To get a better handle on the significance of the Bush tax cuts, it might help to take a shot at a hypothetical case with a fictitious character named Joe. In this case, Joe is 46 years old, has a new late in life son named Ben, is at mid career having worked for 22 years with 22 years to go and Joe just got a tax cut saving him $2,000/year. He will get that break each year for his remaining years. Good for Joe. The down side is that the government will have to borrow every penny each year to cover Joes tax cut and we can't forget the interest payments on that loan.
So, we're all stuck with Joe's growing debt as the government borrows more money to pay the interest. With assumed interest rates at 5% and the inflation rate at 3%, the debt will rise at a 2% inflation adjusted rate. Joe's gift and the associated debt will then top out at $55,682 in our dollars when he retires.
Now we go fast forward to Joe's day of retirement, which is amazingly the very day his son Ben enters the workforce and on that day, Ben finds out that he has to pay the interest on his papa's accumulated debt via a tax increase. Ben will pay $2,784 extra his first year with the inflation adjusted payments increasing each year by 2% bringing his last payment to $6,396/year or over 3 times what papa Joe was saving. What a shock. Papa was saving at a rate of $2,000/year one day and Ben has to start paying at a $2,784/year rate the next. That extra tax money paid by Ben will reach $193,500 when he retires 44 years later.
Now lets go completely crazy and assume that there are 60 million Joes. Then the total government debt created by all of these Joes would add up to a grand total of over 3.3 trillion dollars at the time of Joe's retirement and, of course, growing from there year after year after year if nothing changes.
Let's go into a quick reverse here and assume that Ben didn't pay the interest on papa Joe's debt, that Ben and all the other Bens got a big break, that the interest was paid by the government instead. Then after 44 years when Ben retires, all of the Joes combined debts would have built up to a tidy $11.6 trillion, again, that's inflation adjusted. Add that to the 3.3 trillion that built up during Joe's time and, wow, we have a total debt of $14.9 trillion -- and all that for just a lousy 2,000 tax break for Joe and all the other Joes way back when.
If the government were to take over the interest payments on the $14.9 trillion debt when Ben retires, the government's yearly payments at 5% on that debt would be 755 billion in today's dollars. Those numbers are fierce. One has to wonder if our less than brilliant president ever worked the numbers. No doubt everyone would rather have that money spent on needy programs that we can all tick off.
A tax cut as it relates to stimulation is not addressed here because of the uncertainty of the subject. We know that tax cuts have both simulative and dampening components. Resulting higher interest rates take care of the dampening side.
Going back, tax cuts have had mixed results. Clinton increased taxes and the economy took off allowing him to leave office with a large fiscal surplus, but the story isn't consistent. It may have helped the economy this time around. It's hard to tell with nothing to it compare to. Of course, a tax cut is wonderful when we can afford it -- everybody gains. But now the insane part is we're having tax cuts during a war--never happened before. Of course any time is a good time for some politicos to buy votes with a tax cut. No need to worry about offending. Most of the bill payers haven't arrived yet.
A while back, economist Lafer of USC championed tax cuts. His theory was that tax rates may be adjusted to an ideal point where government revenues are maximized, then once at that point, the increased revenues would more than pay for the tax cuts that achieved that optimum. Lafer had a curve to prove his point, the Lafer curve. I'm afraid that Lafer was discredited though. We haven't heard from Lafer for quite a while. Perhaps people laughed at the Lafer curve. Perhaps Lafer posted a sign that read, "DON"T GO THERE." Perhaps George W doesn't read signs.
The result of all of these assumptions should place us somewhere in or near the realistic ballpark. Having 60 million people all at Joe's age at the same time may raise an eyebrow or two, but that shouldn't take us too far off the mark. The 22 years of Joe's tax cuts may be a bit long, but then, the rich folks and the corporations, that have been getting a big chunk of the tax cuts, were not included. Then, it can all be roughly scaled down by shortening the time frames.
Now, here we are at the most gulling part of the tax cut story. While we're at it, let's just isolate the money here that relates to the tax break for the rich. Much of that borrowed money that has been doubling and tripling over the years will be paid back later by many folks whom will be less then rich with many of those struggling to make ends meet. On top of that, that may happen during less prosperous times considering our recent serious economic blunders and the rising stars of India and China.
