Taxes Must Go Up Eventually

by Kevin on July 10, 2009

Here’s a tough pill no one wants to swallow: taxes in the United States have to go up.

Our government is in the same situation some of you are currently facing right this very moment. Some of you have conquered this moment in the past and have moved on.

But our government hasn’t. Right now we are spending more than we earn. Plain and simple.

Blame the Economic Crisis

Tax revenues down (or flat) and expenses up, up, and up some more. Sure the economic downturn has something to do with increasing the deficit. Even if you take the bailout out of the equation you would have a lot less tax revenue because revenues are down at companies everywhere. Add in that many companies have laid off workers or shut down and unemployment hits 9.5%. That’s less individual tax income. More people are on social programs, both federal and state, so you might expect a deficit.

But the economy is not the only thing to blame for our current predicament. Our spending ways are the main culprit. And it’s not sustainable.

Spend, Spend, Spend

You see we had a spending problem long before the financial crisis of 2008. Long before all the bailouts there was concern that Social Security and Medicare would run out in twenty years or so.

Did we have a solution? No, just sweep it under the rug and let the next administration and group of Congressmen deal with it.

CNN had a great article about how health care reform still won’t get rid of the deficit. I have no problem with reforming health care if it fixed our system and lowered costs across the board. Who wouldn’t want that? (Other than insurance companies.)

But it isn’t going to solve the problem!

A Taxing Solution

I see no way around this. As deficits continue to climb and the value of the dollar continues to fall (due to the deficits and international fears that we won’t be able to pay back all of those IOUs we are sending out) the tax rate will become the primary lever to make up big holes.

It won’t be a popular solution and I’m sure the political parties at the time will somberly explain to us why they need to tax us more here, here, and over there. There won’t be any grand ceremonies to sign the new taxes into law. But it is bound to happen.

Why? Because no one in Congress is going to brave enough to cut spending in such a dramatic fashion to fix our problem.

We’re spending more than we earn. We won’t spend less. There’s only one other side of the equation: earn more. How do governments earn more? Higher taxes.

As an individual there are several ways you can prepare for an America with higher taxes. I’ll discuss this on Monday when I give you tips on how to prepare for higher taxes. Stay tuned and have a great weekend!

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{ 15 comments… read them below or add one }

Jason July 10, 2009 at 6:33 am

You make good points. I have assumed for a while that our system can’t work simply because those who want to run things are the last people that should. Their job isn’t to make things better it is to get reelected which means avoiding the tough calls like cutting spending.

Of course bipartisan historical perspective, revenues increased when we have had major tax rate cuts. (Kennedy, Reagan, and Bush) But I doubt that will be allowed to enter into the conversation.

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Michael Smith July 10, 2009 at 8:08 am

So many things I want to say about this – but I won’t use your comment space as a substitute for my own blog!

One big irk for me in the middle of all of this is the political “spin” that we as taxpayers are “investors” in GM (& other companies). If they return to profitability, we as investors will receive a return.

Wrong. Even in the best case scenario, the companies return to profitablity, but any “return” on this “investment” will just disappear into our enormous deficit, and we’ll still need the tax hikes to try and make up for all this spending (as you so well pointed out).

It just kills me that private companies either become more efficient or die in this economy, because we as the consumer choose whether or not to spend our money with them. But government can increase “profitability” by forcing us to “spend” our money with them.

Anybody else fired up about this??

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Atlas@mymoneyshrugged July 10, 2009 at 8:12 am

This is why I never understand why more PF bloggers do not spend more time talking about what our Government does is going to effect our personal finances? Most of the people/bloggers I talk to just keep sweeping like you said.

Remember: Every cent that the government spends comes out of taxpayers pockets. This ultimately hurts us, the people that care about personal finances. Ronald Reagan said “We are a nation that has a government” ,it seems like we are a government that has a nation.

Good post!

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Jason July 10, 2009 at 8:19 am

I just posted a little one but it is difficult to talk about this topic with out it becoming ridiculous mud slinging event. There are certain topic people can’t normally discuss and disagree on civilly and politics is one of them. I was very scared to put out my first Government/money post. Although I don’t really think they two concepts can be seperated.

