Robin Hood is Back in Town

Presidential hopeful and former North Carolina Senator John Edwards announced this week (his first official week on the campaign trail) that he will raise taxes if elected. His supposed tax increases on the "rich" are to fund that euphemistically titled "universal health care," the successor to "socialized medicine," or my preferred moniker for it "Hillarycare." Let's take a closer look at this issue, and cut beneath the surface talking points and soundbites.

The Myth of the Wealthiest 1%

There is a pervasive myth in America that the "rich get richer and the poor get poorer" and that the so-called wealthiest of Americans do not pay enough in taxes. This is a pretext for Democrat politicians to offer "tax increases on the wealthy" in order to fund social spending programs for supposedly poorer Americans.

According to the Internal Revenue Service, in 2004 (after the Bush tax cuts), the top 1% of income-earners (those making $328,049 or more per year) paid 36.89% of all federal taxes. The top 5% (those making $137,056 or more per year) paid a full 57.13% of all federal taxes. The top 10% (those making $99,112 or more per year) supplied 68.19% of the funding for the federal government's largess, while the top 25% ($60,041 and up) rounds out 84.46%.

The top half of all income-earners in the U.S. pay 96.7% of all taxes, which means that the poorest 50% (those making less than $30,122) pay only 3.3% of all federal taxes. This means that so-called Middle Class America hardly pays taxes as it is. When 1% of the population pays more than a third of the tax bill, if there is to be a tax cut, it is going to be on the so-called "wealthy" because they are the only ones who pay any meaningful sum in taxes as it is.

While we shall not get into the merit of tax cuts from an economic perspective here, it is important to note that government receipts in the post-tax cut days of the Bush Administration have skyrocketed over the levels during the 1990s due to the massive economic growth that ensued as a result of the cuts.

The Looming Disaster of Transfer Payments

The second, and more egregious tragedy of Mr. Edwards' Robin Hood policy is the spending side of the equation. Raising federal income taxes will have a tremendously detrimental effect on the U.S. economy, but not as much as incurring even more future unfunded liabilities. The United States has already promised future beneficiaries of social spending programs far more than it can possibly deliver. According to a report issued in January of this year by the U.S. Government Accountability Office:

The federal government’s financial condition and fiscal outlook are worse than many may understand. Despite an increase in revenues in fiscal year 2006 of about $255 billion, the federal government reported that its costs exceeded its revenues by $450 billion (i.e., net operating cost) and that its cash outlays exceeded its cash receipts by $248 billion (i.e., unified budget deficit). Further, as of September 30, 2006, the U.S. government reported that it owed (i.e., liabilities) more than it owned (i.e., assets) by almost $9 trillion. In addition, the present value1 of the federal government’s major reported long-term “fiscal exposures”—liabilities (e.g., debt), contingencies (e.g., insurance), and social insurance and other commitments and promises (e.g., Social Security, Medicare)—rose from $20 trillion to about $50 trillion in the last 6 years.

Furthermore, according to the 2006 joint reports of the Boards of Trustees of Social Security and Medicare,

Both Social Security and Medicare are projected to be in poor fiscal shape, though Social Security poses a far more manageable problem-in analytic and dollar terms-than does Medicare. The fiscal problems of both programs are driven by inexorable demographics and, in the case of Medicare, inexorable health care cost inflation, and are not likely to be ameliorated by economic growth or mere tinkering with program financing.

The U.S. already owes future creditors $50 Trillion, and those creditors are the promisees of Medicare and Social Security, which are the existing "universal health care" ponzi schemes that have been thrust upon Generations X and Y to fund. With dwindling birth rates, low education levels among immigrants, and the Baby Boomers set to begin retirement in 2011, fiscal disaster is coming to a boil in the U.S. Treasury and John Edwards wants to turn up the heat.

Let’s look at the magnitude of this problem on a more personal level. The total household net worth in the United States is $53.3 trillion, and yet the government has made future promises of $50 trillion in transfer payments. This means that every man, woman, and child in the United States has a $170,000 burden to make good these future liabilities, but when examined on a full-time worker basis, that number skyrockets to $400,000.

By 2040, spending Medicare, Social Security, and interest on the National Debt will consume 30% of the nation’s Gross Domestic Product, with all other spending raising the number above 40%.

The GAO report goes on to conclude,

The “fiscal gap” is a quantitative measure of long-term fiscal imbalance. Under GAO’s more realistic simulation, even if the federal government continued to borrow money from the public at the current share of the economy (i.e., GDP), closing the fiscal gap would require spending cuts or tax increases equal to 8 percent of the entire economy each year over the next 75 years, or a total of about $61 trillion in present value terms. To put this in perspective, closing the gap would require an immediate and permanent increase in federal tax revenues of more than 40 percent or an equivalent reduction in federal program spending (i.e., in all spending except for interest on the debt held by the public, which cannot be directly controlled).

Conclusion

John Edwards and the other "populist" candidates for the White House who will be singing that old familiar tune of steal from the rich and give to the poor will soon be humming taps on behalf of the U.S. Economy and the Federal Treasury. To couple stagnating GDP growth (the result of the tax hikes) with explosive spending ("universla health care") will move more rapidly towards the edge of the cliff that we are inexorably approaching already. Not only should Edwards and his ilk be patently rejected for their mission of economic suicide, but proactive steps must be taken within the next decade if we are to stave off the 2nd Great Depression. China's rise in the East, and the economic upturn of Asia in general evidences that there is a country ready to fill the gap of the world economic superpower if we falter. Let us hope we do not make that mistake.