Sunday, April 13, 2008

Tax Increases Coming

"By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during the five years from 1996 to 2000. ... Proponents of bigger government invariably argue that allowing all or some of President Bush's tax cuts to expire is necessary in the near term to balance the federal budget, and necessary in the longer term to finance the retirement and health-care promises to the baby-boom generation. ... As has so often been true in the past, the economic damage caused by the tax increases and tax avoidance behavior will prevent the promised revenues from being realized. At the same time, the promise of higher revenues will encourage Congress to continue its profligate spending. As a result, a tax increase won't lower the budget deficit. ... Balancing the federal budget without a tax increase will require strong fiscal restraint. ... The strategy of ratifying spending with higher taxes would require that all federal taxes rise by nearly 60%, bringing them to a European-level tax burden", my emphasis, John Cogan & Glen Hubbard (C&H) at the WSJ, 8 April 2008.

I disagree with one thing C&H wrote, "balancing the federal budget without a tax increase" assumes one could balance it. C&H write, "the promise of higher revenues will encourage Congress to continue its profligate spending". Indeed! Congress will spend more no matter what.


Anonymous said...

Hello IA

I've been reading some of the statements that former Comptroller General David Walker has put out, plus I've even heard him on "talk radio" describing a not so bright future for the US.
Do you have an opinion on David Walker? Is he really telling it like it is, or would you consider him somewhat of a... well for a lack of a better word, a scaremonger?
If David Walker is the real deal, why didn't someone at the top start to deal with the SSI, Medicare, etc. problem?

Buzz Saw said...

Taxes won't help, the big money is already hidden overseas.

Independent Accountant said...

I consider DW an optimist! In about 1971, Richard Nixon "reformed" social security (SS), purportedly saving it for all time to come. That's not what happened. SS and Medicare are actuarially unsound. Their actuarial deficits are about $9 trillion and $44 trillion respectively. This can't be paid. The only question about them is: how they will be defaulted, through repudiation or inflation. My bet: inflation.
No politician will deal with the SS and Medicare "problem" because none wants to admit what must be done. People will have to go without. Some people will die because society can't afford to keep them alive. Which politician will speak that plainly?
Some history. SS began in 1872. What? Bismark started it in Germany after the Franco-Prussian War, 1870-71, to unify the German people. Bismark chose 65 as the retirement age since few lived to 65. Bismark was no fool. FDR, our ignorant patrician and Harvard man, also selected 65 as our retirement age not knowing why Bismark chose 65, i.e., Bismark made a promise to Germans that would rarely have to be kept.
FDR was such an ignoramus. Germany's economic system collapsed in the 1922-23 hyperinflation. Many blame WWI reparations for this, John Maynard Keynes being the principal proponent, see "The Economic Consequences of the Peace", 1926. I say nonsense. Germany's WWI reparations could have been paid as they were only 3% of Germany's GDP annually. What drove Germany bankrupt was its SS system founded 51 years earlier! Eventually Hitler dealt with his "undesireables". That's how I see it. Which politician wants to admit we face the same choices Germany did in 1922?
The actuarial deficiencies in SS were recognized 30 years ago. I discussed them with a senior SS actuary when I lived in Chicago in about 1978. Really. Peter Peterson wrote about this problem about 20 years ago. I'll have to find the reference.

Independent Accountant said...

"Facing Up", 1993.

Anonymous said...

Thats a lot to chew on.
I don't believe I've ever came across the connection between Weimer and SS. Makes sense.