Five Unthinkable Options (Part 2 of 5)

The first unthinkable option, as I mentioned at the end of last week’s article, is to sit back, do nothing different, keep on letting the federal government spend more than it brings in, enjoy the ride and hope like hell that you are one of the lucky ones to die the day before everything goes kablooie leaving a huge mess for our posterity. While I think that there are certainly some people that would accept this option in order to maintain their current status within the convoluted system of federal benefits and kickbacks to buy their votes, I think that most Americans find it wholly untenable. But hey, I do not want it to be said that I did not put that option out there for your consideration. So there it is. But each of the remaining four of the five unthinkable options requires us to actually do something other than stay the course. I am not saying each are good options however, just that they are options.

In order to move on to the other options however we have to put forth some numbers and look at federal expenditures and revenues. Before I started writing this series I struggled with exactly which numbers to use. Not because I wanted to make the numbers fall in my favor because, quite frankly, I need no trickery to do that. No, I struggled with this because I wanted to eliminate as many complaints as I could from people looking for any excuse at all to find fault with the five unthinkable options because of the numbers and use those excuses as their cornerstone of support for acceptance of what has already been laid out as option number one.

I could, of course, base the expenditure numbers on President Obama’s recently proposed 2010 budget, which once again spends astronomically more than will be brought in, and use the recent history of revenues collected to present these scenarios. But since we really do not know what the final budget will be once Congress gets through with it as well as what else Congress will add throughout the year, the expenditure projections could be wildly off. And I don’t want to be accused of putting forth a worst case scenario just to gin up as much fear as I can. Again, however it is not that I need to cook the books to do this.

I could also use the 2009 budget as a basis and include all the extra expenditures the President and Congress have tacked on. But I am worried that all the revenues are not being shown in the data I have from the federal government. I do not think that these numbers are good to use because with April 15th still looming there will be refunds and payments galore pending and I am not certain that these numbers are final by any stretch of the imagination.

So I have decided to use numbers from 2008. We are nearly two years removed from 2008 and that means that the expenditures and revenues are pretty well recorded. There is no reason to go further back because I believe that we have to go with the most recent set of good data available that reflects what our current government is doing and spending money on.

So what are the numbers? Well, let’s take a look. In 2008 the federal government in total collected total receipts of $2.569 trillion. Total expenditures for that year were $3.094 trillion[1]. For those of you keeping score at home that is a deficit of $525 billion. Again, these are the government’s numbers, not mine. Just to show that this level of receipts is normal and not an aberration either high or low, in 2007 total federal revenue was $2.568 trillion and in 2006 it was $2.407 trillion[2].

So, let us assume for a second that government will not spend more than this in 2010. We already know that President Obama’s proposed budget is much greater, but let’s just go with a budget just over three trillion to avoid any sort of speculation about what the final, and obscene numbers, will be.

Unthinkable option number two is often one that we hear from people that think money just grows on trees. That option is to raise taxes. So, in order to close this budget gap and raise the $525 billion needed what would we have to do to tax rates? Well, obviously if you believe that raising taxes will close this gap by raising revenues you have to raise tax rates. Personally I don’t buy into this strategy because taxing people more and more strips them of incentive to create and succeed and only when people create and succeed do they produce more wealth and hence more taxes in the process. But I know that there are a lot of people out there that think the opposite. So let’s explore.

In 2005 the median income for workers aged 15 and older was $28,567[3]. There were 155 million people in this category and that gives us total income earned in the United States as $4.428 trillion dollars. Let’s make a reasonable assumption that this increased through the years to 2008. I’ll be generous and say there was a 3% standard wage increase per year in 2006, 2007 and 2008. That gives us a total estimated income of $4.838 trillion in 2008. This is based on 155 million income earners still remain in the labor force.

If we target income taxes, which were $1.124 trillion in 2008 (23% of our extrapolated 2008 total income), we need to get to about $1.649 trillion in personal taxes. That is a 46.7% across the board increase in your taxes and a requirement for the government to take 34% of all wages earned. Are you willing to pay 47% more in income/personal taxes and have over a third of your income taken just to break even?

