Death of the 20th Century
October 21, 2016 \ Business in General \ 0 Comments
What is going on in our country?
As a member of neither of the two popular political parties, I generally steer clear of offering opinions on policy and politics. Regardless of the outcome of the election, each party will be rallying around certain wacky ideas which have no relevance to our modern life. With this in mind, I am putting forth some policy ideas to free you up from the current political maelstrom so you can focus your brain on more productive thoughts for you and your business.
My brother Greg has pointed out to me on numerous occasions that we are not experiencing an ideological battle between Democrats and Republicans or left and right wing or conservative and liberal or Bare Bellied Sneetches and Sneetches with Stars upon Thars but a battle to the death between the 20th Century and the 21st Century.
We have one candidate who wants to relive the glory days of the 1990’s and another who wants to turn back the clock to the 1950’s. Most of the policy ideas being discussed by the parties are throwbacks to the 20th century with little relevance to the current world we live in. What’s on offer are half-baked ideas with a side of economic pandering. We have intellectual chaos because we have a lack of leadership from those in the public eye.
Our political angst is usually attributed to our economic angst. For the past 15 years, our politicians have aggressively pursued policies to funnel money from the many (us) to their favored industries and big companies (them). The results of these policies have been a low or no growth economy which is projected to continue for the foreseeable future. We have crumbling infrastructure. The service level of many government services would embarrass many third world countries. We have institutions which have received extreme largesse from the government who are committing fraud on their customers and then being indignant that people are upset about it.
Over the next 20 years, we need a growing economy to address the financial overhang of our policies up to this date. According to the www.usdebtclock.org, for 2016 the US Government is projected to collect $3.3 trillion from all sources on a GDP of $18.5 trillion (17.8%). $910 billion is paid out for Social Security, $272 billion for federal pensions and $592 billion for Medicare. $520 billion is paid for Medicaid and $303 billion is paid for welfare programs. The Department of Defense runs about $580 billion. Interest on our debt of $19.5 trillion runs about $242 billion per year at current interest rates. These expenses run about $100 billion over what the government collects.
What’s missing here is the $500 billion or so required to actually run the government. This gets added on to our debt each year. Just to make the point clearer, we could close every agency of government (excluding the DoD and IRS because we need them to collect taxes) and we would still be running a deficit each year and growing our debt. The Budget outlays total $3.8 trillion which represents 20.5% of GDP. For the current tax system to pay for our budget we would need our economy to grow to at least $21.7 trillion this year – a 16% increase – which is not anticipated in the next 5 years never mind the next year.
Over half the money collected by the US Government goes to retirees who are not exactly drivers of growth. Another 25% of what is collected goes to social safety net programs.
You have to remember that the budget is the dog that wags the tax tail. Presumably, the budget reflects what our bipartisan lawmakers believe we need to establish a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare and provide the blessings of liberty to ourselves and our posterity.
The only purpose of the tax code is to provide the funding for the budget. There is a lot of anger directed at the IRS regarding the collection of taxes but your anger should be more appropriately focused on your lawmakers in Congress.
The two political parties and other political thought leaders have many new tax ideas that generally fall into the “Heads I Win, Tails You Lose” intellectual school. When evaluating any of these tax ideas, keep in mind that in order to lower the tax rate, we need to expand the pool of funds eligible to be taxed to raise the same amount of money. This pool can be expanded by allowing more things to be taxed (e.g. addressing the definition of taxable income) and/or growing the economy to provide more taxable funds.
When politicians or pundits start talking about changing tax rates and providing tax credits, they are usually totally unaccountable to the budget figure they need to raise. They are just saying stuff to make them look smart and make people feel that they might be better off chasing this shiny object. This is the equivalent of every high school president promising better lunches, more free time and less homework. Remember every tax break for someone, raises taxes for everyone else because the government still has to raise the money to support the budget.
I know they want us to think the budget and taxes are complex, but it’s just math. I realize that every tax acts as a disincentive and every credit or deduction provides an incentive for certain behavior but the reality is they need to figure out how much a program’s going to cost and how is money going to be raised to support that budget item. Budget items are supported by current tax revenues or by promises to pay out future tax revenue (plus interest) in the form of bonds. For every budget item that is not funded by current tax revenue, we will need to raise even more taxes in the future to cover the original cost plus interest. Somewhere in our $19.5 trillion of debt, we are still paying off those $500 toilet seats from the 1980’s.
Assuming the current orthodoxy that payments to the old and needy, the DoD and interest payments are untouchable, just about every other policy of the US Government is funded by future tax payments (plus interest).