September 17, 2008

Taxes Taxes Taxes





I'm tired of the politicians who basically mislead America and say they are going to cut taxes. They must think all of America is stupid. I would love one of them to explain to me how we are going to cut taxes when we just got done in 2008, which isn't over, bailing out Bear Stearns 4-6 Billion, Fannie and Freddie 200 Billion on the conservative side, and now AIG 85 Billion. Not to mention our deficit of 900 Billion a current account deficit of 210 Billion and Morgan Stanley, Goldman, and the auto industry all needing money.

Add it up. Where are we getting the money to cover the debts. In times past we were buying Chinese, Indian, Japanese, Korean, Taiwanese, German, English, Australian, Canadian, Etc Etc. Goods and services. What happens when the average American can't afford to spend like in times past and bet on the come. What happens when our buying of these countries goods goes down, will they still have money to loan America on a daily basis to finance our massive debt? Likely no, moreover, what incentive will they have. The off chance that Americans are smarter and more innovative and thus most likely to recover quickly from an economic downturn is simply not well thought through.

Here is the problem with Smarts and innovation. We absolutely owned these items in times past, but because of the abysmal state of our primary and secondary educational systems fewer and fewer students are qualified to go to college. I'm not saying that fewer students are getting in, I'm saying that fewer people are truly smart enough to be there. It is the great dumming down of the American Student. And in turn we are seeing increasing levels of foreign students taking advantage of our higher educational system, specifically our best schools. The foreigners come in, get a great education, and return to their homes better off and more qualified. This is not to rip foreigners I'm glad they are smart and able to take advantage of a good thing. It is to say that we no longer own innovation and smarts.

The idea that the next Microsoft, eBay, Novell, Google etc. will come from an American is simply overstated. It could, but anymore because of globalization, it could come from anywhere, the next powerhouse could be hatching in India or China or Germany etc. Education was always one of our large competitive advantages and likewise our "smarts account" was always flush, now it is over drawn.

So how do we get out of these deficits and problems. Three solutions as I see it. Turn on the printing presses and print the dollar causing massive inflation, ratchet up interest rates to try to keep foreign investment high, or Tax Tax Tax. It seems to me that the latter is the most likely, inflation is not an option because once unleashed it is difficult to keep in check. Raising interest rates is possible but with so much unemployment and reduced spending that would catapult us into further economic contractions and pain, thus we will have to tax tax tax.

I foresee tax rates getting back to where they were decades ago 50-70% and all of us paying a significantly higher tax increase to finance us out of this mess. Unfortunately it could last for decades and likely will. Time will tell and of course I hope I'm wrong, wake up tomorrow and everything is good and our debts have been magically paid.

2 comments:

  1. Correct me if I'm wrong, but isn't the 900 billion you mention the trade deficit? I believe trade deficits and surpluses are controlled strictly through trade and not taxation. A mistake I believe many people make because the media tends to intermingle these terms during times of crises. I'm not being funny, just curious...

    ReplyDelete
  2. No I'm referring to the projected budget deficit including Iraq for 2009. You are correct about the trade deficit and it not having to do with taxation. On a side note Trade Deficits do have an impact on GDP and a large deficit can be problematic in our current financial system.

    The problem with a budget deficit is that we are adding to it in massive ways by bailing out these companies and banks. Which begs the question:

    How do you give these institutions this money, do you increase taxes? Or do you increase money supply? Or do you raise interest rates to encourage foreign investment?

    Increasing money supply hurts our purchasing power parity, inflation, and is sometimes refered to as a "stealth tax". Increasing interest rates would be problematic and would make it so that banks would be less likely to borrow and lend money and in addition would have the tendency to increase inflation. Nobody likes to raise taxes.

    Unfortunately all three options are in essence a tax. Either direct or indirect, they all reduce what we are able to consume. Taxing does it directly and the other two options do it through opening the door to inflation making things more expensive.

    ReplyDelete