From the Great Depression to the more recent subprime mortgage crisis, Covid 19, and rampant inflation, the government frequently offers solutions to our problems. I have noted several times that those “solutions” provided often sow the seeds of the next crisis. This was obviously the case with our response to Covid 19, which led directly to our recent more pronounced inflation.
Unrepentant noticer that I am, I have noted some other consistencies of government intervention. Perhaps you have too.
First, according to the government, there is nothing they cannot do for us. Meanwhile, science and medicine are constantly reminding us of what we cannot do- at least not yet.
For example, we cannot halt the aging process or travel at light speed. The government, in contrast, labors under no such theoretical constraints. According to them, with enough votes they can do anything. Governments are led by elected officials, and as we all know, politicians do not gain office by telling voters what they cannot do for them. Lamentably, most politicians tell us what we want to hear, not what we need to know.
Someone once said that “The first law of economics is scarcity, there’s never enough of anything to satisfy all those who want it. The first law of politics is to ignore the first law of economics.”
Second, the answer from government always seems to be more. More money, more programs, more bureaucrats, more employees, more power to direct the course of our lives- in short, more government. When a business or a family is struggling financially, they often must cut costs to survive. Most of us have been there in our lives at one time or another. When government programs do not achieve their intended results, they are usually expanded.
Apparently, when you are spending other people’s money, more of what has not worked for months, years, or even decades, is the only answer they can think of. This is the reason Nobel Prize winning economist Milton Freidman said, “The closest thing to immortality is a government program.”
I want to be clear that I am not beating up our country. What I have described is typical of governments going back to Greek and Roman times, as far as I can tell. But it is my responsibility to assist my clients in protecting themselves from what may be coming.
Most of you already know there are three main monetary policy levers available to our government, so let this act as a refresher. The first is to decrease spending, the second is to increase revenue, and the third is to inflate. To inflate simply means printing more money.
I frequently ask myself, “What will the government do in the future?” This is an important question and its answer might have far reaching consequences in our financial lives.
I believe we can dismiss reducing spending almost entirely. As we have already pointed out, governments do not voluntarily contract in size any more than the least productive employees at a given company fire themselves.
Also, reducing the size of government means laying off federal employees. People who have lost their jobs are usually unhappy. Unhappy people have unhappy families. Unhappy families tend to vote for the opponents of those who made them unhappy. Hence, there will be no reduction in the size of government. In fact, government size will likely increase in the future. (Please see my previous comment on government programs.)
Republicans, with all their talk of fiscal responsibility, have a history of reducing taxes but not government spending. As a result, taxes tend to decline but federal deficits tend to rise under Republican administrations. I was surprised to learn this, but it is true. I believe it is because they fear the political fallout from layoffs every bit as much as Democrats do.
Increasing revenue is tricky but more attractive to politicians. Remember, government revenue is just another way of saying tax dollars.
But raising taxes is also politically unpopular. Working people are often already engaged in a delicate financial balancing act. According to many news sources, approximately 57% of the country does not have $1,000 in savings. Asking them to pay even more of their earned income toward taxes is not the way to win their votes.
For these reasons, inflating has been the go-to lever over the past 20 years. Printing money has been called “A stealth tax.” and “…taxation without legislation.” A simple way to think of the effect printing new money has on existing money is by picturing a pizza.
When we order a pizza, it is usually cut into eight slices. If we are feeding eight people each will get one slice. If we are feeding 16 people, you may ask for it to be cut into 16 slices. Cutting into more slices does give us more pizza, however. Each person eating will get less.
When we add new money to the economy, the economy does not get larger any more than the pizza does. Each existing dollar simply becomes proportionately less valuable. Businesses know this and raise prices. We call rising prices caused by this monetary policy effect inflation.
The United States is in a good position. We have the best economy on earth and our dollar is accepted as payment all over the world, at least for now. That status gives us time. It does not exempt us from the laws of prudent finance.
At some point, and it is difficult to know when that point will be reached, printing money can destroy an economy by destroying people’s faith in that currency. If people refuse to accept the dollar as payment or if an alternative appears that seems more attractive- perhaps from China- our economy could be dealt a debilitating blow.
Our nation currently has over $30,000,000,000,000 in debt and our government spends approximately $2,000,000,000,000 per year more than it collects in tax revenue. As the old saying goes, something’s gotta give.
I believe, perhaps cynically, that our elected officials do not want to kill the goose that lays their golden eggs. To keep our currency relevant and our position in the world intact, I think they will ease on the printing of ever more dollars. To take up the slack, they will reach for one of the other levers. Expect taxes to rise in the years to come.
Remember I said this. The government can raise taxes significantly without raising tax rates by a single percent. How? By lowering thresholds. Currently, our top tax rate of 37% does not kick in until our income rises above $578,000.
Perhaps we can see the future by looking elsewhere in the present. Canada’s top tax rate applies to income above $222,000, Australia’s top rate is applied to income above $180,000, and Great Britain’s top tax bracket of 47% applies to income above just $125,000!
It has been said that no country has ever taxed its way to prosperity. Despite that dismal record of success, an awful lot of countries have tried and it is beginning to look like ours might be one of them.
If you would like to implement a plan to help protect you and those you love from potentially rapacious taxation, consider working with a financial planner who is knowledgeable and take action.
Scott R. McGimpsey July 31st, 2023
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