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:

2011:

2012:

2013:

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.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.