Thursday, April 15, 2010

Happy Tax Day !

You could probably spend the entire day today surfing the blogosphere reading posts like this and this complaining about or criticizing taxes.

I am not going to join the tax debate (yet), but I think it's a good time to revisit my last blog post about national debt. I ended that post with this thought:

If we accept the premise that zero debt is not the appropriate goal, then it leads us to the subsequent discussion about how much debt is too much?

Since I don't want to presume the financial literacy of anyone, and because it never hurts to review the basics, let's remember this equation:

Income - Expenses = Surplus or Deficit

Our current national debt is the result of several years of budget deficits created when expenses have exceeded income.

Tax day is a great time to look at the income side of the equation, since government income is nothing but taxes. Yes, that is an over-simplification, but you can see that according to this chart, non-tax revenue is only 4%.

Unfortunately, the issue of tax revenues is a tricky subject. A tax rate of 100% is clearly a bad idea, but so is a tax rate of 0% (like it or not, the government needs money for the country to operate). So the logical next question is, "what tax rate will maximize government income without hampering the entrepreneurial spirit to make money?" Unfortunately, even respected "experts" disagree on the answer to this question. (For what it's worth, my personal opinion is that tax rates over 30% start to look too high, and those below 15% begin to look too low.)

In the next post on this topic, I will look more closely at the "expense" side of the deficit equation. This will allow us to get closer to the ultimate goal of determining the appropriate level of national debt.

Unfortunately, you'll have to wait a few weeks for the next post, because we are off to Disney World for a week of sun, fun, and relaxation with the kids.