, border security and infrastructure with a increase in the cost of money has led to a skyrocketing deficit.
It is of course a mathematical certainty, but not to this group.
If they were asked to do a math problem with one train traveling east and the other train traveling west, the answer would be the trains colliding.
Wednesday, October 10, 2018
Borrowing
Its not talked about much by fiscally conservative republicans, but thanks to the tax cuts and rise in interest rates we are headed towards record deficit levels for a non recession year.
The deficits and national debt are sort of like climate change and many other problems, in that they get harder and harder to fix over time.
In general under the approach adopted by this administration, the cuts and other policies are going to stir so much growth that the revenues from the reduced tax rates will actually exceed the prior revenues.
This is not happening at this time and the Congressional Budget Office or pretty much any other economist is not projecting it to happen.
Instead the deficits are projected to grow consistently over time.
One of the problems with them is that the more we owe the more we pay in interest on them.
Clearly most Americans would probably object to paying taxes to pay interest on prior debts.
However, we are.
Also, as interest rates rise, and the Fed is starting to tighten monetary policy, the cost will go up further increasing the deficit.
The latest projection for the interest was over $300 billion and its not decreasing.
Paying off the debt is not even being talked abut seriously and the only way to do it would be to run budget surpluses leading to decreased debt.
The cuts required to do that would have to include the biggest expenditures, and there is no clear intent to do that. In fact we see big increases in defense spending and changes in social security due to demographics.
The ultimate consequences of deficits like this will at some point mean fiscal austerity as programs are cut and spending is controlled, or alternately rampant inflation.
We are living on borrowed money and borrowed time.
Friday, September 14, 2018
Wicked Circle
There is an irrational fear in this country that the liberal Government wants to raise taxes and give benefits to their supporters, who aren't by the way "real" Americans.
Real Americans in this scenario are church going white people who probably don't live on the coast.
Now as far as increasing taxes, most of the increases people see are state and local taxes, since the federal tax rates have not increased in quite a while, if you ignore the latest round of tariffs ordered by the dontard.
Still, you do hear talk from some democrats that we need to increase taxes on our wealthier individuals in order to reduce the deficit, fund social security and pay our bills.
Assuming that paying our bills is something of an American value we have to figure out a way to do it.
The only real choices would be to increase the Government income or reduce its spending.
We would all prefer to see the spending reduced until we see what is being reduced.
The big pots of money go to areas we don't want to cut, like defense and social security and medicare.
Almost everything else isn't going to be enough and some of those program are quite important to many of us.
We also face an increasing bill for the interest on our debt that is only going up as time passes.
Increasing income can be done by increasing growth, since taxes would go up.
Of course a recession would reduce Government income greatly while forcing up spending.
Right now there is no real plan to eliminate the deficit, nor a spending reduction plan that has any real hope of success.
So we borrow tremendous amounts each year while reducing taxes on the wealthy who can then use that money to buy interest bearing bonds.
Government Ponzi?
Real Americans in this scenario are church going white people who probably don't live on the coast.
Now as far as increasing taxes, most of the increases people see are state and local taxes, since the federal tax rates have not increased in quite a while, if you ignore the latest round of tariffs ordered by the dontard.
Still, you do hear talk from some democrats that we need to increase taxes on our wealthier individuals in order to reduce the deficit, fund social security and pay our bills.
Assuming that paying our bills is something of an American value we have to figure out a way to do it.
The only real choices would be to increase the Government income or reduce its spending.
We would all prefer to see the spending reduced until we see what is being reduced.
The big pots of money go to areas we don't want to cut, like defense and social security and medicare.
Almost everything else isn't going to be enough and some of those program are quite important to many of us.
We also face an increasing bill for the interest on our debt that is only going up as time passes.
Increasing income can be done by increasing growth, since taxes would go up.
Of course a recession would reduce Government income greatly while forcing up spending.
Right now there is no real plan to eliminate the deficit, nor a spending reduction plan that has any real hope of success.
So we borrow tremendous amounts each year while reducing taxes on the wealthy who can then use that money to buy interest bearing bonds.
Government Ponzi?
Monday, August 6, 2018
Ignoring History
If you were to go back in time about 10 years or a little more you would have possibly noticed many Americans living off the rising equity in their homes. In fact this trend had become so prevalent that even the chairmen of the fed seemed to suggest it at one point.
Homes were the stable foundation of the American dream and it was widely believed that they would only increase in value.
Of course it was a house of cards where the whole structure was supported by easy credit and lower than market interest rates. It seemed like easy money and it allowed consumers to convert home equity into new cars, new appliances, college tuition with the expectation that they would be able to pay everything with the growth in equity, not the income from their jobs.
Construction was booming, credit was easy, and life was good.
Until it wasn't and when it turned ugly it really turned ugly.
Interest rates rose a bit, demand slumped a bit and suddenly house prices took a dip. It didn't seem like a big deal at first, of course the housing market has some corrections, but the bubble was fully inflated with no slack available.
As teaser rates expired and suddenly what was owed was more than could be refinanced we started to see foreclosures and mortgage defaults.
