As our elected officials keep rolling out trillion dollar spending plans, allegedly to be financed by proposed increases in taxes on corporations and the wealthiest individuals, one might wonder, what happens if revenues fall short?
None of the details relating to planned spending and tax increases have been released, and it will probably be several months before anything is finalized. However, it is not too early to begin to consider some of the reasons why actual tax receipts may fall well short of expectations.
A few of the more obvious reasons.
- It is a lot easier to spend than to tax, and politically safer. Remember “read my lips, no new taxes”.
- House Democrats have already started to seek exemptions. Once exemptions start, more will get in line.
- At some point, the wealthy and corporations will ramp up lobbying and avoidance strategies.
- Spending almost always exceeds the advertised amount, and revenues never reach the assumptions made to justify the spending.
Investors should consider the implications of a meaningful spread between spending and tax collections over the next several years. What will our leaders do? The more likely options may be limited to letting the deficit get further out of control, or implementing a more efficient and effective tax collection regimen. Letting the deficit run is likely to increase inflation, if not sooner, almost certainly later. If increasing tax collection is the strategy, the most obvious choice would be the introduction of some sort of value-added tax (VAT). We discussed VATs in our blog of Sept. 28, 2017. To summarize, VAT’s are very efficient, almost impossible to avoid and very regressive, but they can easily raise enormous amounts of money, as everyone, literally everyone, pays. Both options reduce purchasing power and, in effect, are consumption taxes, which are inherently regressive.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®