And this is just based on 2008 expenditure numbers and what is needed to not increase the deficit by a single penny. What if we have a really bad year while government expenditures remain the same? What if total revenues drop from $2.569 trillion to around $2.1 trillion? I think it would be reasonable to suggest that as responsible people we plan for the worst don’t you? That means an even higher tax rate on personal taxes. Again, just to break even and we have not even broached the topic of actually paying down the debt. If revenues decline during a recession to $2.1 trillion that would mean a short fall of another $469 billion to make up in the lean years. That also means higher rates of taxation than already discussed.

Ok, so a nearly 50% tax increase being unpalatable without even considering what it would have to be in a bad year where revenues dropped, the often heard refrain will no doubt once again echo from sea to shining sea. “Tax the rich!” will be heard in earnest from those that think it is a good idea to raise taxes to cover the deficit but who don’t want their own taxes raised. That’s ok, “the rich” already past most of the direct personal income taxes in this country anyway with the top 50% of all income earners paying well over 90% of the tab so they are already going to be footing the bill. So you’re assumption that you can pass this bill off to someone else is already accounted for.

Now, just like you, “the rich,” are not going to like having their pay essentially cut. And it will not be just them either. The people that work for them are not going to like it much either. Hey, the rich have to pay their bills too and while you may think that they have too much, the people who build the pricey boats, planes, cars and houses which they buy are not likely to agree. Therefore those taxes, which are just government imposed costs, are going to get passed right on down the line to the final consumer of the products they make and the services they provide. Yeah, you think that you are not going to get socked with the tax bill but you will. That is the dirty secret about taxes. While the direct bill is paid for by the person on whom the tax is levied, the costs that are incurred are wrapped up in the price of the goods and services they provide and passed right on down the line. Like another undesirable substance which I will not mention, taxes also flow downhill.

And just incase you think that raising the taxes by going after other entities rather than the rich’s personal income will solve the problem think again there too. Corporate income taxes would need to be raised to $816 billion to make up the short fall or nearly three times their 2008 levels of $291 billion just, I emphasize, to break even. Wave bye-bye to hundreds of thousands if not millions of jobs as companies find ways to recoup those increased costs while raising prices on all those things you love to buy causing you to once again bear the burden of those taxes.

Of course you can also choose to raise taxes on production and imports to $621 billion or six and a half times what they were in 2008. Again, have fun as prices increase to cover those losses foreign companies will encounter as well as the trade wars that will ensue as American goods shipped overseas get retaliatory tariffs slapped on them. Oh, yeah, and not to sound like a broken record, but this is just once again to break even.

We are hovering around $12 trillion dollars in debt as of right now and chugging quickly to $14 trillion. This does not even count the trillions of dollars our government is going to add to that over the coming years through fiscal irresponsibility and the ominous burden of trillions upon trillions in unfunded liabilities. To pay this debt down in thirty years like a standard mortgage we would need to raise an extra $400 billion dollars a year. Think about that and now you understand why I picked the number of $2.1 trillion earlier when talking about the lean years just to give you an idea about where we would really have to be in order to make progress with paying down the debt. Think about personal taxes going up to $2.049 trillion (82% higher than they were in 2008 and moving to a rate of 42% of total income). Think about corporate taxes being raised to $1.216 billion (four times what they were in 2008). Think about imports getting his with a tax bill of $1.021 trillion (more than ten times what they were in 2008). Think about the price increases that are going to ensue as companies that struggle to get by on even lower margins have to raise prices to stay profitable.

Think about what happens when a company that makes 100,000 units of something a year gets hit with a tax increase of $10,000,000 dollars because we raised taxes on them. That is a new cost of $100 dollars per item which will be recouped one way or another by some combination of lowering costs through means which include laying off workers, increasing efficiency of those that remain and passing that new cost on to the end user.

Now you can choose this unthinkable option, option number two, if you like. But you doom American just as badly as you doomed it as if you had picked unthinkable option number one. But it is there for you to choose if you are foolish enough to do so.

Next week, unthinkable option number three – let the whacking begin! Oh, but don’t you dare touch government welfare programs! Oh no, granny and the poor would never stand for that! Yeah, a lot of you are going to be in for a shock about what the numbers really show and how foolish this unthinkable option is as well.

Until then, sleep tight …

1. http://www.bls.gov/emp/ep_table_408.htm
2. http://www.usgovernmentrevenue.com/#usgs302a
3. http://en.wikipedia.org/wiki/Personal_income_in_the_United_States

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