US Debt 6: Stimulus Trap, $1.75 Trillion Deficit, and Taxation Blackhole

Recently, US President Barack Obama announced that projected federal budget deficit during his first year in office will be $1.75 trillion! This is an eye-popping figure, considering that: (a) this is only for one year, last year’s federal budget deficit was $1 trillion; (b) this is only for the Federal government, the deficit that also needs borrowings by the state and city governments are not included yet; and (c) the cumulative public debt if unfunded social security, Medicare and MedicAid are included, the figure is approaching the $100 trillion mark in just a few years.

A debt is a debt and it has to be paid in the future. So the big question after another pile of debt has been incurred to finance a deficit, is how to pay those ever-expanding public debt. Where do they get the money in the future to pay it?

Perhaps the most common sensical answer is: reduce future spending, increase future taxes, and/or sell or privatize certain government corporations and banks. Live within your means.

The US President’s fiscal team has identified at least two important sources of reducing future deficit and public debt: reduce military spending in Iraq, and raise taxes for the wealthier Americans. The first looks very logical, but can be compromised by possible increase spending in Afghanistan war. Those two wars drain American taxpayers’ pockets by $10 to $12 billion per month. Not included are the costs of rehabilitating physically-disabled and mentally-tortured (by war) soldiers, pension for the family of dead and disabled troops, and so on.

Raising the tax on rich Americans looks “equitable”. The plan is to raise the 2nd highest income bracket from 33% to 36%, and the top bracket from 35% to 39.6%. At a time when a number of other rich and emerging economies are engaged in tax competition (ie, race to attract more investors by lowering taxes), the plan to hike taxes for the richer citizens of a country can backfire. How? Many wealthy and entrepreneurial people would reduce their tax payment to the American government – not through working less, not through tax evasion – but through migration to other low tax countries, by moving out of America!

So while the American President is calling for “fiscal responsibility” after four years (ie, cutting the deficit within 3% of GDP versus the planned deficit this year of 12% of GDP) that may end up as plain rhetorics. The real test of fiscal and personal responsibility, is living within one’s means now, this year, and not four or 10 years from now.

A friend here in Manila posted this quote,

"I think everybody should just calm down. Give Obama four years. See what he can do. Then if he's a miserable failure, we'll do what we did with George W. Bush and elect him to a second term." -- Craig Ferguson

I like that quote. And I wish that the American President will succeed in bloating the US public debt. Then many Americans, especially those high-earning ones, will be overtaxed paying those debts. And many of them may consider moving out and live abroad. There will always be a place for people somewhere, somehow, sometime.

So, if the current American President is paving the way for the future migration of rich and wealthy Americans because of the current overspend-overborrow-overtax policy, resulting in an endless stimulus trap and taxation blackhole, what can the Philippines and other countries do?

This is a great, perhaps a once in a lifetime opportunity, for other countries to position themselves as the target destination for migration by those rich and entrepreneurial Americans – and Europeans and Japanese too. The big challenge for these countries, therefore, is to offer something that their future wealthy migrants want, something that they wished their home countries could give them: low taxes, and a government committed to the preservation of the rule of law. There are other factors that foreign investors look up to, like good infrastructure and simple, predictable business rules. But the promulgation of the rule of law should take care of various other negative concerns: corruption and bad governance, unstable and unpredictable business rules and procedures, high criminality, and so on.

Even if those rich Americans will live and do business not in the Philippines, but in other low-tax Asian countries like HK, Singapore and Malaysia, the Philippines will still benefit because of the economic integration of many Asian economies.

A taxation blackhole in rich countries that try to cover up personal, corporate and fiscal irresponsibility with endless subsidies and bail-out, is a great opportunity for other countries that encourage more personal, corporate and fiscal responsibility. Provide tax haven to rich, productive and entrepreneurial people of the world, and limit government role to the promulgation of the rule of law, to the preservation of the citizens’ right to life, right to private property, right to liberty and entrepreneurship.
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My two short papers written earlier...

