Behind almost every government action lies a single question: How do we pay for it?
The answer seems simple: by taxes or by debt. But taxes have to pay down the debt, so the real question is not “how” but “when” we raise the stake. At the federal level, the answer is often “later”.
These days the country is seeing massive new government spending. Think of the economic recovery from COVID-19, including Maine’s struggle to tax federal business aid, as well as the Texas energy collapse.
The pain of COVID-19 will be long lasting when added to other debts, and the bill must be paid.
President Joe Biden has proposed $ 1.9 trillion as economic stimulation to get out of the coronavirus slowdown. Eventually the cost will be close to that.
Economists have widely agreed that the federal government government stimulus spending is working in the production of renewed economic activity. They also agree that with a weak economy producing reduced tax revenues, the stimulus must be financed by borrowing.
The economic bet is that a newly restored economy will increase tax revenue to pay the cost of borrowing. Right now, with unusually low interest rates, the government can take on more debt at little cost. But beyond the interest, the principal must also be repaid.
The argument against spending as much as Biden wants is that the government continues to take on debt. This is traditionally the Republican position and the current position of this party. Senator Susan Collins and her GOP allies proposed $ 618 billion in stimulus spending, far from a worrying trillion.
Yet when the GOP controlled Congress, it freely increased debt while reducing taxes. This suggests that taking on new debt to stimulate the economy may be more a matter of politics than economics.
the the public seems to favor Biden’s proposal, supporting short-term economic recovery and a return to work on the cost of later bill payment with interest. Former President Trump himself wanted a bill bigger than many GOP senators. Maybe deep down, most people are crypto democrats.
In the United Kingdom, the government has just announced that it go looking for higher taxes to start paying the COVID-19 bill.
Then there was the Paycheque Protection Program, or PPP, tax scheme. The federal government gave P3 loans to businesses, which did not have to pay them back if they kept people working. The loan would then be considered taxable business income which could be fully offset by deducting the payroll expense. In short, the PPP would be taxable income that would be erased by the payroll.
In December 2020 COVID Relief Bill, Congress changed the policy and decided that businesses would not have to count the canceled loan as income. This meant that a business would get a tax deduction for distributing federal money.
The PPP benefit suddenly doubled, including both payroll funds and tax relief. The tax loss would be recovered by the taxpayers.
Maine taxation generally follows federal rules. At first, Governor Janet Mills, a Democrat, supported the original policy of fiscal neutrality. She didn’t like Maine accepting the free ride on PPP revenue. The backlash from the GOP and business groups was immediate, and she withdrew. Companies with up to $ 1 million in P3s would get the new break.
Mills believes she can protect taxpayers from the resulting $ 82 million bill to the state. The cost would be covered by federal funds and state reserves, which all come from taxpayers. Nothing really new here, although the tax trail can be difficult to follow.
Texas had a lot of problems when it was hit by the real winter. He faced blackouts and frozen natural gas pipes. Even as the federal cost of COVID-19 increased, Biden declared a state of emergency, triggering a flow of federal aid into Texas.
Ironically, Biden helped Texas, who had asked the Supreme Court to prevent him from becoming president. The Republican governor thanked Biden but wanted even more help. Federal aid came from debt, which the GOP does not like, and taxes, which it wants to reduce.
States need to balance their budgets and could not get into debt fast enough to cope with the COVID crisis. The federal government can accumulate debts without knowing how to repay them. This is why states have turned to Washington, increasing the federal debt.
Additionally, by relying on federal debt, states and individuals may feel like someone else is footing the bill. They fail to recognize that they are “someone else”.
People are constantly told that taxes take their hard earned money. But just as they shop for households with those dollars, they buy the services they want, from stimulus help for small businesses to emergency aid for states, with their taxes.
At the end of the day, we have to pay for what we buy. Higher taxes are inevitable, not for one “socialist”Government, but to pay for what we have already bought.