Ferg's Fiscal Insight
Mar. 12th, 2012: - johnlocke.org Manage Subscriptions

How about a 64 percent increase to all federal taxes?
By Fergus Hodgson

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How about a 64 percent increase to all federal taxes?

For years now, I've been publicizing that the official national debt bears little resemblance to the federal government's fiscal balance. In fact, while the reported number is approaching $16 trillion, the reality is around $211 trillion, depending on one's calculation.

Last week I spoke with Laurence Kotlikoff, an economist and columnist with Bloomberg News, on precisely this matter. He is one of the leading scholars on the indebtedness of the federal government, and his book, The Coming Generational Storm (2004), first introduced me to the concept of unfunded liabilities.

Kotlikoff explains that federal officials label their transactions creatively, in a way that conceals most of their debts. For example, Social Security and Medicare contributions are recorded as straight revenue flows. The reality, however, is that this money generates liabilities for repayment when the taxpayers retire. In other words, the taxpayer has loaned money to federal officials, planning to receive that money back; then, since federal officials spend the money and ignore the need for repayment, they generate "unfunded liabilities."

This Ponzi scheme (as Texas governor Rick Perry rightly characterized it), of paying current recipients with money from new contributors, is coming to an end. As is always the case, at some point you run out of new people to pay in, and an aging baby boomer population has brought us to that threshold.

To give people a sense for the magnitude of this fiscal gap, closing it would require an immediate and permanent 64 percent increase to all federal taxes. And for every year that passes without reform, the percentage continues to grow. In fiscal year 2011 alone, for example, the federal government acquired $6 trillion in new unfunded liabilities, with no sign of slowing.

The 64 percent increase in taxes is both economically and politically inconceivable. The United States already has the highest corporate income tax and the most progressive income tax in the OECD, so spending cuts are a fiscal necessity. Those who propose sustained or even higher federal spending--Lord save us--ought to face up to this reality.

A tip of my hat to the Independent Women's Forum

This group, IWF, combats the stereotypical "presumption that women want and benefit from big government"--a noble role. Recently, they've published a lot on the contraception mandate, but the theme of their latest Policy Focus, "Tax Simplification," can't be repeated enough.

Not only does tax compliance take our money, it takes our time too. And the more complex a tax code becomes, the more time it wastes. In the case of the United States, taxpayers devote 7.6 billion hours annually to compliance. For each non-business, individual filer, that comes to twelve hours and $160 for tax filing and preparation.

Not only would a simpler tax code waste less time and enable a more competitive business environment, it would discourage political corruption. Disparate tax application, allowing for preferential treatment, is likely the key reason why such an unpopular tax code remains in place. In fact, more than four out of five American adults believe the tax code is both too complex and in need of major changes or a complete overhaul. Touche.

Notes

  • On Wednesday, March 7, I presented testimony before the House Select Committee on Agricultural Regulations at a hearing on raw milk legalization. Listen to that here.

  • There will be a Constitutional Candidate Forum, hosted by Founders' Truth and Constitutionalist Gathering Place, taking place on March 31 from 8.30 a.m. to 12:30 p.m. at the Lighthouse Convention Center, Raleigh. Go here for more details.

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