The Biggest Ponzi Scheme on the Planet-The U.S. Government
"American Economic Exceptionalism Explained"                     USAPonzi                                      by John W. White   Mar 29, 2013

Tax Rate Absurdity
May 7, 2014

The U.S. Government, as of May 1, 2014, has an Obligation to pay back a Debt of $17.4 Trillion and to pay unfunded future social benefits that have a Present Value of $78 Trillion.  The sum of this money ($17.4T) that we have spent that we do not have and the money ($78T) that we have committed to spend that we do not have, yields a total GAAP Obligation of $95.4 Trillion.  This Obligation was created because the Government made the decision, in FY1969, to dramatically undertax the current taxpayers and pass these financial commitments on to future taxpayers which launched "The Biggest Ponzi Scheme on the Planet" (USAPonzi).  Over the last 46 years the U.S. Government has undertaxed the U.S. Citizenry by this $95.4 Trillion.

The "fiscal conservatives and libertarians" seem to have a very common complaint that the U.S. Government is taxing too much, both for individuals and businesses.  I hear a very common quote that generally goes as follows: "we need to lower the tax rate and broaden the base".  That comment implies that we can lower the tax rate and that will be better for me and we can broaden the base so that somebody else takes up the slack for my lower taxes.  Well folks it cannot possibly work that way.  How can you undertax the U.S. Citizenry by $95.4 Trillion over 46 years and then expect to lower tax rates?

We have also seen the beginnings of a very troubling move by corporations to take actions to further lower their future tax liabilities.  Corporations are making or have made arrangements to leave/move profits offshore to avoid paying U.S. taxes.  Even more troubling are the corporate actions that are starting to emerged to move the "corporation" offshore to avoid corporate taxes.  Tricks like acquiring an offshore entity and effecting a reverse merger to transition a U.S. corporation to a non-U.S. corporation.

Getting $95.4 Trillion of tax relief is just not enough to satisfy the management of these corporations.  Or maybe these corporations see the handwriting on the wall that the U.S. Government will eventually have to begin increasing taxes rather dramatically in an attempt to close some of this huge gap between Government spending/committing and Government tax revenue.

This commentary will explain just how grossly out of balance our current tax revenue stream is relative to the spending and committing that the U.S. Government is authorizing and the liabilities that this has created.  The only way it is possible to lower taxes is to dramatically lower the rate of spending, to dramatically lower the level of social benefit commitments, and in fact to default on MOST of the current social benefit commitments.

It is patently absurd, outrageous, and asinine to think that we can get out of our current fiscal crisis by lowering our tax rates.  On the contrary, we must dramatically, and I mean DRAMATICALLY, increase our tax rates to meet the current spending and future social benefit promises that the U.S. Government has authorized.

       Chart 1:  U.S. Actual Tax vs Tax Needs for Current and Future Years Spending

Chart 1 (above) shows how our Actual Tax revenue compares to the revenue that we need to have coming in each year to meet our current year cash expenditures.  This chart shows that for almost every year since 1969 we have not taxed the U.S. Citizenry enough to meet our current year cash expenditures.  Of course when we do not get enough revenue to meet our cash outlays we have to go further in debt.  (Author's note:  Due to a quirk in the U.S. Government financial reporting we have actually increased our national debt every year since 1969 even though it looks like we had a cash budget surplus during the period FY1998-FY2001).  This (blue line to green line comparison) is the message that our current Cash Accounting methodology reports to Congress and to the U.S. Citizenry.

Chart 1 also shows how our Actual Tax revenue compares to the revenue that we need to have coming in each year to both pay our current year bills and to fund the current year increase in our future year social benefit commitments i.e. to balance our GAAP basis budget.  This is the level of tax revenue (shown here as Future Yrs Need) that it takes to keep from increasing our GAAP Obligation (Obligation = Debt + Unfunded Liabilities).  Chart 1 shows that we have been dramatically undertaxing the U.S. Citizenry relative to the spending and committing that the U.S. Government has authorized and as a result we have been dramatically increasing our GAAP Obligation every year since FY1969.

