Reality Check: Even a 50% Increase in Your Taxes Would Not Resolve U.S. Debt Crisis!

The downgrade of U.S. Treasury debt from its long-held AAA rating  was not due to the hideously partisan debt ceiling debate [but] because the U.S. has been addicted to debt for years and additional downgrades will come unless we change…The U.S. has over $14 trillion in debt and, even after reaching a debt ceiling deal, is anticipated to add another $7 trillion over the next decade [and that hardly represents a change!] Even if Congress managed to get a $500 billion income tax increase through, and even if the increase raised $500 billion, it would not come remotely close to solving the problem. Government debt would still soar. [Let me explain.] Words: 891

So says Kurt Brouwer  (www.fundmasteryblog.com) in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Brouwer goes on to say:

If you are like me, you have grave doubts about Congress’s ability to cut spending even in accordance with the debt ceiling deal. Therefore, if anything, the $7 trillion in additional debt may be on the low side. Here is what Bill Gross, portfolio manager of Pimco Total Return wrote in his latest monthly Investment Outlook column:

• Nothing in the Congressional compromise…makes a significant dent in our $1.5 trillion deficit.
• In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
• Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.

Now that the debt ceiling legislation has been passed, we can and should move on to the greater and far more important issue — huge annual budget deficits and burgeoning debt. Despite all the talk about trillions in budget cuts, Gross points out that there is very little substance to those claims saying “…The Office of Management and Budget (OMB) estimates that future deficits will be reduced at most by .5%…” Less than 1/2 of one percent (0.5%) is not much of a reduction and even that is still hypothetical.

Right now we are hearing anguished cries about budgets being slashed, but the reality is that there is nothing in the debt ceiling compromise other than a modest slowing of the rate our debt is growing.

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Let’s take a look at the future deficits as foreseen by the Congressional Budget Office (CBO) and you can judge for yourself if there is any budget cutting at work.

The [above] projections show that deficits will be at or above $1 trillion as far as the eye can see… We will quickly burn through this latest debt ceiling increase and we will have to go through this whole thing again very soon.

Can a tax increase bridge the spending gap?

Even if Congress managed to get a $500 billion income tax increase through and even if the increase raised $500 billion, it would not come remotely close to solving the problem. Government debt would still soar.

Just to put that $500 billion amount in perspective, last year all Federal income tax revenues were just a bit over $900 billion so an increase of $500 billion would imply an increase of over 50%. Rather unlikely I’d say. Nonetheless, even if the Feds got $500 billion in new revenues, we would still be adding debt at the rate of nearly $1 trillion per year. The projected deficits shown above average about the level of the current deficit, $1.48 trillion. By my math, $1.48 trillion minus the extra revenues of $500 billion equals an ongoing increase in debt of just under $1 trillion — per year.

Conclusion

If you hear someone complain that we [should] raise taxes, just ask them how much they think tax revenues should increase. Then, pose the issue as I did in light of projected deficits. I think it should be clear by now that even a huge — that is over 50% — increase in income taxes cannot possibly bridge the spending gap.

We have to get real here folks and accept the fact that we are addicted to enormous deficits and increasing debt. Then we have to accept the fact that hard choices [that is, reduced spending] need to be made.

*http://blogs.marketwatch.com/fundmastery/

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Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

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