Revenue of 19% of GDP Will Not Sustain Spending of 24% of GDP
Data collected by Kurt Hauser of Stanford University shows that Government revenue from the income tax has hovered around 19% of GDP no matter what the tax rates happen to be. Raising the rates, especially the highest marginal rate, does not increase revenue but actually reduces it. That’s because GDP shrinks when taxes on the highest earners are raised. Nineteen percent of a smaller pie is simply less than 19% of a larger pie.
So what happens when Government tries to spend 24% of GDP while collecting in taxes only 19% of GDP?
The difference between Government revenues (19% of GDP) and spending (24% of GDP) accounts for the projected deficit of $3.83 trillion for fiscal 2011. Since the government can’t get that much money out of the pockets of those who work for a living it has to either borrow it or print it. If it borrows $3.83 trillion by selling Treasury Bonds, somebody has to buy those bonds. The bonds will pay interest to the bondholders so taxpayers are on the hook for the interest annually. Right now interest rates are near zero, but are expected to rise.
Of course, the government could just print the money. We knows what that does. Runaway inflation is just another form of tax and an insidious one because overnight we all have less money without writing any checks to the IRS. Our money simply disappears by having its value reduced. One day you have savings from which you could buy a new car. Suddenly, the new car is out of reach because its price tag now exceeds the amount you have available to buy it. Or the house you wanted to buy is now for sale at a higher price. The difference between the old price and the new price is the inflation tax. It’s represents a reduction in your net worth without any increase in anyone else’s net worth. That why it’s an insidious and destructive tax. All because politicians insist on having the government spend money it doesn’t have.
So send checks to the IRS, have the value of your wealth reduced automatically, or strap your future, and the future of your children with ever higher taxes to pay the interest on government borrowing, and eventually to repay the original loan from the bondholders to the government. No way to win, except for government to spend less. A lot less. The measly $61 Billion Congress is currently talking about won’t do a thing. A spending reduction of $3.83 trillion is needed to save our futures, and our childrens’ future. $61 billion to $3.83 trillion is the same as $61 to $3,830. A token that won’t do much good. And the politicians are fighting over that. Fiddling while the future burns.
Obama likes to talk about “winning the future.” You have to win the present to win the future. We’re losing the present, and that results in a lost future.