I'm not an economist and my understanding of macro- and micro-economics is slim to none. However, I wanted to point out something about deficit spending and taxes that you may not know (assuming this is right, of course, which it may not be.)
Deficit spending my the government (you know, the national debt) is one of those things that is a really big number but it is in that macro-economics realm where it is hard to give a shit about. I mean, how does the national debt affect you, right? Well, through ways that are complicated as crap, the higher the debt the higher the interest rates. Interest rates affect what you pay for your car, your house, your credit cards, etc. So a higher deficit means you end up forking out more for those items than you would with a lower national deficit.
Ok, so now taxes. Taxes affect your income directly so the cause/effect relationship there is clear. Lower taxes = more money you take home. Good times.
However, think about this. Your debt is probably higher than your income as far as total numbers go. Meaning, if you own a house, a car, run a credit card balance, have other loans, etc the total amount of all that probably exceeds the total amount you make in any given year from your paycheck, right? Let's put numbers on it to illustrate the point. Say your total debt is $400,000 (house, car, etc) and your yearly income is $75,000/year. Your tax rate is, oh, 18% or so and the combined interest rate you are paying for all that debt is somewhere around 7%. That means $13,500 of your salary a year is going into the void while $28,000 of your hard earned money is going into the void paying off your debt. So already the interest burden on your debt affect you more than the tax burden on your paycheck, even though it isn't as obvious.
Ok, so now say, because of the national debt, your combined interest rate for all that crazy goes up to 8%. However, the nice people in congress cut your taxes and now you only pay 15%. Alright! More money, right! Depends on what your definition of 'more' is. Now you are paying $11,250 in taxes but $32,000 in interest on your debt. So yea, you get the obvious $2250 increase in your paycheck but you end up forking out $4000 more in interest. So you actually end up loosing $1750. Damn politicians!
I say all that to say this. While tax cuts are fine and good, it is just pandering. It is an easy thing to explain to people that 'we are going to give you your money back' because it seems obvious. In reality, there is more going on. Those tax cuts tie directly into increasing the national debt which in turns increases your interest rates which in turn probably actually costs you more money than if the tax rate was maintained (or even raised some) and the deficit payed down.
Of course, there is a LOT more going on than just this but it is something to take into consideration when people fixate on just lower taxes. It isn't that clear cut.
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5 comments:
But how much of that interest do you get to write off as a homeowner?
That is a good point, but a write off isn't a dollar-for-dollar benifit. Meaning, if you can write off $10,000 in interest you don't get $10,000 in offsetting tax credits. Its just another deduction that helps lower your income for tax bracket purposes.
Additionally, you derive some benefit from paying taxes into society. The exact amount is up to debate, obviously, but money you pay in interest does nothing for you while taxes do.
> But how much of that interest do you
> get to write off as a homeowner?
You get to deduct all of the interest from your federal and (most) state taxes. That means you're not taxed on the portion of your income required to pay the interest on your mortgage, however, it doesn't change the fact that you have to shell out the money for the interest in the first place; it doesn't invalidate Ryan's point. The more the national debt goes up the more it costs banks to borrow. They pass that rate-hike directly to the customer -- in other words, interest rates go up, just like Ryan said.
The one saving grace is fixed rate loans. Get a fixed rate mortgage and car loan and pay off your credit card every month and you're not directly at the mercy of the national dept (though you're still affected indirectly).
But you do derive some benefit from the interest. (Which I think was mostly my original point)
Personally though, I'm so incredibly tired of owing money every freaking time I file taxes. This was the first year since basically high school that I've actually had a refund. Also, my interest rates don't increase, apparently only my tax liability does.
The other thing to keep in mind is that large deficits cause inflation which also cranks up the interest rate. And inflation screws you in about a million different ways. I think, on balance, regardless whether or not you have a lot of interest-based debt or not paying down the deficit is going to help you out more in the long term than small tax cuts would.
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