If Taxes Are Supposed to Go Up, Why Did They Just Go Down? with David McKnight

the power of zero

David gets a number of emails from listeners saying that he’s been wrong for years and the central thesis of the Power of Zero paradigm is incorrect. The question is, do the tax cuts of 2016 delegitimize what he and others have been saying?

In reality, the problem has only compounded since the tax cuts came into effect. You have to consider whether the US government is prone to making bad financial decisions and has just kicked the can further down the road.

David Walker says that anytime you have tax cuts, they should be accompanied by a commensurate decrease in spending. The Republican Congressional Budget Office says that the tax cuts will cost $1.5 trillion over the next ten years.

Notice what’s happened to the deficit. Since the tax cuts have been put in place, the deficit has only gone up. When we get to the point where we have trillion dollar deficits, that’s the canary in the coal mine for a sovereign debt crisis.

If anything, we have just covered up the problem and deferred it into the future, but in the process have made the reality of future tax hikes all the more inevitable.

What happens if we don’t increase revenue or cut spending? We will get to a crisis point where we will have to have immediate and dramatic increases in taxes just to pay for social services.

The federal government has a history of waiting until the very last minute to address these problems. Just because the government behaves irresponsibly, that doesn’t mean the math to which David Walker and other economists refer doesn’t add up. Every year that goes by where the government fails to reduce spending, spending reduces its effectiveness. We will get to a point where the interest on our debt consumes such a large part of the budget that we won’t be able to pay out Social Security and Medicare benefits without raising taxes.

We are financing our spending with debt, and eventually the interest on that debt will become so prohibitive that it will crowd all the other expenses out of the budget.

Has the central thesis been disproven? Of course not! If anything, the tax cuts have made the Power of Zero paradigm more important. Every day that goes by where the federal government fails to reduce spending means the reality of higher taxes down the road becomes all the more imminent.

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