Wednesday, September 9, 2009

Taxes Will Be the Death of Us As a Nation

I posted this note on FaceBook a few weeks ago. I wanted to post it here. I will post all the comments from there here following:

Taxes. In the USA, they are going to go up significantly in the next few years. Our deficit will dictate it. As Americans, we already pay, on average, over 50% of what we earn as one tax or another (Federal Income, Excise, State Income, Sales, Property, Fuel, etc.). That's just the direct taxes that we pay. We also indirectly pay the taxes for all of our suppliers, because they just pass the costs on in the form of higher prices and additional fees.

The Congress and the President will probably try to hide the new taxes that are coming by telling us that they are taxing the "fat-cat" corporations. If you don't realize that YOU are paying those taxes, you need some education in economics.

You also need an education in economics if you believe the malarky that Obama and Pelosi are currently spouting about how the government needs to take over health care in order to help the recovery. Spending money will not solve our biggest problem: our deficit. You and I will have to pay that bill, and sooner rather than later. Unfortunately, that will probably kill any recovery that might start.

The Great Depression was not resolved by the spending of the FDR administration. We came out because a very nervous world started buying raw materials and manufactured products from American businesses in preparation for the war they saw coming. We have, regettably, sold our birthright by offshoring our manufacturing.

We are currently offshoring our creation of intellectual property too, leaving us, as a nation, with little to offer the world in order to get the income we need to defray our expenses. Somehow, we need to stop the short-term thinking of corporate management that keeps dismantling our revenue-producing infrastructure in favor of improvement on quarterly balance sheets.

On the government side, the expenses just keep escalating with a President and Congress who have no sense of fiscal responsibility and nothing to keep them in check. As a people, we have to stop the demagoguery and let our voices be heard that the situation is unacceptable.


  1. A colleague, Madhu Siddalingaiah posted:
    We also have the highest standard of living of any country in the world. There are plenty of countries where you don't have to pay any taxes. Of course, in those countries, the air is barely breathable, the water is not potable, the roads are not drivable, the police are corrupt, the legal system works only for those with money and power, most people are illiterate, and humans don't have rights. BTW, those countries are accepting visa applications if you are interested.

  2. I replied:
    There are countries that have almost no taxes that don't have those problems either. That is not the point. The point is that our standard of living cannot continue to be high if we tax away the money of our citizens and if we cannot get some revenue for our country. Little attention is being given to where our standard of living is headed.

  3. A friend, Jonathan John posted:
    Madhu, I agree with you that this is the greatest country in the world and that taxes have provided most of the items you listed. However, I must point out that it is LOCAL taxes not FEDERAL taxes that has given them to us. Although I appreciate your passion and have many times wished certain people would move out of the country, Mike is one we need to keep here because he is thinking clearly and has a great intellect. I'm afraid you've missed the overall point of Mike's article. As of this morning, our debt is at $11.6 trillion. Let me give you some perspective. You could spend $1 million dollars a day since Christ was born and almost have spent $1 trillion. Just as you and I would have to cut spending and increase our income to pay off our maxed out credit cards the federal government is going to have to do the same thing. Adding another huge bureaucracy (universal healthcare), having China buy our debt, monetizing our debt (printing money to pay our debts) and increasing taxes...

  4. Madhu Siddalingaiah replied:
    A strong economy solves a lot of problems. Towards the end of the last decade, the economy was strong and we had budget surpluses as far as the eye could see. Now we are left with the antithesis. Many have argued that if we monkey with the tax code enough, everything will be great. It hasn't happened. Innovative, well educated, productive nations prosper. Ignorant nations full of infighting and lack of vision don't. Taxes codes are a side show. They are a good way to divide and conquer.

  5. Jonathan John:
    ...and cap and tax are doing just the opposite. History has shown that as you lower taxes across the board, tax revenues increase to the government. What you tax you deter.

  6. Madhu SiddalingaiahJonathan, your point is well taken. I've studied the federal budget for many years. Up until 1980, the total federal debt (not the deficit) was $1 trillion (in constant dollars). From 1980 on, it has steadily increased (except for the late 1990s). Taxes were cut, taxes were increased, it didn't matter. There are long term structural issues that are not addressed for a lot of reasons. If it was an easy problem to solve, it would have been solved long ago.

  7. Jonathan John:
    Unfortunately, it seems to me that our government is more focused on control/power over the people instead of our strength as a nation. Just in case you're wondering I'm speaking in terms of since FDR not republican/democrat (which goes to Madhu's point of divide and conquer.)