     Chart 2:  U.S. Current Yr and Future Yrs Needs as a Per Cent of Actual Tax

Chart 2 (above) demonstrates the magnitude of the undertaxing that we have had over the last 46 years for both our current year outlays (Current Yr) as reported by our Cash Accounting and the sum of our current year outlays and the increases in our future liabilities (Future Yrs) as reported by GAAP Accounting.  These are shown in this chart as the ratio of cash outlays to tax revenue (Current Yr) and the ratio of GAAP "expenditures" to tax revenue (Future Yrs).  This chart shows what we all know, that we are spending more cash than we are taking in with the ratio being as high as 167% in FY2009 and projected to be 117% in FY2014.

However on a GAAP basis this undertaxing ratio has been over 300% of tax revenue for the last five years and generally over 250% of tax revenue since FY2000.  That is to say we need to be taxing people more than 3 times as much as we currently are in order to meet the current spending and future social benefit commitments that the U.S. Government has made.

But an even more concerning problem is somewhat hidden even by this analysis.  That is the fact that just getting these ratios to 100% (i.e. getting actual tax revenues to match the Cash expenditures and the GAAP expenditures) does not fix the problem.  It just keeps the problem from getting any worse.  If we increase taxes to match our cash expenditures then we don't reduce our Debt we just keep it from increasing.  If we increase taxes to match our GAAP expenditures we don't reduce our Obligation we just keep it from increasing.  And both our Cash Debt and GAAP Obligation are dramatically out of balance relative to our current tax revenue stream.

     Chart 3:  U.S. Debt and Obligation as a Per Cent of Actual Tax

Chart 3 (above) demonstrates this dramatic out of balance condition for both our Debt and Obligation relative to our current national income (Tax).  Our Debt was about 200% of our tax revenue until FY1981 when it began to increase fairly rapidly getting to about 400% of tax revenue by FY1993.  It stayed nominally at that level of around 400% until FY2007 when it again began to increase rapidly to now about 600% of tax revenue.  This ratio shows that we will have to increase taxes (or reduce spending) quite dramatically to begin to pay down this debt level.

But this Cash Debt problem is dwarfed by the GAAP Obligation problem.  The Obligation to Tax revenue ratio was between 800% and 1200% until FY1998 when it began to increase quite rapidly to now a level of nearly 3500%.  This means that we currently have an Obligation to pay 33X our current income and this Obligation is increasing by 2X (as shown in Chart 2) our income every year.  This is dramatic evidence to me that our social benefit commitments are wildly out of control and Congress must take what will seem to be draconian actions to get our U.S. Government fiscal budget on a sustainable path.

Even though we have this dramatic distortion in our fiscal situation both political parties continue to push for their respective ideologies.  The conservatives want to lower taxes, the liberals want to increase social benefits, and both of them want to increase spending to stimulate the economy.  But  the current U.S. Government fiscal policy has provided $95.4 Trillion of stimulus to the U.S. and global economy over the last 46 years and look where that has gotten us; essentially bankrupt as a nation and facing a "financial catastrophe of epic proportions."

And that is all because of USAPonzi and a simple little accounting trick that LBJ pulled on the U.S. Citizenry in FY1969.  This accounting trick allowed the Government to make the decision to not save one penny for the retirement spending and healthcare emergencies of the U.S. Citizenry but has told them that it will still be able to pay these social benefits.  Couldn't you live a more luxurious lifestyle if you spent every penny of your income each year and borrowed or printed even more money each year to enhance your income.  Well that is what the United States of America has been doing for 46 years and while it has allowed us to appear prosperous and productive as a nation it has also left us with this financial Obligation of $95.4 Trillion (as of May 1, 2014).

It is absurd to think that we can raise tax rates enough to resolve our fiscal crisis.  It is even more absurd to think that we can resolve the fiscal crisis by lowering tax rates.  We must raise taxes a little (to about 21% of GDP), we must reduce spending a lot, and we must dramatically reduce our social benefit promises to a sustainable level.  This is the task that the U.S. Government now faces. (see My Recommendations and Scoping a Grand Bargain).

The U.S. Government will have to decide how to deal with "The Largest Bankruptcy in the History of the Planet".  (see Detroit-A Lesson in Bankruptcy)

Who can you believe when your Government is Lying to you?

www.usaponzi.com


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