It’s a quickly moving target, but as of August 04, 2009, the national debt is $11,653,350,207,790.34. With 307,212,123 people in the country (July Estimate), that works out to $37,932.59 per person. President Obama promised on the campaign trail to not raise taxes on people making under $250,000 annually. Is that promise now on shaky ground?
Soak the Rich
The main problem with taxing households making over $250,000: there aren’t enough of them. There were 2,240,000 of these ‘rich’ households in the United States in 2006, according to the Census Bureau. Seem like a lot? There were 116,011,000 households overall. Is it likely we can pay for proliferate spending on the backs of 1.93% of the country? No, it’s not very likely.
The true situation is even more sobering. As of March, the National Debt was expected to soar to $16.2 trillion by September 2012, an increase of around 12% a year. The current rate to service a 30 year bond is 4.45%. This means that if the debt was financed into a 30 year bond, interest payments alone would come to a cool $712 billion a year. Still think 1.93% of the country can pay for it? For comparison sake, the US GDP was $14.29 trillion in 2008, and in 2007, the top 2% paid 48.68% of all income taxes.
The Reality of Office
Realistically, promises of immovable taxes are the bane of Presidential candidates. The most famous example of the flip flop was from a recent Republican President- George Bush Sr., who spoke the famous phrase, “Read my lips: no new taxes!“. Unfortunately for President Bush, he soon found himself in a minor recession near the end of the 80s. His downfall was the 1991 budget, due in October 1990. He acquiesced to Democratic demands for tax increases, prompting the New York Post to run a headline: “Read My Lips: I Lied.“.
The realities of the office are much different than the demands of the campaign trail. No President wants to back off on promises made during a campaign, but it is sometimes necessary. President Obama will soon have to travel down the same path… with undoubtedly the same political fallout for the wrong decisions made. For Republicans, it will be schadenfreude… but Main Street will be taking the hit.
What Forms Can It Take?
Setting aside pigovian taxes on things like cigarettes (which are overwhelmingly smoked by those earning under $250,000), let’s assume that this theoretical increase will be the first actual tax on the hard-to-define Middle Class. The two politically expedient things for the President to push for are taxes which are not called taxes, or taxes which are not very transparent. In the first column are ‘fees and levies’ which transfer payments from the middle class to somewhere else for distribution. Under this category fall such fees as Government Health Care Premiums. Strangely, because of another campaign promise, taxing medical benefits themselves is in limbo.
- This Picture Seemed Appropriate. (lastig)
Under the second category of ‘call it anything but a tax’ taxes falls nontransparent taxes such as increased business taxes, Cap and Trade pass-throughs, and the (hopefully-not-an-option) value added tax (VAT). Business taxes are paid by increasing the prices of goods and services, so the tax is embedded in the price paid. Cap and Trade would work the same way- tax would be included in energy costs, completely hidden from the average consumer. The scariest of all the taxes is the VAT, a European styled Value Added Tax where a tax is applied at every level of production in a product, and prices already reflect the taxes applied (think Starbucks). The VAT is incredibly efficient and stealthy, and is exemplified in Europe where it coexists alongside higher income taxes. Luckily, the VAT continues to be talked down. However, some form of increase is coming, according to Timothy Geithner and Larry Summers (but strangely, the White House continues to deny their talking points). Where is the money to pay for all of the country’s debts? Squarely in the hands of the middle class.
What You Can Do…
Taxes are a part of life, but you should do your best to avoid future tax increases. If you are part of one of the 1.93% households making $250,000 or greater, your best bet is to get as much money in traditional IRAs to switch over to the Roth option in 2010. It’s all but decided that the Bush Jr. tax cuts will be rolling back in 2011 (but you hopefully knew this already and planned ahead with a tax planner).
For the rest of you, it’s possible that Roth deposits are also the way to go. In the case of a traditional tax hike, this would be the ideal method. In the event of a VAT or any of the stealth taxes mentioned in this article, the only way to hedge is to earn more money. Unfortunately, these consumption taxes will be paid whether you enjoy your carbon based energy sources now (or anything VATable) or when you retire. Want some good news? It’s unlikely your Roth will ever be taxed, but it could change shape dramatically. You should also consult the ubiquitous tax planner.
In my opinion, taxes are going up. You can weigh the evidence and draw your own conclusions. Someone will have to pay for all of the spending the United States is doing. There are a few ways which *seemingly* can get us out of our rut (at first glance; a future article on the Laffer Curve is in order): raise taxes, grow the economy so tax revenues increase, or cut government. Well, two choices; as Milton Friedman once said, “Nothing is so permanent as a temporary government program.” I’m definitely interesdte in your comments; add them below!
Bubble thumbnail sourced from www.flickr.com/photos/95118988@N00/1386970832, shot by Jeff Kubina.
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