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This is the second of two articles on why the taxes will
go up in the US.
Click here for Part One.

We may have no choice but to raise taxes. There are
those that say this is counterproductive. That it
disincentivises work and production, etc. However,
most economists believe that that there is a strong
relationship between tax rates and total tax revenue in
the current range of tax rates. So let’s take a look at,
for example, how much additional tax revenue would
be generated if the “Bush” tax cuts were allowed to
expire in the future.

The difference in the two tax rate structures (shown
below) results in a tax bill roughly 15% higher under
that past schedule for the average taxpayer, and 13%
higher for those in the highest income taxpayers.  Let’
s say that the total tax revenue would be
approximately 13% higher for the US treasury under
that structure, assuming no “feedback loops” - that is,
that the tax structure itself doesn’t otherwise affect
economic activity.  This is a big assumption, but we
are looking at the overall picture as a starting point
here.  
_________________________________________
Here is the different tax rate structure now (Bush) and
prior to 2004:

Income tax structure
    Prior to 2004
2010 tax structure       tax rate structure
(adj for inflation)
10%    8,375                   15%    31,000
15%    34,000                 28       78,800
25%    82,400                 31      159,600
28%    172,000               36      346,000
33%    374000                39.6   346,000+
35%    374,000+
_________________________________________

Let’s assume average economic growth (3.0% GDP
growth) over the next five years. If these tax increases
were put into effect, they would almost bring tax
revenue up to the level of expenditures we had in
2008. The 3.0% growth compounds to 16% bigger
economy and tax revenues in the fifth year.  We can
add the 13% additional revenue as a result of the tax
increases, for a total of 29% additional tax revenue.  
Unfortunately we will be in 2015 by then. It is unlikely
we will have the will or the ability to lower federal
expenditures to the 2008 level in 2015. This illustrates
the necessity of the other key part of the equation,
spending reductions.

I doubt we will have the political will to cut federal
spending and programs to the extent we need to. The
CBO’s estimate of expenditures in 2015 is $4.2
trillion. The level of tax revenue generated by the
above scenario is $2.8 trillion (higher tax rates and
2008 level rollback spending). They also assume that
tax revenues will be much higher, but it is hard to see
how when they don’t even assume tax increases. But
in any case, it just illustrates how far off we might be
even if we increase taxes. It also highlights that we
need to make spending cuts, just to get to a point
where we are not running trillion dollar annual deficits.  
There really is no other alternative than to raise taxes
and cut spending.  

A primary reason that spending is going up over the
next few years is the growth in entitlement program
spending. This is primarily Social Security, Medicare
and Medicaid. The spending in those programs is
going up largely because of demographics. We have
some tough choices to make concerning what is truly
important for the US to be spending it’s money on. But
the spending picture will get worse through just this
natural growth. This reinforces the point that more
revenue is needed in any case, and every other part
of the federal budget must be put under scrutiny to
determine if it is truly necessary.  

Although this direct fiscal situation is bad enough, it
leads directly to a larger problem of  the financial
condition of the US. We have already seen the
decline of the US dollar over the last decade and
especially over the past few years. This is in large part
because of the federal deficits we are running as well
as some of the financing techniques undertaken by
the Fed.  They point to an even bigger crisis  looming
– a situation where the US must start to pay drastically
higher interest rates for it’s debts. This will flow into
the cost all entities, public and private, will pay for
debt. This can lead to a cascading crisis that will
threaten our entire financial system, our future
standard of living and way of life. We have been
warned. We know that we need to act, and we need to
act now.  


* Congressional Budget Office   

Click here to return to Part One of Why Your Taxes
Will Go Up

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_________________________________________
Why Your Taxes Will Go Up. Here are
the facts. The US must close its budget
gap or risk losing its way of life. Part
Two.
Have Questions? Our consultants are available to help you
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consultation concerning any financial issue facing you. We
can help. Please contact:
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Back to Top
Have Questions? Our consultants are available to help
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
Have Questions? Our consultants are available to help you with
any financial question. We can also provide in-depth
consultation concerning any financial issue facing you. We can
help. Please contact:
Best-Financial-Advice.com


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