March 13, 2011

Is America Destined for Major Tax Hikes?

Consider the situation :

  • record high national debt
  • increasing deficit spending
  • we just went through a nasty recession
  • unemployment recently hit 10%
  • American manufacturing jobs are being lost to Asian factories 
  •  Social Security is insolvent.    

That is a fair description of the financial situation we find ourselves in as a nation today.   Many people look at the state we are in and declare that our taxes must go up in the future.   

However, all those things listed above also existed in the 1980's as well.   Back then we had record debt, deficit spending, 10% unemployment and it was Japan that was about to 'eat our lunch' and 'own America'.   Yet today about 30 years later our taxes have actually gone down.  

I'm not sure why so many people are convinced that now is the time that taxes must go up.   I understand the logic that its hard to see how deficit spending and large debt like we have "can't go on forever".  

Taxes will probably go up in some way in the future.   That doesn't mean my taxes or your taxes will go up significantly.   Taxes could go up marginally for high income earners and go down for low income earners and end in a net increase in tax revenues.    If you look back over the past few decades the tax rates for median income level earners didn't change a whole lot.  

The national debt won't "crush" us.    We as a nation have had a pretty large national debt for about 70 years now.   After WWII we had a large debt built up from the cost of the war.    That debt was never paid off.   Our debt just kept getting bigger.   In fact we've carried a substantial national debt the entire time.  The national debt didn't crush us in the 1950's.   The debt didn't cause the end of America in the 1970's.   We've managed to exist and even thrive at times for 70 years with a substantial debt level.   Of course I'm not saying our debt is a good thing.  But its nothing we haven't been dealing with since long before I was born.

Recessions and unemployment are temporary.    Things feel pretty dire lately with the recent recession and lingering high unemployment.   After the Great Recession it is easy to feel shell shocked, and scared about the economy.  This past recession hurt a lot.  It didn't and won't destroy us.

Theres always foreign competition.    Today China is the major worry for many people.   I hear people talk about how China is "eating our lunch" or how they "own us".    But this is exactly what people thought about Japan back in the 1980's.   Japan didn't turn out to be the end of America that many thought they would be.   China's boom will probably eventually fade as well.   Ten or twenty years from now its unlikely that China will be growing as fast as they are now.   If China eventually busts or at least slows down then some other country (or region) will leap into prominence as the next big growth economy.   Then that new contender will be declared as "eating our lunch" or "owning" America.

Social Security has always been "on the brink of failure".   Ever since Social Security was started people were declaring how it was doomed to imminent failure.  This amounts to 'crying wolf'.  Sooner or later congress will slap a fix on it with another tax hike on it or change in benefits.   They've raised taxes 20 times in the history of the program already.   Who wants to wager that they might manage a way to do a 21st rate hike sometime in the next 1-3 decades?   Social Security is not doomed, its just due for some routine maintenance. Yes this IS likely to cause a tax hike.   But the rate hike will be in the 0.5% - 1% range.   Not exactly something to plan your entire economic life around to avoid.

We've had debt and deficit spending for a long time.  We've had foreign competition before and we'll have it again.   Recessions and high unemployment come and go.   Social Security may need a fix but thats nothing new.

Bottom Line:   There isn't anything to see here folks.   Taxes may go up in the future but its not a given.  Most of the problems we have now we've been living with for decades.

1 comment:

  1. I agree, the debt can be handled. The US WWII debt was 120% of GDP, now it is about 85%. Japan has had a 200% debt ratio for the last 20 years. Both countries have thrived despite this debt. Of course no debt would be nice.

    I would point out that Republicans have almost solely run up this debt since Reagan, almost all of it if you include the unavoidable bailouts under Obama. They did this by eliminating progressive income tax brackets and with tax cuts.

    To my mind this was a deliberate strategy to cry ruination and defund post-FDR social programs. From Reagan's "deficits don't matter" to Dick Cheney telling Tres. Sec. Paul Oneill "You know, Paul, Reagan proved deficits don't matter," later firing him for complaining about it.

    This as also resulted in a widening of the distribution of wealth in this country back to levels not seen since 1929.

    A re-imposition of pre-Reagan income tax brackets is the solution to all these problems and stimulus spending to stimulate the economy. Let's modernize our infrastructure to have something to show for it. It might take 35 years to retire the this debt but we have done it before so big deal. It is really a contrived red herring beyond that.

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