Saturday, September 3, 2016

Political Promises Are Like Drugs

Most Political Promises Come
From This Train
Over the course of this presidential campaign, we have all been hit with various proposals and promises about how this or that candidate is going to make our lives better.

Most are untrue. Most are physically and fiscally impossible to do.

But they sure sound great, don't they?

Political promises are like the mind-numbing effects of any stimulant drug usually taken illegally: they cause a 'loss of contact with reality, an intense feeling of happiness'....until they wear off, that is, and reality sets back in.

Let's take a look at some of the promises you may have heard and seen over the past year and see if we can't bring you back to reality before you get too giddy:

  1. 'We are going to make the rich pay their fair share!'

    This one sounds so good that almost everyone says it in one form or the other.

    What hardly anyone will tell the public is that the 'rich 1%' already pay 50% of all income taxes collected by the federal treasury. 50% of all Americans who are working do not pay any federal income taxes anymore.

    What is going to happen when the top 1% pay ALL of the federal income taxes each and every year? The battle cry to 'Make The Rich Pay Their Fair Share!' will look more than a little ridiculous, won't it?
  2. 'All We Gotta Do Is Raise More Tax Revenue To Balance The Budget!'

    This sounds so simple and easy to do, doesn't it?

    It will never happen.

    Take a look at this chart showing the historic level of spending and revenues in the federal budget for the past half-century:

    We have raised taxes multiple times over the past 50 years. We have cut taxes multiple times over the past 50 years.

    Any kind of statistical analysis will show you the percentage of GDP the federal government can expect in revenues to collect over time is about 18.7%. And that is just about it.

    Not 20%. Not the average 21.5% of GDP we would need to raise in taxes to cover the expected annual shortfall between spending and revenues currently.

    There is just something in the American taxpayer psyche that is willing to pay about 18.7% of GDP in overall federal tax collection over time. Wealthy taxpayers can avoid paying ANY higher marginal tax rates ANY Congress might want to pass on them simply because they can afford to hire the very best tax lawyers and accountants to find ways to avoid paying those higher levels of taxes.

    Lower-income wage-earners will find ways to avoid paying excessive taxes if passed on them by resorting to cash payments for labor rendered or barter arrangements for transaction purposes.

    Depending on economic conditions, if we experience an economic boom, and we experience an inordinate amount of capital gains being paid such as during the internet boom years of 1995-2000, we may from time-to-time see revenues approach 20% of GDP.

    However, such surges of income should be viewed as one-time events to be used to pay down national debt and NOT to raise the level of federal spending just because it looks like we are entering a new phase of increased federal tax collection levels relative to GDP.

    Like it or not, our national break-even level for budget and deficit-reduction purposes is 18.7% of GDP. Prudent budget-making would demand that our elected representatives, senators and President reduce spending levels to get at or under that 18.7% of GDP level and at least start us on a road to fiscal sanity in Washington.
  3. Massive Economic Growth Will NOT Solve All of Our Budget Problems!

    We had lunch recently with some budget experts from Washington, DC who have long been fighting for fiscal policies that would curb excessive spending and get us on the rational, if somewhat 'boring' path to financial freedom for everyone going forward.

    We say 'financial freedom' simply because the worst thing we can do as a nation is to keep doubling-down on dumb budget and economic policies and expect different results. The past 8 years have produced 1.7% annual GDP growth for the US economy and added on another $10 trillion in national debt that has to be paid off one way or the other.

    We don't need another 8 years of the same result.

    One of the budget experts mentioned a report put out several years ago that we are trying to find and dig out which we will post at a later time once we find it.

    In that report, some economic expert asked the simple question:

    'How long would it take to pay off the federal debt if we had 10% annual economic growth in America?' 

    Remember, mind you, that the average economic growth we had under President Obama was 1.7%. We only experienced average economic growth under President George W. Bush 43 of 2.3% per annum.

    If we had 10% growth for even one year, we should have fireworks and celebrations for the whole month of the following January.

    Anyway, the speculation put forth by this budget expert was that just to pay off the existing $20 trillion national debt, assuming we could freeze it at that point right now, we would need to experience close to 10% annual economic growth for the NEXT 100 YEARS! to meet the higher demands of providing for an aging retiring population and produce enough surplus revenue to pay down the national debt to zero.

    We are not going to experience 10% annual economic growth under any President or any new Congress.

    We are not going to produce any surplus to pay down any debt any time soon. In fact, we are on-schedule to INCREASE federal deficits back up to $1 trillion in the next 5 years absent any radical change in federal budget spending starting January, 2017.

    And if interest rates return to any sort of normalcy and return to 4-5% in the next couple of years, we will be spending $1 trillion per year on existing federal debt pretty soon which will further squeeze any spending priority on any part of the federal budget other than Social Security, Medicare and Medicaid.

    Which means national defense, homeland security, welfare, environmental protection or any other of the hundreds of federal programs you might think is important to maintain.

    So have a Happy Labor Day this year and get ready to elect a President and a US Congress and Senate who fully understands the gravity of the economic, financial and fiscal problems we face as a nation.

    Because we are going to need them.

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