States Visited

Sunday, February 15, 2009

Uh, oh...

In the process of doing a little statistical digging I came across some information I felt I needed to share. President Obama spent much of his campaign talking about cutting taxes on the middle class and making the top 5% pay more of "their fair share." This is tried-and-true political rhetoric and I have made mention of it before. Even now, in the midst of the greatest financial collapse in eighty years it continues. I have, here and in other places, been trying to explain the dangers of the bailout. But, here is some concrete numbers that provide some scale of the problem:

In 2006, the last year for which data is available - and prior to the bailouts and stimulus - the total income (yes total income, not total taxes) of the top 9% (there is a natural break in the data at that point - it is tax returns with an AGI of $200,000+) of tax returns filed plus the total taxes paid by the bottom 90% of taxpayers is still less than total federal expenditures. Let that roll around in your head for a moment. Even taxing the top 9% at an effective tax rate of 100% still isn't enough. [Yes, there are other taxes, but the individual income taxes are by far the largest source of "revenue"]

This data is from before the bailouts, the stimulus and all the other Obama plans.*

Then, just yesterday, I came across some more jaw-dropping information. The federal government prepares its financial statements on the "Cash Basis." Generally, items do not appear on the financial statements until a cash transaction has occurred. Thus, debts and liabilities do not appear on the statements until an actual transaction has occurred, for example, bonds are issued. If you watch the news or read the paper the debt figure given, $5 trillion or $8 trillion or whatever it is, generally corresponds to the actual debt outstanding. This is important information but it doesn't tell the whole story for it doesn't include future obligations for which a cash transaction is yet to occur. All publicly traded companies prepare their financial statements using GAAP - Generally Accepted Accounting Principles. GAAP calls for all current and future obligations to be listed.

I have found two different groups that have determined the government debt on the GAAP basis and its a little, tiny bit higher:

$55 - $64 trillion, depending on the source. Sixty trillion dollars. Or roughly the equivalent to the GDP of the ENTIRE WORLD.

*I realize that my personal experience does not provide a random sample from which to extrapolate general claims, but my personal experience, combined with reading hundreds of posts on the Internet and hearing hundreds of interviews with people on television leads me to the conclusion that the vast majority of people in this country believe the top 10% (or 5% or 1%, it really doesn’t matter) do not pay “their fair share” (whatever that means) and if they did all our problems would be solved. In one form or another, and to greater and lesser degrees, this is the Democrat position. In addition, while the Democrats may want to cut or reduce given programs (defense spending, for example), cutting total government expenditures is not an option. For the last year in which data is available, the total combined adjusted gross income for ALL taxpayers was about $5.5 trillion. We are quickly approaching the point where it is going to require such a huge percent of all income to cover our obligations that it will begin eroding the economy. Shifting around the tax burden or even shifting around who makes the money will not solve this problem.

The Republicans, on the other hand, continue to push the ‘trickle down’ idea of tax cuts - that cutting taxes on the highest income earners and allowing them to invest that money will lead to higher total tax revenues because of the growth of the economy and middle class incomes. Empirically, there is some truth to that statement, but it assumes that government expenditures will remain constant or decrease over time and that inflation will remain very low or nonexistent, among other things – none of which exist in the real world. They, too, want to cut or eliminate certain programs (welfare programs, for instance), but cutting total expenditures is not an option. The connection to the 10% data here is actually more about what it implies about the bottom 90% - given that expenditures are not likely to decrease, the Republican plan to grow total revenues by ‘trickling down’ is ridiculous. The Republican deceit is, to me, more insidious because it is so much harder to detect. The ‘bracket creep’ of climbing incomes pushing people into higher and higher tax brackets, combined with the horrific effects of inflation, makes for a giant wealth transfer from the people (all of them) to the government and it punishes the poor and lower income people the most.

The bottom line is that the entire situation was unsustainable BEFORE the bailouts and the "stimulus" and neither party has any intention of doing what it will take to fix it. Now, we've just made it horribly worse. But politicians aren't stupid. Most of the effects are going to be through inflation and most people will never realize what is really happening. The people and the government will just blame "greedy" businesses for raising prices. Keep your eyes open - I'm willing to wager that we see some form of price controls, in an effort to stop "greedy" businesses from raising prices, before Obama leaves office.

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