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August 6, 2007

What to Do About Taxes

by Dan

After reading an article published by the Mises Institute claiming that President Bush has not cut taxes, I got to thinking about things. I’m convinced that Mises has got it right. The best, and only correct, measure of whether taxes have gone up is government spending.

Spending = Taxes

This makes a lot of sense for two simple reasons. First, if the government spends money, that money has to come from taxpayers eventually — if later, then it actually costs us more because of interest.

Second, if the government sells an asset it owns, like large sections of Nevada, then taxpayers are still paying for it because now we, as citizens, don’t own that asset anymore. This represents a decrease in our wealth — another way we pay.

So if government spending is the best indicator of taxes, both current and future, what should we do about it?

A Balanced Budget Isn’t Enough

The solution that has been proposed numerous times is to “balance” the budget by offsetting any increase in spending with a corresponding increase in taxes. Balancing the budget would probably work to some degree, but I believe it would fail to accomplish much because it deals with each spending item individually. A much better approach would be to deal with the issue as a whole.

Taxes Should Follow Spending

I think that adjusting taxes automatically to match spending would be much better. If some Senator wants to spend $223 million to build a bridge in his home state, fine. Next year, every taxpayer would have to contribute 74¢ for each person in their family for that bridge. Knowing that just might make him (or her) reconsider how happy his constituents might be about that bridge.

This would allow Congress to spend when they wanted to spend, but would deny them the ability to pretend that it doesn’t cost taxpayers anything. And since most taxpayers are voters, I think a lot of their pet projects, so-called “earmarks,” would get eliminated quickly.

Long-standing nation debt would have to be handled differently because it’s too large to payoff quickly. Perhaps setting a goal to eliminate it in 30 years would work. That’d be the same as putting 10% of our national spending (about $300 billion) into debt reduction.

Each year, the Department of the Treasury, Congressional Budget Office, and Government Accountability Office could get together an adjust taxes automatically based on actual spending for the prior year. All new debts would be scheduled to be paid off within 4 years.

Another problem needing a solution is what to do about promises to spend in the future. Social Security and Medicare come to mind. Currently, the government just ignores these promises when campaigning and making financial projections. The U.S. Treasury’s report for 2006 includes these commitments and should become the basis for starting to accumulate a nest egg to pay for them. Perhaps another 10% could be put towards the retirement of our citizens.

Basic Money Principles

So, as a nation can we put 10% toward debt reduction and 10% towards retirement while starting to live within our means? Does this advice sound familiar? It should. The best thing is that eliminating earmarks (congressional pet projects) would almost pay for both of these. Instead of a balanced budget amendment, maybe we should just try some basic principles of sound money management.

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