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MLR July 10, 2009 at 8:47 am

Atlas@MMS —
That line of thinking brings us back to the Mercantilism days! “Every cent that the government spends comes out of taxpayers pockets.” The pie is not finite, as the past two centuries have shown very well. The government may spend $1 and get a $0.99 return on investment… thus every dollar they spent was only $0.01 out of our pocket. Or they could get a $1.01 return, thus making us $0.01! Or, the $1 they spent could have generated another $0.25 of wealth in the private sector, thus expanding the pie. I am only arguing the logic behind your statement… so don’t think I am saying that the government typically gets that return on their spending or that those numbers are feasible. Just illustrating a point.

andd…
In regards to higher taxes needed, I agree it will have to happen. One problem you see that is consistent is that anytime the government does cut spending or increase revenue and runs a surplus, what happens? People expect tax refunds because surely the government shouldn’t MAKE money?! Never mind the fact that:
1) We should run a surplus during good times to help smooth our economy out for when there are bad times (consumption smoothing) and
2) We could use that to pay our national debt down.

Until people stop feeling like the government owes them any surplus, we will have issues. We can complain about the national debt, the out of control spending, etc all we want… but its all for not if we take the surplus back as soon as the government gets their budget in line.

As far as human nature is concerned, I guess it makes sense. If:
-Senator A is promising “I’ll build more libraries! More funding for schools! etc”
-Senator B is saying “I’ll cut spending drastically and use the excess to pay off our debt!” and
-Senator C is saying “I’ll cut spending drastically and give you tax refunds!!”

… who do you think people will vote for? I would guess the vote would be pretty competitive between A and C because people either love their money being spent on societal good or they want their money back… paying off debt doesn’t get voters.

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The Weakonomist July 10, 2009 at 9:42 am

Atlas, the reason PF blogs don’t focus on larger economic issues is because that is not personal finance.  Ultimately, personal finance boils down to debt reduction, savings, investments, and budgeting.  Taxes are an inevitability that can’t be avoided.  There are tricks here and there to save $100 or so but the traditional PF community is wasting their time and their readers’ time by going on rants of deficit spending and raised taxes.  The two are related, but only so much as NBA basketball and NCAA basketball are related.  Some of us do cover both topics but it’s rare because the audiences are different.  This is the sort of subject I would touch on, and you can call it personal economics if you want.

Now, as for raised taxes.  It will come, however we don’t know where from.  The most unlikely situation is raised income taxes for the middle class.  It just won’t happen easily.  Corporate income taxes will be raised, perhaps health benefits will be taxed, and we could see the end of the capital gains tax.  The taxes will not be raised in the near term because that has already been tried, the govt did that during the Great Depression and some schools of thought blame its length on this action.  I’m fine with higher taxes because we actually need them to be higher.  However I will not pay additional taxes unless the government does their part and reigns in spending. “I’ll give if you give” sort of thing.  My vote: defense spending.

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Liz July 10, 2009 at 9:47 am

Although people like to make the point that tax revenue increased when Kennedy and Reagan had major tax rate cuts (I don’t think the same can be said for Bush’s tax cuts), one can’t assume the same would happen with future tax rate cuts. First, whether revenues increased based on the Kennedy rate cuts is inconclusive, since the rate cuts were accompanied by a 10% temporary income tax surcharge. After the surcharge expired in 1969, revenues stagnated until 1977.

Second, Kennedy’s cuts lowered the individual top rate from 91% to 70%. Reagan’s first cut took the top rate from 70% to 50%. Both of the “before” rates were very high, and it’s possible that there were benefits from the reduction as individuals were more motivated to earn dollars in the top rate range. It’s difficult to ascertain whether the second Reagan cut, from 50% to the much lower 28% made a meaningful difference in these revenues, since impacts of taxation changes generally take several years to show up in the economic data.

In contrast, the Bush tax cuts appear to have not had beneficial impacts on revenues. Under Bush, individual income tax receipts declined from 2001-2007.

Further, Reagan’s tax cuts were designed to “starve” the government, forcing spending cuts. This minimized the increase in the federal deficit from what it would have been otherwise. Bush did not take the same approach.

What’s my point? That you’re absolutely right. Taxes must go up, and people who point to the tax cuts of Kennedy, Reagan, and Bush as reason that they should not need to broaden their perspective and look at independent assessments regarding the impact of these historical tax cuts. Of course, my second point is that in return for those higher taxes, the government spending needs to actually help people in our country, rather than being spent in inefficient and wasteful ways.

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Jason Fisher July 10, 2009 at 11:10 am

Hoping for the government to spend money efficiently is a lost cause because those in charge use it to accomplish their only goal, re election. Our only hope is to make the tax system fairer via flat tax, “fair” tax (national sales tax) or some other method. Almost half of the country doesn’t pay any taxes so they have no vested interest in how they are spent.

