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Tax Hikes to Cut the Debt? It's a Numbers Game

By Robert Wiedemer   |   Monday, 03 May 2010 12:53 PM

There’s a lot of concern right now that taxes will have to be raised to deal with the U.S. debt problem.

However, few people who talk about it seem to look very closely at the real numbers regarding taxes and our debt.

Let’s start with a few basics.

How much do we raise in federal taxes in a year? About $2.1 trillion last year. Only about $900 billion of that is from personal income taxes. The rest is from corporate income tax and social security taxes.

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Remember, almost half the country doesn’t pay personal federal income tax (that doesn’t include Social Security taxes).

Let’s assume we wanted to pay off the debt in a relatively modest 30-year period.

Let’s further assume that we attempt to do this in a couple more years.

By that time, our debt will have risen to almost $15 trillion. That also makes the math easy — we could pay it off in 30 years at $500 billion per year.

Of course, that assumes no interest.

Let’s assume low interest rates and low inflation for the next 30 years (optimistic assumptions, to say the least) and we can pay this whole thing off in maybe 40 years at $500 billion per year.

Now, since we are running a deficit of $1.5 trillion, we would need to add that amount to the $500 billion needed to pay off the debt. So, that’s about $2 trillion per year to pay off the debt in 40 years.

Now, how much do we get in taxes per year?

That’s right, about the same amount — $2.1 trillion.

That means we would have to increase all federal taxes by 100 percent for a 40-year payoff. Or we could raise all federal personal income taxes by 133 percent (they’re about $900 billion now).

Again, 40 years is not a lightning-speed pace. And the assumption of low interest rates for the next 30 to 40 years is pretty optimistic.

But, even with all that optimism, it’s hard to pay it off with anything less than a 133 percent increase in personal income taxes. Needless to say, such a tax increase would be rather devastating to our economy and, hence, self defeating.

Of course, we can do less than that to at least show some interest in the whole issue.

But, then we are back to a psychological game of trying to make people feel good while the government is, in fact, massively undermining what was for most of our history, including the Great Depression, a rock-solid financial foundation that we and the world could rely on.

Psychology is important and can hold things up for a while.

But any real analysis of the problem shows we are facing a much more serious issue than anyone discussing tax increases seems to realize.

And, before you can take any real action to solve a problem, you have to first understand that problem.

About the Author: Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, Aftershock, by Clicking Here Now.

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