This led to defaults in bonds that were based on complicated derivatives but which were ultimately dependent on the worst sub-prime mortgages.
Large financial institutions had obligations they couldn't meet, credit got tight, construction and buying ground to a halt and we saw a potential depression that would rival the great one of the 30s.
We managed to avoid that using easy money and some economic stimulus to boost the economy while adding some regulations to try to avoid a similar situation in the future.
It worked but the easy money and stimulus were supposed to be short term remedies not a way of life.
Still the economy recovered at a slower pace than it had in some previous recessions but it recovered and some long term trends in the American economic structure hindered it a bit.
We now are trying to recreate the period of unsupportable growth via tax stimuli and allowing the financial institutions to resume their reckless practices.
We see the national deficit and debt increasing at record paces, but the one thing that is still true as always.
If you ignore history, you are doomed to repeat it.
Homes were the stable foundation of the American dream and it was widely believed that they would only increase in value.
Of course it was a house of cards where the whole structure was supported by easy credit and lower than market interest rates. It seemed like easy money and it allowed consumers to convert home equity into new cars, new appliances, college tuition with the expectation that they would be able to pay everything with the growth in equity, not the income from their jobs.
Construction was booming, credit was easy, and life was good.
Until it wasn't and when it turned ugly it really turned ugly.
Interest rates rose a bit, demand slumped a bit and suddenly house prices took a dip. It didn't seem like a big deal at first, of course the housing market has some corrections, but the bubble was fully inflated with no slack available.
As teaser rates expired and suddenly what was owed was more than could be refinanced we started to see foreclosures and mortgage defaults.
This led to defaults in bonds that were based on complicated derivatives but which were ultimately dependent on the worst sub-prime mortgages.
Large financial institutions had obligations they couldn't meet, credit got tight, construction and buying ground to a halt and we saw a potential depression that would rival the great one of the 30s.
We managed to avoid that using easy money and some economic stimulus to boost the economy while adding some regulations to try to avoid a similar situation in the future.
It worked but the easy money and stimulus were supposed to be short term remedies not a way of life.
Still the economy recovered at a slower pace than it had in some previous recessions but it recovered and some long term trends in the American economic structure hindered it a bit.
We now are trying to recreate the period of unsupportable growth via tax stimuli and allowing the financial institutions to resume their reckless practices.
We see the national deficit and debt increasing at record paces, but the one thing that is still true as always.
If you ignore history, you are doomed to repeat it.
Monday, April 23, 2018
Debt
The amount of debt the country is building is setting new records all the time, and worse is that the rate of growth is increasing due to the tax cuts and the increased spending.
Further, the low interest rates we have been experiencing are showing signs of increasing and if they do the amount required to service the debt will also increase.
Can the country afford it?
Well the simple answer is no.
The more complicated answer is still no, but we can party till the bills come due.
A basic rule of finances is you don't borrow to pay for current expenses, you borrow for extraordinary items, like a house, a car, or an education. If you have to borrow to buy milk, you probably have a problem. If your ordinary budget simply doesn't cover your regular expenses you definitely do.
The US budget doesn't cover its expenses.
Part of the problem is that we have to pay over $300 billion just to cover the interest on the debt we already have. We run a deficit of nearly $1 trillion so a third of that is for the interest.
That's a little bit like paying your credit cards with new credit cards.
Its actually a lot like that.
With the deficit and debt growing a relatively minor change in the interest rate is significant.
There is no real solution being proposed and the only real ones would be increased taxes or reduced spending.
Enjoy it while you can.
Further, the low interest rates we have been experiencing are showing signs of increasing and if they do the amount required to service the debt will also increase.
Can the country afford it?
Well the simple answer is no.
The more complicated answer is still no, but we can party till the bills come due.
A basic rule of finances is you don't borrow to pay for current expenses, you borrow for extraordinary items, like a house, a car, or an education. If you have to borrow to buy milk, you probably have a problem. If your ordinary budget simply doesn't cover your regular expenses you definitely do.
The US budget doesn't cover its expenses.
Part of the problem is that we have to pay over $300 billion just to cover the interest on the debt we already have. We run a deficit of nearly $1 trillion so a third of that is for the interest.
That's a little bit like paying your credit cards with new credit cards.
Its actually a lot like that.
With the deficit and debt growing a relatively minor change in the interest rate is significant.
There is no real solution being proposed and the only real ones would be increased taxes or reduced spending.
Enjoy it while you can.
Friday, January 26, 2018
Increased Profits, Increased Deficit
Good article today in the Wall Street Journal about various impacts of the new tax law, the link is below.
Tax Law Impacts
The analysis is generally favorable in the sense that companies will have more money to use and the uses will also be more profitable.
Of course that was clear in the reduction of the corporate tax rate, but the question about whether the impact will be enough to pay for the increase in the deficit isn't really addressed but based on the article there is no reason to believe it will even come close.
Yes in some cases the investments in new facilities will be spent in this country but the number of jobs from new facilities may after all be offset by the modernization which actually results in less jobs.
The article discusses a simple law of economics that companies will only expand if there is a market for their additional products.
