The Lunacy of Tax Cuts

Don’t panic:  I believe in tax cuts….believe me.  I believe in getting the federal government as much out of my pocket as possible.  However, tax cuts alone will not take care of the financial/debt problems we have right now.  Understand this:  even though we do not yet have the full text of the proposed tax cuts leaked to us by the Trump Administration, I promise that they are planned to be just “budget neutral.”  The target for these cuts (as were promised again and again during the Trump campaign) are “Tax cuts for the Middle Class.”  And that is a wonderful thing.  As we’ve heard over and over, the Middle Class in America have been totally forgotten in the last 8 years and have seen their actual income shrink while watching the Wealthy’s income dramatically increase.  I applaud these cuts.

“Budget Neutral.”  Actually in a stand alone environment, “budget neutral” tax cuts would be a dramatic improvement for all Americans.  How?  Taxpayers will see dramatic cuts in income taxes both in their payroll deductions, 1099 liabilities, and in tax liability reductions for their small companies.  The wealthy are supposed to see taxes rise slightly or remain flat.  Once again the plan to replace the lost revenue from these cuts to the federal government come from hoped for spending increases by these taxpayers by their spending more because they have more and from companies investing in expansion and growth because of their increased net revenue.  This has been a promise every time there have been federal tax cuts, but have been realized only twice:  once when John F. Kennedy drastically cut taxes and again when Reagan did.  As you can imagine there are dramatic expectations necessary to project outcomes in these tax and tax cut scenarios that sometimes are not realized because of various unknowns:  changing interest rates, necessary military spending increases, national unemployment, etc.  Projections are just that — projections.  Even though the Reagan tax cuts were the largest in American history, the budget deficit soared.  Why?  The government spent all the new money they found through increased tax revenue that came from increased taxpayer spending.  John F. Kennedy’s government spending increased only slightly, allowing Americans to experience the personal benefits of tax cuts while watching their government operate more fiscally responsible.  We need something different.

“Budget with Decreased Spending.”  $19.5 trillion our federal government owes.  You saw yesterday just how ridiculous our national debt is and how mind boggling it is to think of just how we will ever be able to pay it back.  I offered a couple of options to resolve the debt issue, but at this point I do not see any real resolve on the part of lawmakers to tackle the payback.  We certainly cannot do so with budget neutral tax cuts.  And historically we have never seen our government not spend all the revenue it receives during the year.  There is only one option for the federal government to maintain U.S. economic solvency:  we MUST cut government spending.

Here’s a laughable example of the D.C. Congressional budget/spending mentality as it pertains to tax cuts:  Bubba works for a small company as a technician and makes $20,000 a year.  Bubba tries to put away $2,000 in savings but it takes the balance to live.  But he pays his bills.  He has some debt:  he bought a house and a new car and has a mortgage and car loan.  But Bubba tries to make certain he can pay the mortgage, car payment, and all his other  bills.  But it seems that every year he faces some unexpected economic trauma that puts his budget upside down and he finishes the year having to borrow some money to pay those:  home air conditioner had to be replaced; broken leg meant big medical bills; insurance premiums for his house and car almost doubled; his property taxes on his house went way up.  He had to take out a home equity loan to just keep up.

But, thankfully, Bubba got a HUGE raise that came from a new management position and title for him at work.  He now makes $40,000 a year!  He excitedly shared the news with his family who all breathed a sigh of relief because Bubba will be able to pay off all his bills and have plenty going forward and can even save a little more money.  But instead of going that route, Bubba decided his house was too small and repairs were too high, so he sold his house and bought a new one….that cost twice what he paid for the house he sold.  He also decided to trade in his 2010 Toyota for a 2017 Mercedes SUV.  His house payment tripled and his car payment doubled.  His home and car insurance premiums doubled, and he had to buy an entirely new wardrobe because in his new position he had to wear a suit and tie everyday.  For the first time in his life he could join the local country club (because he loved golf).  Club dues?  Only $500 per month plus cart fees.  But he has the money.  And to celebrate his new job he invited his fiancee to share a two week trip with him to the all inclusive Sandals Resort in Barbados.  (He can afford that now)  But before Bubba knew what had happened, even though he had doubled his income, he had doubled his expenses!  He might as well not even taken the new job.  He had made NO headway.  He spent on new bills ALL of his salary increase.

You get the comparison here I know.  8 years ago the USA spent $2.9 trillion to pay its bills.  In 2016 it spent $3.85 trillion.  Each year the USA income has risen since then, but so has spending.  Even though 2016 revenue climbed to the highest number in history — $3.27 trillion, our government spending $3.85 trillion spent $587 billion more than came in.  The government got a big raise, but the government spent all that came with the raise PLUS $587 billion more.  HOW STUPID IS THAT!

“Budget Neutral is unsustainable. “   Remember that and keep it on your mind as the conversation gets underway about these new proposed  tax cuts.  If we had no debt at all (or just a very small amount) a budget neutral scenario would not be so bad.  Not only do we owe $19.5 trillion in real debt and an additional amount for “unfunded liabilities,” (see detail in yesterday’s story) we in fiscal year 2017 are paying $222,961,474,558.67 IN INTEREST, before even paying one penny of the $19.5 trillion principle we owe.

Conclusion.  Tax cuts are a good thing, but honestly are not the key to getting our federal budget under control.  The desired “Miracle Grow” in this scenario are spending cuts.  Yes, it will  be hard to make spending cuts because cutting a dollar in spending means taking that dollar away from someone.  But you cut spending; I cut spending; we personally all do without now and then to make ends meet. Our government MUST do the same thing!  Don’t let the excitement of the promise of tax cuts get your thinking messed up:  tax cuts while nice for everyone will only help slightly.  And without corresponding spending cuts they will get us no where.  We must cut spending!  Tell your Congressmen and Senators to take that increased revenue that results from tax cuts and pay every penny on the U.S. debt.  And tell them that is the ONLY scenario that is acceptable. 

If we don’t make that happen and make it happen soon, we all may need to move into Bubba’s extra bedroom in his new house because we will not be able to afford the mortgage we’re paying now.

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