  8. Me:
    I agree with what you two are saying, in essence, but another point I was trying to make is that our economy has been weakened by sort-term thinking on the part of many of our corporate bean counters. We have much less manufacturing in our country than we did 10 years ago, which was much less than the 10 years before that. For the first time we're dealing with losses in the knowledge worker side of the economy too. We cannot have a strong economy where our jobs are all in government and the service industries. We need growth in knowledge work and manufacturing.

  9. Justin Lott, a friend posted:
    i agree with the short-term gains. everyone is so focused on the now, its enough to make one sick. If we can get a halfway decent president, congressmen and women, and CEOs that want the best for our country instead of thinking of only themselves, it will be a much better. This is why I support the once popular phrase, "American Made, American Owned."

  10. Madhu Siddalingaiah:
    It's easy to blame someone else for our problems as a nation, but this is a representative democracy with a vibrant, open economy. We are the ones that elected our representatives. We are the ones that invested in bogus companies. We are the ones that chose service careers rather than manufacturing. We are the ones that purchased foreign oil. We are the ones that didn't want to solve our energy problems in 1973. We are the ones that purchased SUVs rather than alternatives. We were the ones that wanted short term gains. No one forced us to make any of these choices. We each made these choices and we have to answer for them. Myself included.

    How about we each do one thing individually that will help solve our problems? You all sound like thoughtful, intelligent people. I'm sure you don't need me to help you find ways to make a positive difference.

    PS: there are plenty of legal ways to avoid paying high taxes if that really concerns you. Mike, you know I'm not picking on you ;-)

  11. Jonathan John:
    As a representative democracy we don't have direct control over the decisions made by our representatives. Yes. The idea is that we vote for those who would best represent us but the 2 party system has made this nearly impossible. Also it has been arranged through the progressive movement that only a certain class of people can be voted in. The process involves becoming beholden to the few instead of the many.

  12. Jonathan John:
    Madhu, it sounds like you've bought into the popular "man-made global warming" crises. Personally I reject that. The peer review papers I've read refute it. It is just another way to control the people. Progressive
    Playbook: Create fear - tell them you can save them. This ties back into Mike's concerns of the lack of production of goods. With cap and tax it make it too expensive to produce anything here - so with China and India rejecting to go along guess where the companies are going to continue to flee. Herein lies the problem - over regulation.

  13. Mike Terrazas:
    I know where you are coming from, Madhu. But you overestimate the knowledge and influence many people have on some of these topics. Knowledge work is being offshored to Ukraine, India, Philippines, Ireland, etc. and US knowledge workers are losing their jobs. Just like we offshored our manufacturing during the 60s, 70s and 80s. No one worried about it then because we had the knowledge work, which gave us sustained economic advantage. But now, to save the bottom line, managers and accountants go for the cheaper knowledge work offshore. That restricts the jobs available. The only place where there is growth is in the small business sector. Unfortunately, our representatives are not listening to the complaints by small business owners about the onerous taxes and regulations. The bailouts were only available to the large businesses that are exacerbating the problems.

  14. Mike Terrazas:
    Madhu, On you comment on each doing their little part: that is way too trite a statement when we are facing multi-trillion dollar DEFICITS (not just debts) and an already eroded infrastructure. It's like telling the small farmers that were run over by agribusiness conglomerates to fix their problems. At a certain point, the problems get so large that they must be fixed by getting enough people together to be a force. To try to do that, those like me state our opinions and try to motivate others to wake up to the dire situation we are in. Closing your eyes and telling people to go away doesn't help, and yet that is what one Nancy Pelosi and the senators from my state (California) have done when they were approached by a small business coalition. We don't represent their demographic, so they ignore us.

  15. Madhu Siddalingaiah:
    These are big problems, no doubt. I am not presumptuous enough to believe I have all the answers. One thing is true, if the economy slows, the government is the first to feel it since they are already running deficits. This is structural, the only solution is to run surpluses to take up the slack when things go south. That's easier said than done.

    Take a look at the graphs in this article:

    The US debt was stable, even going down from the end of WWII until 1980. At that point it shoots off at an incredible rate. Notice it was coming down a little in the late 90s but in 2000 it goes back up at the same rate. This has been going on for nearly 30 years. If it took 30 years and 4 administrations to get here, it's going to take a while to get out.

  16. Matthew Ronnow, a missionary that served in Santa Maria said:
    couldn't have said it better. I thought I was the only one who thinks the deficit is our biggest concern.

  17. Glen Wolfram a colleague posted:
    I think I'll pick complacency as the biggest threat to the U.S.
    Look at the re-election rate of representatives.
    Taxes are a side-effect.

