What’s A Foreseeable Rate of Taxation?

You may recall that yesterday I commented that there is no realistically foreseeable level of taxation that will pay for the programs we’ve already got. Today the Tax Foundation has a little support for my assertion:

During the fiscal year that’s just beginning, fiscal year 2010, the federal government plans to spend $3.8 trillion dollars, the largest annual expenditure ever. On the revenue side, taxes will bring in about $2.3 trillion, so the federal government is creating a shortfall of approximately
$1.5 trillion. That projected deficit will vary as the months pass, but it may well end up being even higher than the record-setting deficit in 2009 of $1.4 trillion. Those huge amounts translate into a federal government that will spend $33,000 on each household but that will raise only $19,000.

Although President Obama and the Congress do plan to raise taxes, which will cut into the deficit, they also have new spending plans, leaving the budget with historically huge deficits throughout the next decade. Those deficits will be financed by selling U.S. Treasury bonds to people all over the world and paying them back with interest in years to come. But instead of borrowing, could a congress willing to bring taxpayers the full bill for this year’s spending erase the deficit by raising taxes this year?

And here’s what they came up with:

I’ll go out on a limb here and predict that isn’t a realistically foreseeable level of taxation. That means that we can’t get our fiscal house in order by additional taxes alone. We’re going to need some spending restraint and some borrowing.

Keynesian theory says we should balance counter-cyclical stimulus with pro-cyclical cuts. Unfortunately, we’ve never had the stomach for making the cuts and the result is the mess that we’re in right now.

Don’t expect growth to pull our onions out of the fire, either. Just as you don’t count on winning the lottery to pay your rent, don’t count another dot com boom to enable us to continue our profligate spending ways.

Hat tip: TaxProf Blog

17 comments… add one
  • Does this take into account that the 2009 deficit is unique, owing to TARP payments as well as something on the order of revenues coming in around $400-500 billion less than expected?

  • That question is answered at the link, Alex.

    “Unique” is an interesting word, Alex. I note that Dr. Krugman’s column this morning calls for another stimulus package. How confident are you that there won’t be another TARP program?

    In my view the way to ensure that it is unique is by emphasizing and re-emphasizing points like those I’m making here.

  • I’ll go out on a limb here and predict that isn’t a realistically foreseeable level of taxation. That means that we can’t get our fiscal house in order by additional taxes alone. We’re going to need some spending restraint and some borrowing.

    Sure we can, and we have guys like Michael who will work harder and more as his taxes go up. I don’t see the problem at all.

    Keynesian theory says we should balance counter-cyclical stimulus with pro-cyclical cuts. Unfortunately, we’ve never had the stomach for making the cuts and the result is the mess that we’re in right now.

    Translation, all the new spending wont go away. In fact, most of it will likely stay and grow over time.

    Don’t expect growth to pull our onions out of the fire, either. Just as you don’t count on winning the lottery to pay your rent, don’t count another dot com boom to enable us to continue our profligate spending ways.

    No kidding. Growth rates haven’t been all that great and with higher taxes, or at least at the levels near what we see above it would be considerably lower.

    The fiscal situation has been pretty much destroyed by both Democrats and Republicans. And the above numbers probably don’t look out much past 2010 and thus ignore things like the short fall in Social Security and Medicare. Of course some dimbulb will show up and say, “Oh Social Security is fine.” Problem is when you have a $1.5 trillion deficit, national debt that is going to be quickly approaching 100% of GDP, and a $10 trillion (NPV) shortfall in Social Security a $45 trillion (NPV) shortfall in Medicare, not it isn’t fine.

    But hey, if we elect just the right philosopher king why everything will be okay. Unfortunately Obama isn’t that philosopher king. The first hint was that he was a product of Chicago politics.

  • Another thing that I don’t think that many people are taking into account is that interest rates are at historic lows right now—nearly zero. They have nowhere to go but up and that means that interest payments will start growing, too.

  • Andy Link

    It pains me to say it, but this mess almost makes me wish for a decade or two of double-digit inflation.

