Opportunity Cost: Tax Payer's Enemy

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Most American tax payers could not give a definition of the term "opportunity cost". Just as most Americans could not tell you what al-Queda was, prior to 9/11, 2001. Not knowing however, did not stop al-Queda from attacking America, and not knowing what opportunity cost is, will not stop those oppressive and suffocating costs from forcing future tax increases on income earners in America and pushing the nation toward bankruptcy.

There is a simple economic truth that is lost in the political battle for your vote. That truth is this: During positive economic growth, taxes should generally be raised, and during economic downturns, taxes should generally be cut, if balance is to be maintained for the government and taxpayers across generations. Politicians routinely lie to their constituents on this matter however, telling voters what they want to hear, instead of the truth about the economics of taxes.

For example, Republicans continue to make the blanket statement that cutting taxes creates more revenues. It sounds too good to be common-sensically true. That's because it is. In the 2002 and 2004 elections Republicans could routinely be heard touting the lie that cutting taxes would increase government revenues. The Congressional Budget Office, the Federal Reserve, the former Comptroller of of the U.S., David Walker, economists now have the numbers. Tax cuts, while stimulating expansion of businesses and jobs where consumer demand is healthy, do create an increase in revenues from the new business expansion and growth. However, this increase in revenue to the federal government does not equal the total of revenues lost by the tax cuts. Only a percentage of the lost revenue from the tax cuts is recovered through new revenues from business expansion.

Conversely, Democrats will tell voters that increasing spending which puts more Americans to work through retraining, education spending, and extension of unemployment benefits, will stimulate the economy by increasing wage earning consumers and the amount of money they spend, and thereby increase tax revenues down the road. Like the Republican lie however, the cost of deficit spending to increase employment, does not necessarily equal the new tax revenue growth created by those newly employed. The national debt increases, and the amount spent on the interest payments on that debt grows as well; more than the tax revenue increase from expanding the work force. The work force will expand and contract, the interest on debt gets paid, regardless.

Debt limits one's options. There simply is no truer statement than this often heard from Libertarians. There is a loss of freedom of choice when one is carrying debt. Each month, a debtor has to pay a certain percentage of their income to pay back a portion of the principal on their debt, and in addition, interest payments associated with that borrowing. The percentage of one's income spent on debt, is money one cannot spend on other needs and wants going forward. This is the definition of opportunity cost by example. One's opportunities to choose what to buy and for how much in the future are reduced by the previous choice to borrow and repay a debt.

The tax payers in America have chosen to re-elect politicians who have nearly doubled our national debt in just 8 years. The politicians they re-elected doubled the national debt in order to spend money on current voters and national 'needs', borrowed from future wage earner's page checks, in order to get the votes of voters in current elections. Pay very close to attention to that last sentence, because it is crucially and fundamentally true. Deficit spending and debt results in future wage earner's higher taxes taken from their paychecks.

The American economy and the value of its IOU's, called U.S. dollars, rests on a concept known as the full faith and credit of the American government to pay its debts. If the American government were to ever default on making its interest and principal payments on its debts, the government would be subject to remedies petitioned by its foreign creditors. Needless to say, such an event would result in the collapse of our economy, inflation and unemployment would skyrocket, and rapidly growing percentages of Americans would be thrown out of their homes and jobs. To put it simply, the government cannot afford to NOT raise taxes on future workers. If the government doesn't raise taxes on future workers, it will not be able to pay its debts and everything economic comes crashing down.

The big problem is, no one knows how much we can tax future workers before we compromise the full faith and credit of the United States. Because no one knows where that limit is, (which would require seeing into the future of events and challenges facing future tax payers), prudence and caution are mandatory to insure we do not cross that line into the bankrupting of America in our near, or even distant, future.

The government cannot afford to continue increasing its national debt, or it will have to raise taxes so high on future workers that those workers will revolt. They will revolt against working for less and less net pay to the point that workers are forced into choosing to buy food instead of paying their tax debts. Many of these workers will seek employment in the underground economy (drugs, prostitution, crime, and tax evasion) where income is not reported, and therefore not taxed. (This underground economy already exists).

Others owning businesses will find themselves unable, due to increasing taxes, to pay as many employees and begin to lay off workers to reduce their costs, which in turn will reduce the number of customers they can serve. Still other future workers will protest their government's taxes and demand the government lower taxes, which would cause the government to default on its debts and the entire economy crashes as a result.

One often hears the argument that our government has survived very high debt in the past as at the end of World War II and the Great Depression, and we prospered afterward. That was true, then. It will not be true now or in the foreseeable future. The difference is that after WWII, America had an enormous amount of economic growth ahead of it in a rapidly growing work force and consumer base (baby boom), and vast untapped export markets to develop. Our economy then could tap into bringing women permanently into the new work force in the 1950's, 60's, 70's and beyond. Most of the nation's in the world then, were not as innovative nor as productive as ours, making a bright future of American exports possible. That is not the case today.