I also think we need to do away with with holdings so each us is forced to actually write a check each quarter. That way people can really see how much they pay.

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MLR July 10, 2009 at 1:28 pm

A fair tax system would institute a 30% sales tax on ALL purchases (a $1 item would go up to $1.30.. fair tax advocates play tricky math and then do 30 cents divided by $1.30 = 23%… that’s not how most people think of sales taxes). Even government purchases (other than Education) would have to pay this tax.

So, look at our spending now and increase it by 30%.

The rebates would add another $600 billion of spending. Additionally, the rebates are paid out based on the poverty level income. Poverty level income as a way to gauge poverty is like BMI as a way to gauge obesity, it doesn’t work how it should. A childless couple would get a monthly rebate of $391 per month, but a single mother with two children would only get $329 per month. Sound fair?

Prices will rise with the additional 30% tax. I don’t understand how they claim prices would fall. Sales taxes never make the price go down. The fact that their is no more income tax makes no difference because the employer was paying the gross all along. The only way to lower prices is to cut costs… would people be taking 30% pay cuts? No? Of course not. So prices would raise.

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Ethan July 10, 2009 at 8:44 pm

Of course they *will* go up, but it’s not a must. We could spend far less. It’s perfectly possibly that we will do so, though no betting man would wager a penny on it. Expecting the government to fight the deficit is like expecting the Mafia to fight crime.

“When a man spends his own money to buy something for himself, he is very careful about how much he spends and how he spends it. When a man spends his own money to buy something for someone else, he is still very careful about how much he spends, but somewhat less what he spends it on. When a man spends someone else’s money to buy something for himself, he is very careful about what he buys, but doesn’t care at all how much he spends. And when a man spends someone else’s money on someone else, he does’t care how much he spends or what he spends it on. And that’s government for you.” – Milton Friedman

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SJ July 10, 2009 at 11:21 pm

Remember… there’s always the morbid option of no longer needing to pay taxes… i.e. death. So maybe it will get swept under the rug that long! Or a train will…

In the politicians terms after serving terms =)

Politicians goal is re-election is b/cuz we have such short terms. Honestly, what can you do in 2/4/6 yrs? Start a war? Start reform? Start a lot of things? When taxes are such an easy issue… ugha

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Affacturage July 11, 2009 at 3:15 am

Greed, Wall Street, or whatever couldn’t explain why all of a sudden greed was given free rein and why the collapse affected everyone at once. Remember the past, when a bank or business that failed, by not making financially sound decisions, only hurt a very small localized group, and remember when it wasn’t so easy to get a home loan or credit card unless you passed all the strict guidelines and there also were financially sound limits based on your income.

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Matt SF July 11, 2009 at 12:18 pm

Sad but true observation Kevin. The key caveat is the money has to come from somewhere or we risk losing our stellar credit rating.

I had a conversation earlier in the week where the gist of the conversation was…

What’s worse? Setting up a portfolio to protect you against higher inflation, or protect you from higher taxes?

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David July 11, 2009 at 1:55 pm

@ Weakonomist

Maybe taxes is one area where PF bloggers could improve. As an example, the debate between Roth IRAs and regular IRAs appears frequently, but normally the government tax rate is just an afterthought. Most articles that do discuss tax rates just say “tax rates could go up in the future, but there is no way to know.”

Another thing I’ve noticed that bothers me is people say that “I saved $XXX by contributing money to my 401(K), but in reality, the money hasn’t been saved – the spending is just delayed.

I definitely agree with you that defense spending should be the first to be cut. People argue that war is good for the economy, but I do not accept this on the surface. Money spent on weapons does not produce goods and services that go back into the economy. Also, most wars are normally followed by a period where we pay for the stuff that we just blew up.

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Kevin July 13, 2009 at 12:26 pm

@Atlas and @Ethan: Absolutely we could spend less. There’s just something that tells me that will absolutely never happen simply because cutting spending — and thus programs — is politically unpopular.

Great discussion. Keep it up. 🙂

@Matt_SF: Both? Definitely not an easy path to follow. Rock, meet hard place.

@Everyone: I typically don’t write about taxes much for a few reasons. A.) I’m not a qualified tax professional. B.) Talking about anything in government is an emotionally charged environment. I try to keep my politics personal. In fact Republican, Democrat, Independent… I’ll take them if they can balance the budget.

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