  • Drew Link

    Those tax rates would cripple the economy almost instantaneously. The deficit argument is a fascinating one, and useful in separating partisans from analysts or realists.

    The government has run a deficit every year since the early 60’s. (Clinton apologists’ claims of that one year situation aside.) Both flavor of Presidents and Congresses. So whether its Johnson’s guns AND butter, Reagan paired with a Democratic Congress, Clinton throttled by a Republican Congress or Bush when he had a Republican Congress but earmarked the money away, its always the same – deficits. Blood on everyone’s hands. And we might cite the current situation as “unique,” but look back three years from now and there will be nothing unique about it.

    And is it any wonder? Spending is packaged and sold to the voter as necessary “for the children,” “the helpless,” or to “save the planet.” And of course no one will ever have to pay, except as we are told by the current crop of politicians, just 3 out of 100. In other words, your neighbor, not you………..or your great grandchildren might have to pay, so who cares? The truth is that voter selfishness and irresponsibility – sanitized as “voting your self interest” – is to blame. Not the politicians who capitalize on it. They are simply behaving like, well, politicians.

    I know the phrase was used in a different context and meaning years ago, but the truth is we have met the enemy, and the enemy is us.

  • It pains me to say it, but this mess almost makes me wish for a decade or two of double-digit inflation.

    And that is EXACTLY what the bond markets are looking for. Any hint that the Fed is going to “solve” the problem via inflation.

    BTW, its still a tax.

  • Hi Dave,
    Economist Arthur Laffer proved that above a certain level, raising taxes actually decreases tax revenues. I’m sure you’re familiar with this.

    I don’t expect the neo-Marxist in DC to be familiar with this, but it’s true. It will get even worse if he manages to shove cap and trade and ObamaCare down our throats, because they are actually tax bills.

    And despite the disclaimers of some people on this board, Obama is indeed spending at a much greater clip than any of the presidents named above.

    And the problem is that in the case of someone like Presidents Reagan or FDR, the deficits ‘disappeared’ because the pie expanded as the economy grew. The problem with Obama is that he is not only spending at a much higher rate but that he is spending the money largely on rewards to his political allies rather than investing in anything likely to grow the economy in the future. We may get to the point of selling off vital government assets to keep up – which would suit Obama’s backer George Soros just fine, if you examine his history. The trillion dollar ‘stimulus’ was entirely wasted. The only sector adding any jobs now is government, and that’s unsustainable.

    Obama’s an unmitigated disaster.

    The Fed needs to raise interest rates to continue to attract foreigners to buy our debt, but can’t because of what that would do to Obama politically. The big plan they have, I think, is to destroy the dollar’s value so that we’re repaying debt in cheaper dollars.

    They might want to check what happened when Argentina tried that. There’s a price to pay.

    The best solution is to hope that Congress can delay Obamacare , Cap n’ trade and any future ‘stimulus’ ideas from Obama until there are enough fiscal hawks in Congress to stifle him.

    Once he’s history, we will have to make massive spending cuts, invest in things like nuclear power, domestic oil drilling and gasification and cut taxes.If we do that, I think the American economy will come back.

    Meanwhile, we had better all hunker down, prepare for interesting times and hope for the best.

    Regards,
    Rob

  • Economist Arthur Laffer proved that above a certain level, raising taxes actually decreases tax revenues.

    Not quite. The Wikipedia article is pretty good. The idea goes back several hundred years. The actual concept is that there is an optimal range for taxation. When you’re within the optimal range and you reduce marginal rates, revenues increase. When you get outside the optimal range and reduce marginal rates, revenues decrease. There is such a thing as reducing marginal tax rates to the point that, when we reduce them further, revenues go down, too.

  • pavan Link

    Here’s a simple minded proof that an optimal level of taxation exists.

    There are 2 tax rates that bring in no revenue to the government, they are 0% and 100%. Therefore, there is some level in between that is optimal. It’s probably around 20%.

    However, Marxists never lower taxes, so logical arguments are irrelevant. In fact, a Marxist would not accept that a 100% tax rate would bring in 0 revenue.

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