Today, many of America's natural resources, used in the past to manufacture goods and export them, are no longer abundant or cheap. And an untapped work force of new and educated and innovative consumers, is in ever shorter supply, unlike the period after World War II. Many thought we could deal with the worker shortage by turning a blind eye to illegal immigration. But, illegal immigration has proven to cost more to our economy and government spending than it brings in the form of taxes paid to the federal government.

Our growing dependence upon foreign imports of oil, food, and manufactured goods at the rate of 3/4 of a trillion dollars per year more than we export, literally means a loss of 3/4 trillion dollars per year to foreign economies. (This trade deficit has been growing for 30 years straight.) The opportunity to use that money going overseas, to create jobs here, to make and sell American products for American consumers, is lost. It is an opportunity cost that is costing American's jobs, wage increases, and increasingly, causing more and more Americans to file bankruptcy and forfeit their homes, and middle class status.

The opportunities to choose options in our future, 2, 5, 10, and 30 years from now, which are in our best interest instead of the interest of our foreign creditors, are growing ever more limited. And as our future choices become more limited, their cost those chioices continue to rise. Voters and their reelected politicians have chosen to add 2 trillion more dollars to our national debt in the hopes of stemming an economic meltdown today.

While no one wants an economic meltdown today, the addition of 2 more trillion dollars to our national debt in addition to the 4.5 trillion already added since 2001, is seriously compromising our choices going forward. Voters can no longer afford to tolerate politicians who insist on voting for legislation and spending and tax cuts without prioritizing current benefit and future cost. We have arrived at the time when we must stop acting like the wealthiest nation in the world, and start acting like the most indebted nation in the world, which in reality, we have become.

When the consumers are strong and buying and business is having trouble keeping up with demand and borrowing money to expand production is difficult, targeted (as opposed to blanket) tax cuts toward business and investors in businesses, can make sense. Such tax cuts will stimulate further economic development and jobs. But, there is a future price to be paid for such tax cuts when the government is carrying debt.

On the other hand, when the economy is slowing like now, due to consumers struggling to find the money to keep purchasing, businesses cut jobs due to lack of demand, not lack of money to expand their business. In such times as these, targeted tax cuts (as opposed to universal tax cuts) aimed at consumers can make sense when the economy is threatened by falling consumption. But, again, such tax cuts are not without a cost down the road when national debt is high and growing.

Debt in previous generations was considered more a last resort than a first choice. Our government over these past many years, has increasingly abandoned this traditional view of debt, Republicans and Democrats alike. Our debt now threatens our ability to respond to future crises, our ability to elect less expensive options, our ability to choose at all in some cases. Reducing spending by the federal government means redefining what our goals are, and how we will act in the future. Reducing spending will reduce our deficits.

But, reducing spending to the point of eliminating our deficits and lowering our national debt, will make poverty in our society grow dramatically, and sow the seeds of voter and citizen discontent. The solution to our debt problem must be a combination of redefining who we can afford to be, cutting spending and raising some taxes in a fashion that yields the greatest benefit for the most Americans present and future. That is no easy task. But, that task, if undertaken, can only be undertaken by the voters. Our current lot of politicians have no stomach for it.

If one loves this nation, one will insist that she be managed with the goal of insuring her future, not increasing her future risk. If one loves one's children, and seeks a future for them equal or better than the quality of life the parent has enjoyed, reelecting politicians responsible for this selling out of America's future for next year's reelection, must be halted. If one wishes to meet their end with the knowledge that they lived responsibly and with the best of intentions for those to follow them, one has an obligation to exercise the power of their vote for its intended purpose, to remove politicians who would sacrifice our future for their political career.

Voting out incumbents, voting for challengers, in a time of national crisis caused in no small part by politicians, is the only responsible vote. When enough American voters choose to vote responsibly in this manner, most of the challengers they elect will observe the lesson of the politicians they replace, and seek to govern for the nation's future, as well as their own, as the appropriate way to earn their reelection. The opportunity cost of reelecting today's Congress, has simply become too high.

The one certain truth about debt is this. Pay now, avoid debt, and one gets the best price. There is nothing one can buy through debt, that won't end up costing very much more on credit, if and when it is payed off. And the only reason debts are not payed off, is bankruptcy. Weighing the cost of debt against human suffering and privation, and making careful targeted decisions to optimize our future, should be the single greatest priority of every politician in office. Since, it isn't, it is up to the voters to make their removal from office their top priority. We simply will not achieve responsible government by reelecting irresponsible politicians.

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This page contains a single entry by David R. Remer published on October 21, 2008 9:02 PM.

Obama - McCain Debate 3 was the previous entry in this blog.

Anti-incumbent Sentiment Opens Door of Opportunity is the next entry in this blog.

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