Pay now or later

guest commentary by David Potts

I know, you think I am full of it. You aren’t for a tax increase and never will be. Our government gets too much of your money as it is and they spend much of it foolishly. But when it comes to a tax increase, could you be wrong?

In June 2009, the Congressional Budget Office (CBO) published The Long-Term Budget Outlook. The first paragraph in the summary section of this report says,

“Under current law, the federal budget is on an unsustainable path — meaning the federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt. Keeping deficits and debt from reaching levels that would cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two.”

What does this mean in practical terms? The last paragraph of the summary section the report spells out the consequences of large budget deficits.

“…Large budget deficits would reduce national savings, leading to more borrowing from abroad and less domestic investments, which in turn would depress income growth in the United States. Over time, the accumulation of debt would seriously harm the economy. Alternatively, if spending grew as projected and taxes were raised in tandem, tax rates would have to reach levels never seen in the United States. High tax rates would slow the growth of the economy, making the spending burden harder to bear.”

Let me take a moment to summarize our circumstances in words I can understand. The Federal budget year ended Sept. 30. The Federal budget deficit for the fiscal year ended Sept. 30, 2009 is estimated to total $1.4 trillion dollars, a $950 billion increase over the previous year. A $1.4 trillion budget deficit is not good. Humongous budget deficits lead to a humongous accumulation of debt.

Debt costs money, i.e., interest expense. Although the country can survive without being debt free, humongous debt is a drain on future income limiting what you can buy in the future.

The easiest way to visualize the affect of huge debt is visualizing your own household finances. If you’re up to your neck in debt, you have to keep working hard to earn the income to pay the debt back, with interest. You might even need a second job. While you owe this debt, you can’t buy everything you want and maybe things you really need. Debt carries the obligation to pay the debtor on a regular basis. You have to pay the debt back with money you earn in the future. You’ve already spent part of your future.

I realize that if you are older than 10, this is all basic stuff and even reads like grade school material. But sometimes we need to bring things down to a basic level. There are only two ways to reduce a budget deficit and pay back debt: decrease spending or increase taxes. Our budget deficits are so humongous that we need to do both. If you were in this circumstance with your personal finances, you would do both. You wouldn’t like it, but you would do it.

According to the CBO report, the average historical ratio of debt to GDP is 36%. This ratio is forecast to be 60% at the end of 2010. The quicker we do something to reduce the trend of humongous deficits and large debt, the more prosperous our country will be in the future. Everybody already talks about the need for the government to control spending. But we need a tax increase along with controlled spending.

But here’s the problem. We have a bunch of spendthrifts in Congress. We have established in a previous commentary that as a group, Congress operates at a lower level of ethics than its citizenry. If they can figure a way to direct the money to the interests that have bought them, they will. (Why is it that most members of Congress leave Congress significantly wealthier than when they entered?) So isn’t agreeing to a tax increase throwing our money away? And who are we going to tax? Businesses? Individuals? Only those that make over $250,000?

I propose a surtax that is temporary. The surtax would be temporary because it would be tied to the ratio of U.S. debt to GDP. When our debt exceeded a certain level, maybe when the ratio of debt to GDP exceeded 40%, the surtax would be levied until debt fell below the 40% benchmark.

I propose the surtax be assessed against everybody including those below the poverty line, those receiving welfare and other entitlements. Everybody can survive a small surtax, a surtax of 3% for instance. We need to be united in fighting our excessive debt as if it was a war. United means everybody needs to participate. If everybody had to pay the tax, everybody could share in the aggravation and maybe we would hold our Presidents and Congress accountable for their decisions. Hit everybody’s pocket book at once and see if Congress doesn’t feel the pressure to do right. Rather than making decisions based on party positions and political games, our government should find the best solutions. Wars cost a lot of money. Bailouts cost a lot of money. Paying off political debts cost a lot of money. Your money, not theirs.

But it’s our own fault. Any government governs only by the consent of the people. Think the Soviet Union in the 1980s. We continue to vote for the most fluent candidate, the best looking candidate and the candidate with the most money. We are too busy to learn anything about an issue except for what we hear in sound bites or our favorite talk radio or television shows.

The United States is our country. I love my country. It’s still the best country in the world. We need to defend it against all threats. Excessive debt is a threat to our future prosperity. Read the CBO’s Long-term Budget Outlook. It explains the threat with supporting figures.

If you found your household in excessive debt, and if you wanted to return to a position of financial strength, you would reduce your spending and find extra ways to make money to reduce your debt. The United States is your household, our household. Paying additional taxes to reduce or prevent the country’s excessive debt is not evil. It’s just not a pleasant thing to do. But it could help ensure a more prosperous future.

David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com.

Also, feel free to e-mail topic suggestions or questions to davidpotts@potts-cpa.com