The Case For Higher Taxes

Birmingham Tea Party (11 of 50)

Listen to almost every politician and you’ll likely hear a similar theme coming from their mouths – lower taxes. And why not? Telling taxpayers that you’re going to lower their tax bill is how you win elections.

But there’s a stark reality that America is facing right now. The low tax rates that Americans have enjoyed for the last decade or so are simply not sustainable. The current United States federal debt is over $12 trillion and is increasing by almost $4 billion a day. We’ve financed bailouts of the banking and auto industries. We’re funding unemployment benefits for an ever-growing number of citizens. We’re helping individuals who’ve had their homes foreclosed and are assisting other nations who’ve suffered unspeakable disasters like the citizens of Haiti.

All that money has to come from somewhere. It comes from taxpayers like you and me. The value of the dollar continues to drop and the deficit continues to rise. It shouldn’t be long before the government starts to do something about it.

That something will be raising taxes. And that might not be a bad thing.

Many Americans don’t really understand what a large federal deficit means to them. They’re pretty sure that the government won’t ever send them a bill for their portion of the deficit but outside of that it’s largely a mystery. The truth is that a ballooning debt will affect everything from the rates they pay for a loan to the value of their retirement accounts.

Let’s face it. A rising federal deficit causes all sorts of issues. First, a high federal deficit raises questions about the health of the U.S. economy. If the perception is that the country’s financial health is in doubt, foreign investors may start looking to other locales to invest their money. If foreign investors start dumping their U.S. dollar denominated assets that could send interest rates higher, lead to higher inflation and potentially usher in a bear market in equities.

Second is the simple concept that the more money that needs to be dedicated to addressing the federal deficit, the less money that is available to fund other projects like infrastructure, technology and education. This might not directly hit your pocketbook but it will be visible in the world around you.

The solution that the government is almost assuredly going to need to take to address this is raising income tax rates. It sounds like an unpalatable solution as higher tax rates take a direct chomp out of your paycheck but in the big picture it might not be as bad as it seems. Using that additional tax revenue to keep the federal deficit in check could not only help us avoid the issues listed above but actually help the exact opposite to occur – lower interest rates on loans and a positive stimulus for stocks.

If you are worried about tax rates going up, there are things you can do to prepare for it. Namely, pay down your tax obligations at today’s low rates. If you have traditional or rollover IRAs, for example, start converting those over to Roth IRAs and take the tax hit now. It might be painful now but you’ll be thankful you did in the long run.

The words “higher taxes” are something that almost no one likes to hear but understanding the full impact of them helps you to be prepared. Knowledge is power as the saying goes and in this case it could actually mean more money in your pocket.

Photo credit: Josh Self

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Author Info

This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at The Ultimate Fit Challenge

9 Responses to “The Case For Higher Taxes”

  1. tom |  Jan 20, 2010 at 1:24 pm

    Sadly… I must agree.

    We’ve done this to ourselves by allowing our politicians to continuously increase the debt ceiling and decreasing taxes.

    Low taxes are not sustainable in the long run.

  2. David |  Jan 20, 2010 at 4:55 pm

    The problem is our country is too democratic. We’d be better off if the people had less power…since well quite frankly the people are stupid. Less democracy would lead to some corruption, and some good leaders. Currently it’s impossible to get anything worthwhile accomplished because there are enough people that will stupidly automatically vote against somebody that raises taxes, and there aren’t enough leaders willing to do the right thing (raise taxes) and sacrifice their career for it, even if they know it is right for their country.

    Right now the real leader is the collective political/economic intelligence of the voters…and we are quite an uneducated group.

  3. JT |  Jan 20, 2010 at 5:36 pm

    Well, it’s pretty obvious you wrote this article with the intention of stirring up controversy, or at least probability of it in mind. So, I’ll take you up on that offer.

    This post has to be one of the most short-sighted articles I’ve read in a while.

    For starters, you jump to the conclusion that, because their is a large federal deficit, taxes must be raised. However, you fail to mention that we should maybe stop spending first! What good is raising taxes if we continue our runaway spending, leading only to a larger deficit? On top of that, you seem to act like it’ll be a trivial task to pay down $12+ TRILLION dollars.

    Another mistake is you see the deficit as the cause of our problems when, in reality, it is the symptom of the cause. The real cause of the problems you mentioned is spending more than we earn. The deficit is the consequence that occurs as a result of this unbalanced budget.

