Tuesday, May 30, 2017

Let's Raise Taxes Already!

The Trump disaster is upon us. More specifically, the Trumponomics disaster is upon us. That is, the President and his Republican goons are going to try to pass a massive tax cut to benefit the super rich.

You don’t have to be an economist to see why this is a disaster. And I am not even talking about the immorality and  the injustice of making the rich even richer and the poor even poorer. No, what I am talking about is what this is going to do to the federal budget and the national economy.

One of America’s most obstinate problems is that its government is increasingly broke. It is broke  the same way that you would be broke if you kept increasing your debt year after year, and kept spending more and more of your income to finance your debt,  i.e. on  interest payments.  Each year you would have less  money left over to buy things. This is a vicious circle. Currently, Uncle Sam spends each year nearly  half a trillion (!) dollars  more than it collects  in taxes.

In order to continue to provide all the necessary services, the  government has  to spend more than it collects. To make up the shortfall, it has to borrow money  by issuing treasury bonds. It has been doing this for decades, and  the accumulated federal debt keeps growing. It now stands at $20 trillion, which is roughly 106% of the GDP.

Table One shows what’s been happening since the 1960s:

                                                        Table I: Growth of US Federal Deficit: 1960 to 2016

Amount borrowed
President(s); event(s)
Cumulative Debt;
% of GDP
$22 billion =
$7.5 billion per year
$309 billion
= 51% of GDP
$50 billion =
$8.3 billion per year
Johnson; Vietnam escalation
$359 billion
= 38% of GDP
$61 billion = $12.2 billion per year
Nixon; Vietnam war
$420 billion
= 30% of GDP
$134 billion = $44.4 billion per year
Ford; Vietnam war
$554 billion
= 30% of GDP
$228 billion = $57 billion per year
Carter; Inflation
$782 billion
= 30% of GDP
$1260 billion = $158 billion per  yr.
Reagan; “Starve the beast;” Tax cuts
$2.1 trillion
= 34% of GDP
$994 billion = $249 billion per yr.
Bush I
$3.1 trillion
= 50% of GDP
$2.3 trillion =
$287 billion per year
$5.4 trillion
=  56% of GDP
$4.5 trillion =
half a trillion per yr.
Bush II; 9/11; Wars;
Tax cuts
$9.9 trillion
=  68% of GDP
$9.5 trillion = $1.24 trillion  per yr.
Obama; Great Recession
$19.4 trillion
= 106% of GDP

The last time this country enjoyed a federal surplus was during a few of the Clinton years, when the Cold War had ended and we reaped a “peace dividend.” After that,  all hell broke loose - 9/11, several wars, the great recession, etc. And even though the  government was called upon to meet an  unprecedented number of new responsibilities, politicians such as George W. Bush enacted vast tax CUTS. Today, the ruling party and its know-nothing  President continue to bark up that very same  wrong tree, clamoring for more tax  cuts. Obama, of course, had no choice but to also contribute to the debt. His Keynesian  response to the Great Recession was what saved us all.    

But make no mistake about it: We ARE going broke. The government is spending a greater proportion of its income on servicing its growing debt,  and it is  therefore increasingly unable to meets is responsibilities to the American people. This is reminiscent of what was happening in France in the second half of the 18th century, which  led to the French  Revolution. Louis XVI  and Marie Antoinette paid dearly for bankrupting the state.

The list below shows the steady increase in the government’s interest payments over the past 66 years:

Year                Fed. % payments:
1950                            $6     billion
1960                            $14   billion
1970                            $35   billion
1980                            $113 billion
1990                            $293 billion
2000                            $356 billion
2010                            $395 billion
2011                            $416 billion
2012                            $420 billion
2013                            $422 billion
2014                            $431 billion
2015                            $440 billion
2016                            $454 billion

The growing cost of servicing the debt is as wasteful as burning dollar bills - by the billions! All this money could be spent on services, on the safety nets that are more and more needed by our increasingly impoverished population, on science, education, health care, infrastructure, you name it.

How much of its money does the government waste in this manner? Just take a look at a recent (2015) federal budget:
The total size of the budget is about $4 trillion. Below is a list of  the major budgetary categories:

1. Social Security: 33.3%
2. Medicare and health: 27.4%
3. Military: 15.9%
4.Interest payment: 6 %*
5. V A benefits: 4.2%
6. Food and Agriculture: 3.5%
7. Education.:  2.7%
8. Transportation:  2.2%
9. Housing and Community: 1.6%
10. International affairs: 1.3%
11. Energy and Environment: 1.2%
12. Science: .8%
* This source understates the amount spent on debt servicing.  Like all borrowers, the government has benefitted from the extremely low interest rates of recent years. Sooner or later the rates will rise, and the government’s interest payments will skyrocket.
Even so, interest payment is already the fourth largest expense on the list, exceeding all categories except Social Security, Medicare and  military spending.
Imagine what wonderful things the government could fund with the hundreds of billions of dollars it wastes on %? How much scientific research? How many college scholarships? How many roads and bridges? How much new housing? How much on  renewable energy?  How many improvements to  the national parks? Public transportation?  Support for arts and  music? Affordable universal health care?

The downward spiral of out-of-control borrowing can only be stopped through a combination of (1) belt tightening and (2) major tax increase, if only temporarily. Debt financing is already beginning to  crowd out even the most essential services and safety nets. This the meaning of the cruel Republican  efforts to cut back Medicaid, to repeal Obamacare, to abolish defined-benefits retirement plans, to cut and cut whatever basic services and safety nets help the downtrodden, while at the same further reducing the taxes of the rich. 
Quite the opposite is needed: A massive tax increase, hopefully a temporary one, to eliminate the debt, to break the vicious cycle. This shouldn’t be  difficult, especially if done progressively. After all, there is an obscene concentration of wealth in this country. 40 years ago, the average CEO made about 30 times the salary of his average employee. Now, that ratio is 300! Can  a CEO not get by on a million and a half a year? Must he make ten times that much?

© Tom Kando 2017;All Rights Reserved

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