Isn’t it time to cry “Uncle?”

Henry K. (Bud) Hebeler

2-22-09

The government won’t talk about it nor will most financial journalists, but there are secrets that will eventually come out in our tax bills. In www.analyzenow.com and my books I have often written about the deplorable state of our national savings rate and the fact that people would have to save over 20% of their disposable income for the next twenty years to overcome the lack of savings from the last twenty years. Apparently that damning statistic is just too horrible for the public to accept.

But there’s another “secret” that few have ventured to bring to light. And it has even bigger consequences. It’s the annual tax obligation politicians have been adding to our future tax payments. The major contributors are the national debt and entitlements such as Social Security, Medicare numerous civil-servant benefits, etc. In the past, the Feds have relied on inflation to reduce the apparent size of the national debt, but inflation won’t hide the entitlement obligations which are almost all inflation adjusted. Further, the new stimulus bills likely will add many more to the rolls of entitlement beneficiaries.

Since our deficits (annual contributions to the national debt) and entitlement promises are larger than our income tax can afford, we are adding huge increments that must be funded with government securities sold in large part to foreign investors who consider the return and risk to be more desirable than other competing securities. Much of the existing debt is also funded the same way and will have to be rolled over into new securities as the existing ones mature.

If we assume that a competitive federal interest rate will be 1.5% plus inflation and a term of 30 years for bonds, we can calculate the amount of the annual payments that our taxpayers will be saddled with for 30 years. (Paying only the interest is even more a disaster for future generations.) I estimate future taxes for the payback will have to be about 3.7 times the amount of federal income taxes at current income tax rates. (See figure.)

Annual Income Taxes to Repay 30 Year Bonds *
	$ Trillions
Expenses at current level of personal income taxes **	$1.1
Extra taxes needed for national debt reduction	$0.7
Extra taxes needed to support entitlement obligations **	$2.3
Net annual personal income tax receipts needed **	$4.1
Taxes needed ($4.1 T) divided by current taxes ($1.1 T)	3.7
* 4.5% interest on national debt, 1.5% + inflation on entitlements
** Amounts increase each year with inflation

These numbers do not add the entitlements of the stimulus packages, and dollar values are in “today’s” values, so understand that the tax payments will go up with inflation and the stimulus. The numbers above are only personal income taxes. One could argue that if corporate taxes go down, personal income taxes would have to go up further. On the other hand, corporate taxes are passed on to consumers as part of the price, so they are, in effect, a sales tax.

Because of the aging of our population there will be fewer people paying income tax, so the income tax burden per tax payer will increase as well. By the end of the 30 years there may be only two workers per retiree instead of the almost three today, and retirement incomes will be lower. All of this is exacerbated by the fact that there are an increasing percentage of those who file tax returns who not only have no income tax obligation but end up getting a net welfare payment which the politicians call a “refundable tax credit.”

Further, the numbers above don’t include any provisions pledged to bail out the financial sector which are about equal to the current national debt. (Pittman and Ivy in Bloomberg, 2/9/09) Nor does it include mortgage debts, credit card debts, automobile loans, and other personal debts which total several times the current national debt. Ah well. These are things that hyper-inflation can solve for the borrowers at the expense of the investors who lent the money—providing borrowers’ incomes increase with inflation.

There is more! This doesn’t include state and local government deficits which will add to state and local income taxes, sales taxes, property taxes, excise taxes and fees of various sorts.

Taxes this high would eventually use all personal income and leave nothing for consumption or savings. The only remaining employers would be Federal and State governments.

“Uncle!!!” Come on Congress. You’ve got to stop spending. Why not start by each member setting an example by cutting your staffs in half? Then, instead of increasing entitlements, face up to reducing the future obligations for Social Security, Medicare, government employees’ health supplements and pensions with cost-of-living adjustments that none of us in the private sector enjoy. Then revise your policies so that individuals take responsibilities for their own financial actions instead of the remaining tax-paying public. Finally, how about doing your own 1040 return yourself—by hand! Simplifying returns might cut the IRS costs in half or more. It’s time for a more responsible government.