    “The low tax rates that Americans have enjoyed for the last decade or so are simply not sustainable.” No, the entitlement mentality and the kick-the-can-down-the-road solution is what is not sustainable. Low taxes are, and historically, have been sustainable if the government wasn’t filled with greedy politicians that wanted nothing more than to stuff their own pockets. The income tax wasn’t even ratified as an amendment until 1913; that means there were over 100 years where it did not exist. And you’re telling me that low taxes are an impossibility?

    Now let’s get to your main point, that higher taxes are somehow good for me. That’s like saying paying off your $50,000 credit card debt is a good thing. Sure, it’s great in that fact that you’re getting yourself out of debt. But what’s even better is not getting yourself $50,000 in debt to begin with! Much less continuing to rack up debt with that very same card as you’re trying to pay it off!!!

  4. JT |  Jan 20, 2010 at 5:40 pm

    There’s no end to the madness:

    http://blog.taragana.com/politics/2010/01/20/senate-democrats-propose-19-trillion-increase-in-federal-debt-limit-14286/

    And this is most certainly not a Democrat-only problem. This is a bi-partisan issue, coming from both sides. The Democrats just want to fund the unions while the Republicans want to donate our money to Wall Street and useless, wasteful wars.

  5. Edwin |  Jan 20, 2010 at 7:07 pm

    Not to start an argument about government spending but I think spending on things associated with social welfare is a good idea and shouldn’t be stopped. Our military spending admittedly is pretty out there but there is only so much savings you can get from reducing spending. Particularly when our economy is in this shape and fiscal policy is the only way left to get out of it in a reasonable time frame.

    As for raising taxes, I believe its proven to be necessary. But looking at it in a different light should have a better impact. Even if we raised taxes significantly, we would only be back up to the tax levels of the 90s. So while people tend to paint a doom and gloom pictures of insane taxes and runaway spending, its all just rhetoric.

  6. JT |  Jan 20, 2010 at 8:27 pm

    Edwin,

    Not to start an argument about government taxation but I think reducing taxes on things associated with income is a good idea and shouldn’t be stopped. Our entitlement society admittedly is pretty out there but there is only so much savings you can get from raising taxes. Particularly when our economy is in this shape and common sense is the only way left to get out of it in a reasonable time frame.

    As for reducing spending, I believe its proven to be necessary. But looking at it in a different light should have a better impact. Even if we reduced spending significantly, we would only be back down to the spending levels of the 90s. So while people tend to paint a doom and gloom pictures of fewer services and people starving in the streets, it’s all just rhetoric.

  7. Michael |  Jan 24, 2010 at 2:29 pm

    I would say that raising taxes is not the most likely choice for the government to deal with their debt problem. The most likely escape for them is inflation. Inflation is hidden from the public eye and allows the gov to deal with their debt problem without the political consequences of raising taxes.

    Unfortunately inflation is far more destructive to the common man than increased taxes. When our taxes go up we only pay the increase on what we made that year, but when inflation goes up, all of our savings become less valuable. During this last financial crises the Federal Reserve doubled the money supply. Once this money starts circulating inflation is going to be bad.

  8. Mickey Blue Eyes |  Feb 03, 2010 at 11:38 am

    Here’s a novel idea! How about the government do what people do when they are unable to get more money from their boss and CUT SPENDING!

    The whole welfare state that Democrats have created in the federal government is hardly Constitutional. Cut the expenses of non-constitutional welfare spending, end the cycle of generations suckling at the teat of the taxpayers and force them to get a job.

    The problem with Obama and the Democrats is they keep spending money they don’t have. They keep spending money on non-Constitutional welfare state programs and running the economy into the ground.

  9. Edwin |  Feb 03, 2010 at 5:52 pm

    Mickey, let me give you some much needed perspective. Yes Democrats created the systems in our welfare system through the New Deal back in the 1930s. Now, its a modern system accepted by both parties. Notice the amount of GOP members who actually attacked the Democrats saying that they will destroy social security. Both parties now support it.

    As for spending money they don’t have, the Bush administration is definitely the biggest culprit. Expensive wars, expensive unfunded medicare benefits, tax cuts. Obama also has increased the deficit through his reaction to the economic downturn.

    The difference is that Bush spent the money on pointless things that help the country in no way while Obama’s deficit is due to the economic necessities brought on by our recession.