These Tax Cuts May Wipe You Out.
This article was written following the 2001 tax cuts.
How 'bout them tax cuts!! Pretty cool stuff, eh—gettin' some of our own money back and all. No politician ever got in trouble by cutting taxes, and they know that.
So what about these tax cuts? Are they good or bad? Too big or too small? Benefitting the right people, or not? Should they be temporary or permanent?
Here's the truth. The National Debt is now over $7 trillion! And that's why the tax cuts are a problem. That debt is not a fiction. It's real money. You owe it to your neighbors. Your personal share, if you're a typical employed person in the U.S. is over $50,000. And you pay interest on it—every day of your life. Interest on the debt currently takes about $200 out of your pocket every month! If we paid off the debt, your taxes and other expenses would shrink by $200 per month. That is huge when compared to these tax cuts.
(Interest figures can vary widely month-to-month; see the National Debt Numbers at a Glance page for the most recent figures.)
So what's the connection? How is the tax cut related to that huge interest bill you're paying? It's pretty simple, really. Every dollar of tax reduction today delays the day when the debt will be paid off, and increases the amount of interest you pay on the debt.
Maybe you are believing that the tax cut will be greater than the increased interest costs. Don't be deceived. Every dollar of tax reduction you receive this year will cost you nearly ten dollars over the next fifteen years. Of course, you aren't getting just a one-dollar tax cut. Suppose your tax reduction this year amounts to $300. That means that you'll actually pay almost $2900 more over the next fifteen years—and that's with your $300 per year tax cut figured in. The interest penalty will be $2900 more than the tax cut.
Does it get worse than this? Of course it does. Under this plan there isn't even any discussion of ever paying off the debt. Over the next thirty years, the cost of your $300 annual tax cut will be almost $17,000.
Perhaps you doubt me. Do this. If you don't know how to figure amortization on a loan, find a friend who does. Calculate the monthly payment amount on a $50,000 loan over fifteen years, at 4.7% annual interest (about what interest on the debt has been running). Then calculate the total cost of the loan by multiplying the payment amount by the number of payments. Now calculate the effect of reducing the monthly payment by 1/12 of $300-that's equivalent to your $300 annual tax cut. Calculate how much longer it takes to pay off the loan. Again multiply the payment amount by the number of payments, including the fractional payment you'll owe at the end. Look at how much the cost of the loan has increased. You'll see that my figures are reasonably accurate.
One more detail before we leave this discussion. Interest on the debt in recent months has been averaging about 4.7% (it fluctuates wildly, depending on just how much is being borrowed, at what interest rate, and what old obligations are being paid off). The current interest rate is phenomenally low. When the government begins borrowing more heavily, as it surely must do in the face of these tax cuts and the current spending levels, interest rates will have to rise. Average interest on the National Debt could easily rise to 7.5% or more. That will make the gloomy picture I've painted much worse. In time the interest could double or even triple.
I don't think you can afford these tax cuts. They could bankrupt you.