It’s Simple Math

That’s what the President said recently about his plan to solve the debt and deficit crisis. If “we can just get the richest Americans to pay a little more,” we can solve this fiscal problem.

Not even close.

At least the Republicans have stopped claiming (as they did throughout the election) that the problem will go away if we can just get enough tax cuts to create more jobs.

Both claims are simply wrong. On a galactic scale. Here is some simple math that explains why.

In very round numbers, this year’s federal budget is about $ 4.5 Trillion.  About 60% of that budget (a bit less than $3 Trillion - what we are actually spending) is paid for by taxes. About 40% (more than $1.5 Trillion) is borrowed.

(By the way, it is NOT borrowed primarily from China or Japan any more, but from the U.S. Treasury. That’s right -- we are now routinely printing money to buy the bonds we issue. We are inventing money with nothing behind it and lending it to ourselves to pay our debts. We have seen this before in history and it leads to catastrophe. Not the “Jimmy Carter 14% interest” kind of catastrophe. But the “Germany in 1935 - 5 million DM for a loaf of bread” kind of catastrophe.  But that is a story for another day.)

The 40% we are borrowing is 2/3 of the 60% we are actually funding.  This is not hard – follow me here. If we are going to balance the debt without cuts:

·         We either need to raise 2/3 more money by new taxes above the tax we pay now,  OR

·         We need to raise 2/3 more taxes at the current rate through new jobs.

Got it now? Raise every federal tax in America (income tax, gas tax, customs tax, etc.) ON EVERYBODY by 66%, or increase the number of jobs by 66%. Both absolutely impossible.

      Let’s look at the Dem solution first: Don't tax the middle class -- just raise taxes on the top 2% (it used to be 1% -- remember “we are the 99%”?)  The “simple math” does not work.  Even if you tax every penny of the earnings of the top 2 %, you still fall far short of this year’s $1.5+ Trillion deficit. And of course, this does not pay a penny toward the existing $16 Trillion debt.   (Read that sentence quickly – because the debt is about to zoom over the Congressional limit once again).  Also, if you take all of the earnings from the 2%, they quit working and earning for next year.  As the Soviets found out, you can confiscate everything from “the rich” just one time.  Then you have to confiscate the wealth of the “nearly-rich” – and so on, and so on, etc.  Keep raising taxes and people work and save less because they do not get to keep the profit from their labor. That is why socialism always fails eventually. Always. The Dem solution of taxing the rich to cover the deficit cannot possibly work. The rich don't have enough money.

Now the Rep solution – cut taxes to grow the economy enough to close the deficit by taxing the new growth at the old rates. But remember, all our current jobs only pay 60% of the taxes we need to cover annual spending. To break even we need 40% more. That requires growing jobs by 2/3. Really? How much of a tax cut do you think business needs to encourage them to hire 2/3 more people? Sell 2/3 more product? Create 2/3 more businesses?  Impossible.  The Rep solution for covering the deficit can’t work either.

And remember, these solutions fail to pay the DEFICIT for just this year’s budget.  The DEBT is TEN TIMES AS LARGE.  The debt does not seem to matter much now because the Treasury can control the interest rate it is paying, since it is essentially printing pretend money to lend to itself. This is the key to the whole scheme.  If you could pay your mortgage by printing money and lending to yourself, you could lend at 0% interest – because you would be paying it back to yourself.  Get it?  

            Since the election, the initial Republican plan – cutting taxes to promote new growth – is entirely off the table. The Republican Plan B is “just don’t end the tax cuts put in place 10 years ago.” That is not enough to grow any new jobs, but maybe (they argue) it will keep the economy from getting worse. As a concession to surrendering on new cuts, they want reductions in social spending (benefits). And they are willing to compromise with the Dems by means testing those reductions. (So if you are in the middle class, your taxes remain the same, but the benefits you paid into are reduced when you come to claim them.)

The President’s response is a political “in your face.”  Keep the 10 year old reductions (again, these are not new cuts and will not generate new growth) on “the 98%” (or more precisely 51% of the 53 % that actually pay taxes. Jack up taxes on the top 2%. Reduce some benefits by means testing. And dramatically increase other benefits – and the deficit in the process.

Again, neither solution can possibly work – the deficit and debt are way larger than the solutions being offered.  Unless social benefits are reduced, taxes must go up on everyone. And the one thing both parties are willing to give up is the government benefits earned by the middle class who paid for them.

Oh yes – for those who say “take the cuts from the military.”  Total military spending is about 18% of the budget. Remember, 40% of spending is borrowed.  So close the entire Department of Defense, shut every base, release every soldier, park every ship and tank and airplane, and stop paying every retiree, and you are still spending 22% more than you  are taking in.

If your grown daughter is spending 40% more than she is taking in, would you advise her to just get a job making 40% more? Or cut spending a little and get more income? No!  You would tell her "Stop spending now! We can worry about the better job and more income later. Stop digging the hole now!” It’s simple math.

So why don’t we?  Watch this space for the answer.