Tuesday, May 12, 2009

Your Implied Tax Rate Is...

The wool is being pulled over the eyes of the American people. The President has revealed a budget with $3.5 trillion in spending and a $1.2 trillion deficit. The wool is in the latter number, and the eyes are really our collective pockets. Every dollar the government spends must eventually be paid for with a dollar of taxes. At some future point in time, the deficit must be made whole. But since the money is not being taken out of the peoples’ pockets today, outrage over the obscene level of spending is muted.

Unfortunately, most people are not computing their implied tax rate. As in, if instead of deficit spending, taxes were raised to cover the difference, tax rates would be much higher than they currently are. Estimated receipts for 2010 are $2.4 trillion, with $1.2 trillion of that coming from income taxes (both individual and corporate). If the entire budget deficit were covered by an increase in income taxes, rates would have to double. Double. Double? Double! Repeat: Double!

For reference, $940 billion of the remaining $1.2 trillion in receipts comes from social security and other payroll taxes – thus, it is assumed for purposes of calculating the implied tax rate that the increase is covered by income taxes.

If taxpayers understood that their implied tax rate is double in order to cover the budget deficit, would it still be tolerated? Of course, if actual income tax rates were doubled, would income tax receipts double? Both questions are a few notches beyond rhetorical.

The question remains on how to adjust the implied tax rate given that the taxes will be paid in the future. Is the number higher because of the interest cost on the debt, or should it be lowered due to the massive inflation that will no doubt be generated by the absurd government spending and printing of money?

Maybe we will all feel better after seeing our government healthcare provider. Wait – is that cost included in our implied tax rate?

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