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Tax Rates and Tax Waste   (January 22, 2007)

You, dear reader, do not tolerate unsupported claims or muddled thinking--much to my benefit. You make me do more research and clarify my thinking, for which I'm grateful. My recent entry on taxes brought a number of thoughtful responses, politely calling me to explore issues left unaddressed or back up unsubstantiated claims.

First up is astute reader Greg B., who questioned the moral basis for high taxes:

I began reading your blog because I agreed with your thesis that the Federal Government was the cause of most of our problems (too low Fed Fund rates, loose lending standards, excessive spending, etc.)

I now find that you are an advocate of very high tax rates, and apparently, a Socialist Welfare state.

Do you regard individuals as merely cogs of the collective whole, happily forking over their earnings to the poor and lazy because it is their duty?

You seem to be a very intelligent person. Can you please state the MORAL justification why I have the duty to relinquish my wealth that I have EARNED to anyone else? And if it is immoral for me to enjoy the fruits of my labor, why is it moral for the recipients of my taxes to enjoy them?

Please don't respond by saying that we should enjoy half of our earnings and sacrifice the other half. We are talking about a moral principle here, that a man has a right to exist for his own happiness.
Excellent point, Greg, for "no taxation without representation" lies at the heart of the American Republic. We the people have the right to set our own taxation, and to direct or approve the spending of that taxation. This is a key moral foundation of our Republic.

What I should have said was something like this: I morally object to borrowing trillions to pay benefits to ourselves and then offloading the payment of that debt to our children and grandchildren.

What we as a people seem to want (based on the gutless "leaders" we elect to high office) is low taxes but plump entitlements--in other words, we want to have our cake and to eat it, too. Of course no nation can offer its citizens low taxes and rich entitlement benefits, and so we have collectively borrowed trillions of dollars in the form of Federal borrowing to make up the difference. But all debt carries interest, and an astounding $192 billion already goes to pay interest on the $8 trillion in Federal debt we've borrowed to balance our national income with our desired benefits.

Please see the chart above for the train wreck which lies just ahead and read an earlier entry on The Real Federal Deficit: $2.3 trillion a Year (June 2005)

As for the interest payments on that stupendous debt, according to the Federal Government, it now totals $405 billion a year. About half of this is transfers within the government, "paying interest to itself," but the outlays to outside holders of debt are nearing $200 billion a year. That's more than half of Medicare's $390 billion budget. Yet no one squawks at all about this massive transfer of funds to support deficits--deficits which are sure to climb as out-of-control entitlement spending leaps with Baby Boomers' retirement.

We want Free Enterprise and low taxes when we're making money, and Socialism when it comes time to collect "our" Social Security and Medicare benefits. Let's face it: Social Security was always a generational 3-Card Monte gamble. When it started, there were something like 40 workers for each retiree; now that's down to about 3 workers per retiree. The gamble depended on ever rising numbers of workers entering the system to keep the retiree-worker ratio high. The Baby Boom enabled the system to continue for decades, ballooning the workforce with its huge cohort of 70 million, but now that the "pig in a python" (the 70 million boomers) is set to retire, the ratio will slip to an unsustainable 2 workers for every retiree.

Back in the '30s, when Ma and Pa Kettle retired at 65, they lived to 67 (actuarily) or so before going to their rewards. Now we retire at 62 and live to 82. It doesn't take much common sense to see that a system set up for a few years of modest retirement cannot possibly carry retirees for decades.

For more on this subject, please read two books on my Recommended List:
Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

And don't even get me started on the SSI "crazy money" and all the other welfare programs which have been offloaded onto Social Security to tap all those surpluses without having to allot discretionary funds. The system is set to implode, and I am skeptical of claims that all is well until 2060. Recall that the Social Security surpluses are being spent on other Federal spending, so once the surpluses vanish (which will be soon), then the shortfall will come from the same source we depend on so mightily: borrowed money, mostly from the rest of the world.

Yes, there is a moral imperative for the government to justify its taxation and spending, but there is also a moral imperative for the citizenry to not offload its own profligate spending onto future generations. Thank you, Greg, for bringing the moral aspects of taxation to the fore and making me clarify my own position.

Nexr up, frequent correspondent Michael Goodfellow asks for data on the total tax burden, and for some accountability on spending:
You'd really have to include state and local taxes in your effective tax rates, especially if you are going to compare internationally. The U.S. states are as large as many countries, and provide a significant portion of services.

And of course when considering tax by income bracket, you would have to subtract the value of transfer payments, which would improve things even more for the low income earners.

As for Social Security and Medicare, I agree they are in trouble, but it's not due to lack of taxes. Currently, both programs are in surplus, with the extra income going to fund other government spending. And that should tell you exactly what would happen to any additional revenue raised in the name of balancing those two programs! The fundamental problems with retirement funding is a) increase in the number of retirees, which we are not planning for, and b) continual increases in the cost of health care, which we are not trying to slow.

You could have linked that TCS article about Denmark in your parting comment on how wonderful it is to pay 50% of your income in taxes. When it comes to brainwashing, many people seem to think Scandinavia and Canada have it made, but articles on the Canadian health care system, or the overall health of the Scandinavian economies show that to be a myth.

I find the absolute faith in government by people on the left to be bizarre. It seems immune to facts. For example, the prevailing myth is that the disaster in New Orleans from Katrina was simply due to the storm (probably caused by global warming) and that the government response was inadequate. In fact, the disaster was entirely due to government incompetence in designing and maintaining the levees. The response was confused exactly because various levels of government fought over jurisdiction and displayed their usual idiocy. And the follow through has not be characterized by lack of resources, but by huge amounts of money spread over the entire area without any consideration of cost management or effectiveness.
Fortunately, correspondent U. Doran supplied this account of our total tax bill, including state and local taxes; by this reckoning, we already pay 54%:
How much tax do we really pay?

Next up: correspondent Paul M. politely calls me to account for my claim that Medicare spending surpasses the gross mismanagement of funds within the Pentagon:
I must take issue with some statements you made about our deficit in your January 19, 2007 entry, the most unsupportable one contending:

"Yes, there is massive waste in Pentagon spending, but probably less than in Medicare."

Pentagon Unable to Account for Trillions in Spending

I invite you to review the above CBS news item dating back almost five (5) years, and challenge you to cite anything remotely comparable in the Medicare program, reported before or since.

Here is a list of federal budget adjustments worth looking at, and endorsing:


Note the distinctions made on this page between mandatory and discretionary spending programs (since your entry did not):


I am not contending that effective tax rates should not rise, to at least stop the debt hemorrhaging. John Edwards has publicly and emphatically stated that universal health care is a higher priority for him than deficit reduction. While that position certainly is debatable, at least one presidential candidate has expressed a preference. I doubt any others will. But whether for health care or deficit reduction, the military spending must be pared down, particularly since much of the purported Cold War justification for such high (and considerably untraceable) outlays is a past perception. Today, there is but one superpower left in global geopolitics, the United States, which, ironically, may be its own worst enemy.
Thank you, readers, for sharpening the issues and providing excellent data on tax-related issues. I will take up Paul's question about Pentagon and Medicare waste tomorrow.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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