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With all these informal taxes at work, there will be less left to pay the interest on the debt we've run up as individuals.
The government owes even more. But it has two huge advantages over individual consumers: It can print money, and it can raise taxes.
When the government prints more money, it is another one of these informal taxes. Printing more Treasury bills, notes and bonds is easy, but selling them to investors already holding $9.4 trillion in Treasury debt is a lot tougher. To make the sale to an increasingly skeptical overseas market, the U.S. government will have to pay higher yields. That pushes up U.S. interest rates and slows growth in the U.S. economy because companies have to pay more for the capital they need to expand or maintain their businesses. Less growth takes money out of your pocket just as effectively as higher taxes.
Tax-free retirement accounts? Uh . . .
That brings us to the question of formal taxes. No politician now running for office will say it, because it means election-year death, but it's hard to see how taxes won't go up.The needs of an aging population alone guarantee it. Health spending will grow faster than the economy, by a huge 1.9 percentage points annually, according to the Centers for Medicare and Medicaid Services. Public spending on Medicaid and Medicare will grow by 8% annually in 2017 as the baby-boom generation hits the peak of its health-care consumption.
The total present value of Medicare, Medicaid and Social Security benefits over the next 75 years is $43 trillion. That's about three times the size of the entire $14 trillion U.S. economy today.
Think an outright repeal of the alternative minimum tax is in the cards? The AMT, a tax designed to catch wealthy tax dodgers, increasingly hits middle-class taxpayers. But repealing it would cost $806 billion to $1.4 trillion from 2007 through 2016. The fiscal 2009 budget that President Bush proposed in February includes a $400 billion deficit and no money for fixing the AMT beyond 2009.
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How about new sources of formal taxes? Over the long term, I believe governments follow the advice of famous bank robber Willie Sutton. When asked why he robbed banks, Sutton is reported to have said, "Because that's where the money is."
Where's the biggest pool of money the government could tax? How about 401(k)s and individual retirement accounts. There's more than $4 trillion invested in IRAs alone.
Investors currently expect taxes on this money will be deferred (if the money invested came from pretax income) or nonexistent (if the money came from after-tax income). But what Congress put into law, Congress can take away in a new law. Think the politicians will be able to keep their hands off this pot of cash when the debt crunch really hits, sometime after 2015? I wouldn't bet on it.
And any increase in the taxes on these nest eggs would play havoc with the retirement plans of millions of people. I've yet to see a retirement calculator that includes the possibility that retirement accounts could get hit with some kind of tax surcharge.
How to keep taxes low
What's the best way to keep formal and informal taxes as low as possible?Well, you could hope that a rogue scientist at a secret lab somewhere has produced a new strain of genetically altered politicians who would double over in excruciating pain whenever they're asked to vote for wasteful spending.
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Tax-time reality checkWhy aren't the presidential candidates talking about taxes? The debate about making the Bush tax cuts permanent is a sideshow, MSN Money's Jim Jubak says. The real worry is how we'll cover the rising costs of things like health care, national defense and debt payments.
Short of that, though, I'd put my hopes on the power of faster economic growth to produce a bigger economy so that current levels of taxation are enough. Think that's a wild dream?
Well, I've actually got a scheme that could work. It's one that the governments of the fast-growing economies of China, Russia, Singapore and others think enough of to invest billions.
It's called infrastructure. And that's the topic of my next column.
Continued: Developments on a past column
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