  18. Mike Terrazas:
    Flippancy aside, in order to get rid of the apathy, the people have to be awakened as to the severity of the problems. We can't expect the politicians to do it, because most merely reflect the ideas they perceive from their constituency. We can't expect the mainstream media to do it, because that would sound too much like a criticism of the Obama administration. The conservative media are almost laughable in their hyperbole, so their voice goes unheard. (I cannot watch Fox News nor the likes of Rush Limbaugh).

    We must educate ourselves and seek to educate others in order to know what the real issues are. Even in this thread, from a person I know to be very smart and a good businessman, I have seen what I interpret as a severe misunderstanding of terms: I have been talking about deficit, but Madhu has been talking debt. Those are two different, albeit related, issues. Both are important, but the fact that something this basic is misunderstood tells me there is a lot of work to do.

  19. Madhu Siddalingaiah:
    Mike are you picking on me? :-) Yes, the deficit and the debt are both related and each important, but the debt is what we pay interest on. A significant percentage of our tax dollars go to pay interest on the debt. There was a time (80s and 90s) that if we had no debt, we would not have a deficit. Simply because the interest we paid every year on the debt carried us over the top. Since 2000, the debt has nearly doubled. That means the interest we pay on the debt has nearly doubled. Without a decrease in spending or an increase in revenue, deficits will more than double without doing anything. Add a downturn in the economy, which automatically reduces revenue, then the deficit increases even more. All this without any changes to the budget or the tax code. The debt has concerned me for two decades. It's a huge structural drain.

    I do take objection to one statement you made Mike, I'm really not that smart and my success in business has been checkered at best. ;-)

  20. Glen Wolfram:
    Sorry, using the word revenue instead of taxes cracks me up.

  21. Mike Terrazas:
    I have to disagree with you completely, Madhu. We were never solvent in the 80s and 90s. Congress and the administrations KNEW the interest burdens. A fiscally responsible government would not have spent any more than we brought in, INCLUDING the debt burden. Debt servicing should be accounted for as the first priority. After that, then you know how much you have to spend.

  22. Madhu Siddalingaiah:
    According to this site:

    Income taxes are less than 50% of revenue. When the country was founded, import duties were favored. That's considered protectionist today and not good for free trade.

    Not my opinion, just the numbers.

  23. Madhu Siddalingaiah:
    Mike, I completely agree with you about fiscal discipline. Not everyone does. What's the credit card debt for the average american? In the 80s, the idea of "deficit spending" became popular.

    I only look at the numbers, I'm not promoting any policy or ideology. We can all debate the causes of rampant growth in the debt, but there is no question on when it happened and how much it went up. It is not new.

    Even if there is no change in policy now, the debt and the deficit will go up in the near term. If the economy improves significantly, the deficit will go down, but the debt will likely increase for a while.

    I don't have any simple answers. It is what it is.

  24. Mike Terrazas:
    One point I do want to make about "revenue": most of it is taxes, my original post talked about ALL taxes, not just federal taxes and not just income taxes. I can do things to offset some of my income taxes, but some of the taxes have no way to be mitigated. And I have absolutely no way to avoid the payment of indirect taxes on goods and services that I need, since they are part of the price I pay already.

    And, BTW, in my opinion, a fee imposed upon me by a government is a tax. I don't care what the politicians call it to avoid being called out for imposing a tax. The US IRC backs me up in this, since it allows me to claim deductions for most fees imposed by state, local or foreign governments as taxes (but I cannot claim penalties, since they are determined to be punishment for some crime).

  25. Bob Terrazas, my dad, said:
    Everyone seems to forget the Great Depression where the current agenda in slightly different form was tried; same thing though. The government under FDR started massive spending including Social Security (which was to be only temporary!), the WPA, CCC, TVA and hundreds of government programs supposedly to get money into the economy and get us out of it. Some 8 years later one of the engineers in the administration admitted it was all a failure. The government couldn't tax itself into prosperty. What saved us was the private spending for war materiel for WWII and we still had problems even after it. Winston Churchill commented to the effect it was tantamount to a person stepping in a bucket and trying to lift himself up. It can't be done, won't happen with what's happened up to now and I have terrible concerns for your kids' future. It may even bite me more before I depart for another world.

    Liked your post Mike. Just got to it having disussed it with Deb while visiting.

  26. And that is exactly my point: we have nothing that the rest of the world wants any more. We're no longer a manufacturing powerhouse, which got us out of recessions in the 50s, 60s and 70s. And now we are no longer the knowledge powerhouse. That's what got us out of recessions in the 70s, 80s and 90s. What does the rest of the world want to come to us for? They can go to Mexico, Korea, China and Viet Nam for manufacturing, Japan, China, India, Ukraine and the Philippines for knowledge. And even today I read about even more companies starting to offshore knowledge work. We are in dire straits and very few are astute enough to recognize it.

  27. I'd say something but...there is already a lot said. =]