So a biological research company that needed a new facility now decides it is cheaper to build it here, will create some jobs.
However additional use of robots in existing plants that get modernized will cost jobs.
Small businesses may grow faster, but growth is still a measure of demand.
Expansion without customers = bankruptcy.
The amount of economic growth being forecast as a result of the tax changes is modest indeed and it points out the flaw in the republican math without meaning to.
I've heard them say we only need .4% growth to offset the costs, but they mean .4% each year. We might get a one time .4% boost but then it becomes as we say, cooked in, and the next year it doesn't generate new growth.
The companies have more money to use and it may reduce debt, increase dividend, even increase wages and bonuses some, but this was all money that used to get paid as taxes and without it the Government has to increase the deficit.
Its going to have to get paid sometime.
Wednesday, August 26, 2009
Paying for the future
Over the next few decades we are going to see a major transitional period in America. The primary element of this transition is the aging of the Baby Boomer generation and their movement into retirement and of course eventual reduction via natural causes.
One would like demographics to look like a pyramid with each age group being slightly less than the next younger group. This would lead to a fairly stable relationship between number of people in prime earning years, retirees and students. That sort of demographic would allow for an orderly approach to the various infrastructures required to support each group.
However, the baby boomers distorted that pyramid and in fact they will in some ways continue to distort it for quite a bit longer. In addition, advances in health care and life expectancy have compounded the problem, as the boomer generation is not only getting older, but can also be expected to live longer.
The problem with this is that we have set up social systems that require current workers to pay for the retirement benefits and medical benefits of those who are retired. We never wanted to tax the boomers enough to secure either Social Security or Medicare financially in the future.
So as the ratio of workers to retiree drops the current tax structure will be insufficient to fully fund these benefits. So, we are faced with three options, increase taxes, reduce benefits or increase debt. The first two options are very difficult to accomplish politically so we see the third option being implemented.
Is this a sustainable option? Ultimately it may be, but only over a very long time period. It is certainly predictable that in the future, the demographics may return to a better ratio and that the benefits paid drop below the taxes collected. At that point we could see debt reduced. However, this is so far in the future that the problem is supporting the debt for such a long time. Also, the debt itself creates an expense related to the interest payments required.
The only real solution is to balance the expenses and the taxes. Since cutting benefits is extremely difficult, and the amount that can be saved via efficiencies is simply not enough to balance the budget, we need to consider how to increase taxes.
This of course is unrelated to any further increase in Government outlays, simply based on the deficits that will be created supporting our current systems. This tax burden can not easily be borne by the smaller percentage of the population that is of working age and needs to be shared across the demographic spectrum.
I believe the most important thing we should be doing in this country is looking at ways to increase our tax base. I believe a consumption tax that replaces business taxes would lead to two things if applied appropriately, an increase in jobs in this country and an increase in tax revenues. If jobs increase, we will either get boomers to work longer or alternately, attract immigration of younger people who will share the burden. To increase jobs we need to reduce the cost of doing business in this country and further make sure that anyone selling product in this country pays a fair share of taxes.
One would like demographics to look like a pyramid with each age group being slightly less than the next younger group. This would lead to a fairly stable relationship between number of people in prime earning years, retirees and students. That sort of demographic would allow for an orderly approach to the various infrastructures required to support each group.
However, the baby boomers distorted that pyramid and in fact they will in some ways continue to distort it for quite a bit longer. In addition, advances in health care and life expectancy have compounded the problem, as the boomer generation is not only getting older, but can also be expected to live longer.
The problem with this is that we have set up social systems that require current workers to pay for the retirement benefits and medical benefits of those who are retired. We never wanted to tax the boomers enough to secure either Social Security or Medicare financially in the future.
So as the ratio of workers to retiree drops the current tax structure will be insufficient to fully fund these benefits. So, we are faced with three options, increase taxes, reduce benefits or increase debt. The first two options are very difficult to accomplish politically so we see the third option being implemented.
Is this a sustainable option? Ultimately it may be, but only over a very long time period. It is certainly predictable that in the future, the demographics may return to a better ratio and that the benefits paid drop below the taxes collected. At that point we could see debt reduced. However, this is so far in the future that the problem is supporting the debt for such a long time. Also, the debt itself creates an expense related to the interest payments required.
The only real solution is to balance the expenses and the taxes. Since cutting benefits is extremely difficult, and the amount that can be saved via efficiencies is simply not enough to balance the budget, we need to consider how to increase taxes.
This of course is unrelated to any further increase in Government outlays, simply based on the deficits that will be created supporting our current systems. This tax burden can not easily be borne by the smaller percentage of the population that is of working age and needs to be shared across the demographic spectrum.
I believe the most important thing we should be doing in this country is looking at ways to increase our tax base. I believe a consumption tax that replaces business taxes would lead to two things if applied appropriately, an increase in jobs in this country and an increase in tax revenues. If jobs increase, we will either get boomers to work longer or alternately, attract immigration of younger people who will share the burden. To increase jobs we need to reduce the cost of doing business in this country and further make sure that anyone selling product in this country pays a fair share of taxes.
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