Why We're Headed for a Collapse

by: Karl Denninger

From Bloomberg this morning:

Americans want Congress to bring down a federal budget deficit that many believe is dangerously out of control, only under two conditions: minimize the pain and make the rich pay.

The public wants Congress to keep its hands off entitlements such as Medicare, Medicaid and Social Security, a Bloomberg National Poll shows. They oppose cuts in most other major domestic programs and defense. They want to maintain subsidies for farmers and tax breaks like the mortgage-interest deduction. And they're against an increase in the gasoline tax.

Meanwhile, over in Britain, an attempt to play a game called "reality" has led to violence:

Britain's coalition government survived the most serious challenge yet to its austerity plans on Thursday when Parliament narrowly approved a sharp increase in college fees. But violent student protests in central London, including an attack on a car carrying Prince Charles and his wife, Camilla, to the theater, provided a stark measure of growing public resistance.

That the word "survived" had to be used in that paragraph is a stark reminder of just how close things are to not surviving "as currently constituted."

Here's the problem with the American perspective (and that in Britain, for that matter): There is no means by which playing "tax the rich" can close the gap.

Here, again, is the budget picture in terms of deficits in dollars:

(Click to enlarge)

So let's assume we don't pass the tax cuts for the "rich." Okay, that's $70 billion a year. The gap between revenue and spending is over $1.6 trillion. In other words, "soak the rich" gets you 4.4% of the problem.

And remember, this change gets rid of the dividend, capital gains, and income tax preferences for the wealthy, defined as "those who make over $250,000 as a couple, or $200,000 as an individual."

If we "soak the rich" even more, we could probably take another $200 billion off that number. That still doesn't matter, simply on the mathematics.

Beyond that level you probably run into "avoidance" -- that is, perfectly legal choices to make less.

There have been plenty of years where I've written really big checks to the IRS, and not all of them were related to MCSNet. The last few years have been pretty good. But this much I can tell you: If the government was to, for example, tax everything I made at 90% beyond $200,000, I would never make more than $200,000 a year again. Ever. I will not work hard to earn that money, only to turn 90% of it over to the government.

Exactly where does that "avoidance" behavior begin? I don't know. But what I do know is that it begins at a lot lower level than you probably think. And the spiral that this promotes downward in tax receipts is both very real and impossible for the government to stop or prevent.

This isn't to say that letting the Bush tax cuts (all of them) expire shouldn't happen. It should, in my opinion, rather than not only extending them but also creating a structural decrease in FICA tax that will, I believe, never be reversed. That will cause Social Security to run into actuarial trouble much sooner than it otherwise would.

Never mind that the big problem is in Medicare and Medicaid, two sacred cows. But while I've long written about these, in point of fact it really doesn't matter at the rate we're going. We're not going to keep this set of plates in the air long enough for that to all play out.

We have no leadership in Congress and, worse, we've become soft as a nation, demanding handouts and refusing to work for what we have. We think we have a right to advanced medical technology even though we have no money -- simply because we're alive. We have a "right" to unlimited unemployment if we can't -- or won't -- find a job. And make no mistake -- much of it is "won't." There are jobs ... just not at the rate of pay you expect to support the lifestyle you think you're entitled to. Or that job might be halfway across the country ... and you, of course, are "entitled" to live in a particular place, in a McMansion, irrespective of whether a job that pays enough to cover your expenses exists there.

Our sense of hubris has exceeded our willingness to get off our collective fat behinds by several orders of magnitude.

I'm sure I'll get more hate mail for this missive, as I usually do when I write something like this. But I do it because it's right, and because it is impossible for me to sit here with a clean conscience and see polls like that referenced in Bloomberg and say, "Oh, it will all be okay."

No, it won't, and the day of reckoning, when we're no longer able to play this game, will come here to the United States far sooner than most of you believe.

It is not just our leaders who need to step up -- it is also our people.

Disclosure: None