The Economy, Taxation, and National Debt

Vote Republican Net ^ | 4/17/2003 | Travis Main

[hawkins]

America is consumed with taxation. We have been since the inception of this nation. Today, there are a few great questions about taxation, especially its effect on the economy. When the country is deeply in debt should taxes be cut? Are tax cuts helpful to the economy? Who in this country is overtaxed and what should be done about it?

There is a great deal of misinformation regarding the taxation situation and frankly, a lot of misleading scare tactics to steer various agendas by political figures. Below is an attempt to address the facts of our national debt and the taxation system as they work together.

National debt

There are claims that the “next generation of Americans” will inherit the largest debt in the history of mankind. The facts surrounding this claim support it. If you look back as far as 1940, the national debt has risen every decade through to the new millennium. If we stop there, we could have damning arguments about our future and nearly every president and their economic decisions. We are examining the facts though, so we will not stop with just a cursory glance.

When examining the amount of debt an entity holds it should be taken in context with the amount of cash inflow vs. outflow. For the United States, we can get an accurate picture of the effect of our expenditures by comparing the amount of expenditure to the GDP (gross domestic product). As a percentage of GDP, expenditures in the United States have stayed relatively constant since 1952. The range has been between 17.0% and 23.5%. From 1975 until 1997 the percentage was consistently above 20%. From 1997 to 2002 the expenditures fell back into the teens as compared to GDP, but starting in 2002 this figure began to rise slightly as America found itself in a new era of awareness in regard to national security since the September 11, 2001 terrorist attacks. For the year 2003, the expenditures are estimated to be around 19.9% of GDP, but there are reports that it may be closer to 21%. Clearly, this is higher, however, it is most certainly nothing out of the ordinary and not worth a second glance historically speaking.

The national debt is not simply a matter of expenditures, we must look at revenues to the government. From where do government revenues come? Taxes! The more taxes a government receives from its citizens, the more it can afford to provide the services its citizens desire, national security to welfare rolls. However, if expenditures exceed the revenues then we increase the debt of the United States. The simple solution to avoid incurring this debt, raise taxes... or is that the solution?

Tax Increase vs. Tax Cuts

If all things were constant, as in an economists make believe bubble, merely increasing the tax rate on citizens would increase the tax revenues. Unfortunately, when taxes are increased citizens begin to tighten their spending belts. They cut they luxury expenses, buy fewer goods, lesser quality goods, or at times go without. What is the problem with that (sacrificing for your country some might say)? As citizens spend less, companies earn less or fail to meet their expenses altogether. This triggers company closures and increased unemployment from the resulting layoffs - both of these a loss of tax revenue to the government. Further expanding the problem for companies that do not go under is the lack of capital improvements. When times are hard companies do not invest in tools and equipment to keep their companies competitive with the rest of the world, making their goods less attractive.

Tax cuts have been utilized in tough times before. Both Kennedy and Reagan instituted tax cuts to spur the economy in times of War and in both cases tax revenues increased in dollar amount and percentage of GDP. Why does this happen? This occurs because consumers who now have more money in their pocket begin to purchase more items they need, prefer, or want. This again triggers a corporate response. The response this time is investment in the company (spurring manufacturing), hiring of new employees to handle volume, and the ability to provide better wages for the employees. All of this, results in more tax revenues for the country, answering our question, “Yes, even when a country carries debt it should cut taxes”.

Over taxation and What Should Be Done About It

Under our current system of taxation there are indeed individuals and companies being taxed unfairly. Currently, the top 5% of earners are paying more than 50% of taxes and the bottom 50% of taxpayers pay only 3.9% of taxes. Now, that could be an easily defensible argument, if the rate at which they were taxed was equal. Unfortunately, it is not. The graduated tax system in use in the United States today taxes those in higher income brackets higher that it does the remainder of the population. Why are higher rates applied to those Americans? Did they do something wrong such as not having enough children to receive tax rebates? Should they be punished for providing jobs for others or working hard to achieve the American Dream? These Americans are nothing more than overtaxed.

What can be done about the over taxation of selected groups of Americans? There are two main avenues of thought departing from our current system of taxation to a fair system for all Americans. These are the Flat Tax and National Sales Tax (of which there are a few but slightly differing plans).

The Flat Tax - http://flattax.house.gov/proposal/flat-sum.asp This system provides a constant rate of Income taxation for all citizens. Some estimates note that the economy would grow 5 times larger than the current taxation system - Increased revenues through decreased tax rates.

The Fair Tax (National Sales Tax) - http://www.fairtax.org/ This system sets a rate of taxation on goods purchased in the United States. It does not infringe upon the rights of Americans by prying into how much income they earn. It doesnt require social security numbers, personal addresses, numbers of children in your house, or any information about you whatsoever. It simply applies a tax at the register.

Wrap Up and Conclusions

Taxation in the United States is in peril. The system currently being used simply needs to be scraped. However, in political discussions regarding expenditures and revenues to the government we need to focus on the existing system. The current US administration led by President Bush wants to make the changes that will spur our economic outlook. The president is leading the way for tax cuts! The president has kept expenditures in line with historic practices while also shoring up areas of the government that have been abused in the past. These specifically include funding to rebuild the FBI, CIA, and the military. Unfortunately, many of our representatives have failed to back the presidents economic stimulus through tax cuts and controlled spending either out of desire for their own political gain or pure ignorance of the facts. We must recall the presidents first tax cuts after taking office kept us from falling into a deeper recession. Back then he stated that more was needed! Our congressional representatives rebuked his call for stimulus saying more than enough had been done. Now we see the president again approaching congress, pleading with them to be sensible. Hundreds of economic experts have come out in support of the Presidents plan. The presidents plan has backing by experts, it has backing by history, isnt it time we encouraged the politicians to take heed? Getting things back on track now will certainly make it simpler to improve the currently unbalanced taxation system (or scrap it altogether) in the future.

The information gathered for the writings above come from Office of Management and Budget, Treasury Dept, Commerce Dept, http://www.fairtax.org/, http://flattax.house.gov/proposal/flat-sum.asp, and KiplingerForecasts.com

Travis Main Vote Republican Net http://www.voterepublican.net mainstream@voterepublican.net

[hawkins]

This post gets a lot of good information out there regarding taxation. It is funny how a topic can be so broad when you want an explanation at times that is so brief.