(1) Trillion $ deficit and irresponsibility

The budget deficit (expenditures larger than revenues) of the US federal government in 2008 alone was estimated at $1 trillion. It's the biggest figure in US fiscal history. And note that state and other local governments' deficit are not included here, it's only the federal government.

For this year, the US' Congressional Budget Office (www.cbo.gov) projects federal deficit to top $1.2 trillion! And federal spending will be $3.54 trillion, that's equivalent to the combined GDP (joint output of all companies, households and government) of Russia and Italy in 2007.

The debt culture, exemplified by ever-rising public debts, is an indicator of irresponsibility. When expenditures exceed income, responsible people would cut expenses and live within one's means, whereas irresponsible people would borrow more and continue living beyond one's means. And we are told that governments are our leaders, they set the direction of our lives and economy by signalling to us, explicitly or implicitly, that it pays to be irresponsible because there are always taxes to subsidize you, or there are always borrowings to plug any deficit by over-spending.

There is a chorus of "more government spending to fight recession" from officials and consultants of many governments, the IMF, WB, UN, ADB, other multilateral and foreign aid bodies. This would seem understandable because these are people who live off on taxes and not on any productive entrepreneurial activities. In entrepreneurship, expansion or bankruptcy is as certain as the sun shining tomorrow. But in governments and multilateral institutions that live off on taxes, bankruptcy is a never-heard word for them.


(2) Obama’s $1.75 trillion ’09 federal deficit

February 26, 2009

Aside from the Dow Jones just 2 days ago hitting just half of its all-time high level of 14,000+ index sometime in 2007, another eye-popping story in the US today is the level of the federal budget deficit under President Obama’s first year in office: $1.75 trillion!

That’s the news report today,
“Obama forecasts $1.75 trillion deficit this year”
http://www.reuters.com/article/topNews/idUSTRE51O6JA20090226?feedType=RSS&feedName=topNews&pageNumber=2&virtualBrandChannel=10112

Before proceeding futher, please take note of the following:

One, this is only for 1 year. Last year, the federal budget deficit was $1 trillion.
Two, this is only for the Federal government alone. Not included there are deficit that also need borrowings, by the state and city governments, and by counties.
And three, the cumulative public debt if unfunded social security, Medicare and MedicAid are included, the figure is approaching the $100 trillion mark in just a few years.

Debt is a debt is a debt, the same way that a tax is a tax is a tax. Even a $1 debt has to be paid in the future. So the next big question after another pile of debt has been incurred to finance a deficit, is how to pay those ever-expanding public debt? Where to get the money in the future, aside from borrowing in the future to pay the debt, waste and other fiscal profligacy of the past and the current period?

Perhaps the most common sensical answer to that question is: reduce future spending, increase future taxes, and/or sell or privatize certain government corporations and banks.

President Obama’s fiscal team has identified 2 important sources of reducing future deficit and public debt: reduce military spending in Iraq, and raise taxes for the wealthier Americans. The first looks very logical, but can be compromised by possible increase spending in Afghanistan war. The second looks “equitable” too, but what if many of those wealthy Americans would reduce their tax payment to the American government, not through tax evasion, but through migration to other low tax countries?

For all the dreams and plans of instilling “fiscal responsibility” after 4 years (ie, cutting the deficit within 3 percent of GDP versus the planned deficit this year of 12 percent of GDP) when the President finishes his term, those may end up as plain rhetorics. Because the real test of fiscal and personal responsibility, is living within one’s means now, this year, and not 4 or 10 years from now.
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See also 
US Debt 1: How Bloated is the US Govt? May 08, 2006
US Debt 2: Private Sector Bailout of Government, September 26, 2008
US Debt 3: Crisis of Irresponsibility, October 13, 2008
US Debt 4: Obama and US Entitlement, November 11, 2008
US Debt 5: Obama's Taxes, Bail Outs, $56 Trillion Debt Bomb, November 13, 2009