The National Debt turns 13 (trillion dollars)

As our debt passes $13 trillion (with a T), FoxNews has covered the national debt clock. The clock gives all sorts of measures of per capita indebtedness and they are all wrong. You can see the clock at http://www.usdebtclock.org/.

For individual personal debt, what you owe is just what you owe. If you have no mortgage, you don't worry about someone else's mortgage. It's not your problem unless you hold a mortgage backed security - and if you bought that kind of junk you deserve what you get. Other people's credit card debt also has nothing to do with you, unless you also have problems paying your balance and the credit card company needs the money to cover their losses.

National debt figures are even more remote from the average citizen. We don't have a head tax, so the correct assessment of debt liability is debt per income tax dollar, since the income tax is what allows us to run up debt. To find that ratio, divide the debt by the amount collected by the personal income tax. We take in roughly a trillion in income taxes and owe $13 trillion in debt - including obligations to retirees that must be redeemed with income taxes. To find what a particular individual owes, multiply the income tax/debt ratio (13) by the number of dollars actually paid during the tax year. Nothing else is an honest portrayal. Note that this number will go down to 11 if the tax cuts on the rich are allowed to expire.

40% of families, who pay no income taxes, also owe nothing on the national debt - and won't as long as no head tax is passed. The only concern they have is that the government will fail to raise taxes to back interest payments (taxation must be five times net interest before the financial markets care - because after that point ratings agencies start downgrading and printing presses get turned on - which means price inflation that always outstrips wage inflation).

People who pay taxes worry the most, since they know their taxes will eventually go up. Of course, part of the reason that taxes need to go up is that they were cut so sharply by George W. Bush. If Obama lets this tax bite on the rich come back, the bond markets will be fine and the debt will go down. If his staff convinces him to extend the cuts on the rich, all Hell could break loose. Let's hope he listens to some liberals.

Conservatives talk about how we are stealing from our children by running a deficit (unless they are cutting taxes - then deficits don't matter). They are only partly right. Most children will never be in the position of paying much in the way of income tax. If you increase their taxes, the economy will slow as they consume less. To pay back the debt, it is the rich kids who will eventually pay, so when conservatives call for tax cuts, or for not letting the Bush cuts expire, they are robbing from their own children, not everyone else's. The children of the top 10% of income earners will owe 2 times their parents tax bite more than if the cuts are allowed to expire. Rich people, look at your children and ask yourself if that extra Jag is worth the debt they will owe. Rich kids, tell your parents to quit raiding your future - since the tax man cometh eventually.

Orrin Hatch on higher taxes and the VAT

In Politico last Friday, Senator Orrin Hatch (or some of his aides) wrote about the prospects of tax increases, including expiration of the Bush tax cuts and the enactment of a Value Added Tax (VAT). I, and I think the President, agree with the Senator that the 10% tax bracket and the $1000 child tax credit should be permanent (I actually believe the child credit should be increased by a multiple of six). Where Obama and I part with Hatch and the GOP is in their belief that raising tax cuts on the wealthy will hurt small business. They won't.

Unincorporated small businesses pay income tax on what the owners pay themselves through either salary or profit. When business owners pay other people, those people pay their own income taxes - although the business owner does collect the funds and mails them to the IRS to pay their tax liability. This is why raising taxes are not a job killer - just the opposite. If a business owner wants to minimize tax liability, they can hire someone to help with the work, presumably at a lower tax bracket than they themselves pay. Under that scenario, higher tax rates would actually encourage more employment, at least if you assume that taxation has anything to do with the decision to hire more people - rather than the standard reason - which is the amount of work to be done in order to meet customer demand. Indeed, if customer demand is key, taxing the rich, who are more likely to save than spend, would be best for small businesses because in the aggregate it increases consumption. Taxing speculation also would increase demand, since it takes away the incentive to invest in land and stock bubbles - neither of which expand the economy (stocks are a secondary market - firms rarely use stock sales to finance expansion).

Regarding the VAT, Hatch attacks it because the debate on establishing it creates uncertainty and that it would lead to European style social spending. I would counter that ever increasing deficits are producing much more economic uncertainty. One need only look to Greece and to last week's market hiccup to see this (although to be fair, much of the problem last week was a typo and the way automated trading systems reacted to it). I am also not sure what kind of additional social spending the Senator is referring to. We have already passed health insurance reform and his own party enacted a Medicare Drug Benefit with protections against price bargaining for big PhARMA. Is there anything left to do (aside from paying for these reforms)?

I guess the one thing we could do is pass gauranteed income provisions, however the Senator talked about preserving the $1000 child tax credit, which is a form of income gaurantee. We could use tax reform to increase the credit - but this would help growth, consumption and small business overall, not hurt it.

Ironically, the Senator calls for tax simplification, "to make it easier, more competitive on a global basis and friendlier to economic growth." Someone needs to tell the Senator and his staff that this is exactly what a VAT would do if it is used to replace income taxation at the lower rates and provide a simpler vehicle, such as an expanded VAT prebate paid with wages, to distribute tax credits to families.