Taxes, National Debt, and, Oh – More Taxes

Why only the private sector can repay our National Debt

There has been much debate about increasing taxes to help balance the budget and repay our sky-rocketing National Debt.  The debate centers on the fact that even though annual federal, state and local tax revenues have increased by 18% over the last decade, this increase offsets a mere quarter of the same period’s 71% rise in government spending.  Today, nearly 50 cents of every dollar spent by the government is borrowed. 

Regardless of the fiscal path chosen, tax-debaters should keep two facts in mind as they seek a solution: 1) Tax revenues must increase (or government spending decrease) by at least 50% simply to balance the budget, and 2) tax revenues must increase (or government spending decrease) by substantially more than 50% BEFORE the U.S. can begin to repay the record $15.7 Trillion (over $50,000 for each man, woman, and child in the US) it has borrowed so far. 

Another point often missed by those debating this issue is the fact that only taxes generated by private enterprise can repay our Debt.  Taxes paid by public sector employees (and the ever-growing number of those working for government contracts) cannot. 

Why?  “Taxes” on those who receive government funding act as a decrease in government spending - not a “tax” in the traditional sense.  It’s like someone giving you a dollar and you handing them back 50 cents.

Why is this important?  Even if taxes on government salaries and funding were increased to 100%, the total “tax” collected would simply make government spending equal zero.  Beyond freeing up taxes paid by the private sector, which could now be applied to the debt, public sector taxation can do nothing – ABSOLUTELY NOTHING - to repay our National Debt.  Only taxes paid by vastly growing the private sector (and shrinking government) will give us any hope of repaying one thin dime of our collective debt.

How can this be?  Government spending nearly always generates less in tax revenue than the amount spent (unless the combined savings rate and import rate is negative). 

For example:  The government borrows and spends $1,000.  The current approx tax rate, saving rate, and import rate are 15%, 3.7% and 3.8% respectively.  The result: GDP increases by $4,476, savings by $161, and $166 is sent to other countries in the form of exports purchased.  Unfortunately, however, only $671 in new taxes are generated.  Who repays the $329 net-increase in the National Debt? 

Increase the tax rate to 60%, every $1,000 of new government spending still digs the hole deeper by over $100. 

If the government can’t recoup more than it spends in a given year (such as with 100% tax on all government spending or making its spending equal zero), any money that ultimately repays our $15 trillion National Debt must come from revenues generated by private enterprise.
 
Higher Taxes are Here: Those who desire higher taxes, however, needn’t worry – they’re already here!  Health Care Reform (via The Patient Protection and Affordable Care Act of 2010) will raise $450 billion in new tax revenues, partially offsetting its estimated $900 billion cost.  Below is a list of tax changes that have already occurred and those you can look forward to next year.

2010:

• $50,000 tax on nonprofit hospitals who fail to conduct financial needs analysis and create financial assistance policies for those in need.
• A 10% tax on indoor tanning services provided after June 30th 2010.

2011:

• Owners of Health Savings (HSA), Medical Savings (MSA), Flexible Spending, and Health Reimbursement Accounts can no longer use them to buy over-the-counter medications without paying income tax and additional penalties.
• Penalty for distributions from an HSA or MSA that are not used for qualified medical expenses increased from 10% to 20%.

2012:

• A $2.5 billion tax will be divided among manufacturers of “branded” prescription drugs based on market share.  The tax increases to $4.1 billion by 2019, then decreases to $2.8 for following years.

2013:

• Medical expense itemized deduction threshold will increase from 7.5% of Adjusted Gross Income (AGI) to 10% of AGI.  For those 65 years or older the percent will remain 7.5% until 2017.
• The annual contribution to Flexible Spending Accounts for medical expenses will be limited to $2,500.
• A 2.3% tax on medical devices used by physicians or implanted in patients (from tongue depressors, to bedpans, to replacement knees).  Tax is paid by manufacturers and does not apply to items purchased directly by the general public such as eyeglasses, hearing aids, or devices.
• A 0.9% Medicare surtax on individuals earning wages of over $200,000 per year and couples with combined wages exceeding $250,000 per year.  Tax will be calculated on the taxpayer’s personal income tax return.
• Employers will lose the deduction for the subsidy given to those who provide retiree’s with drug benefits that equal those of Medicare Part D. 
• A 3.8% Medicare surtax on those with net investment income over certain amounts.  For individuals, the tax will be imposed on “investment income” that causes their income to exceed $200,000 or $250,000 for those married filing jointly.  Investment income includes interest, rents, annuity income, capital gains, dividends, and royalties.  Although the tax may not impact the sale of most primary residences, it may affect those selling second homes, rental, and investment properties.

Today, I put on my economist cap and discussed taxation’s relationship to our National Debt.  I also shared a few often-overlooked tax increases brought about by Health Care Reform.  Unfortunately, the employer tax rules going into effect in 2014 are too complex to relate in a single article.  As always, if you need assistance with a particular tax issue, please feel free to contact our office to consult with a tax professional.

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