So although politicians may talk of “cutting taxes”, this is an impossibility in a world of high debts and deficits. The latest cut in the payroll tax is estimated to cost the government $120 billion in revenues for a calendar year. But all government spending is paid – directly, or indirectly – by its taxpayers. Those extra deficits will have to be finances in one of three ways.
One easy solution to dealing with deficits is to prevent them from happening by raising taxes. However, it may be easy, but it’s politically difficult. Politicians like to promise tax cuts. They’re good for votes. But they don’t like to demand tax increases. So in recent decades, in order to finance its deficits the government has turned to alternative two, borrowing the money. While it used to be that Americans were the largest buyer of U.S. Treasury bonds, these days it is more commonly the Chinese, Japanese or Middle Eastern countries that support American overspending.
However, any debts that are added will have to be paid in the future, along with yearly interest.
Unfortunately, the recent mammoth deficits, along with increasing nervousness from past debt buyers, have led to the third solution to new deficits: money printing. This is probably the easiest “solution”, since increasing the money supply spreads the pain of inflation around, and few are directly punished. But inflation takes its toll nonetheless. Higher inflation is particularly noticeable at the gas pump, the grocery store, and the services we buy every day. However, despite the attraction governments have for creating money, and inflation, they inevitably lead to more money printing and more inflation. Besides the obvious impact inflation has on consumers, the inflation that washes through a country makes all the government services that taxpayers pay for become more and more expensive. When those cities, states and the federal government see higher costs for the services they provide, the result is more taxes, money printing and money borrowing.
Until the federal government, state governments and local governments learn to live within their means, short-term tax cuts will always be replaced with long-term tax hikes. And that may be accompanied by higher inflation, a by-product of both money-borrowing and money printing. The easy thing for politicians, and for the economy, to some extent, is to give temporary tax “cuts” for one in three of its citizens. But one way or another, those tax cuts will be paid for by higher future taxes by us and our children, a higher cost of living for everyone, and an increasingly shaky economy.
Don’t get me wrong. Individuals in America would benefit significantly by tax cuts, but it will only improve our long-term economic condition if they are accompanied by spending cuts at the state, federal and local level. It’s rather disgraceful that the richest country in the world will not face its financial responsibilities. And it will not balance its books by passing short-term schemes instead of lasting reforms, which is the only true long-term solution.