The Trouble with Government Spending
This essay was first written by Ron Muhlenkamp in October of 1996 and updated in March, 2005.

The trouble with government spending is that the government doesn’t have any money. Every dollar spent by the government must be raised - either through taxes or through borrowing. We’ve heard a lot about the borrowing -  to cover the Federal deficit, but we don’t hear much about the taxes. For most of us, we only see the taxes on our annual tax return and our W-2 forms. The W-2 lists our gross pay along with deductions for Social Security (FICA) and state and local taxes, but this is only part of the story. The other part is the taxes paid by the employer that the employee never sees. The following table shows the W-2 numbers for someone making a gross income of $40,000 per year, but the table also shows the amounts paid by the employer for FICA, various "unemployment" taxes, health care, etc. As you can see, for the employee to take home $31,586.00, the costs to the employer are 64,962.86. Specifically, for my son to take home $1.00 costs me (his employer) $2.06. So he must earn $2.16. The ten cents is my return for hiring him. (In fact, the average profit to payroll in the U.S. economy is 5-7%.)

If the employee doesn’t produce $2.16, he/she won’t have job. So the way to encourage job creation is to allow the employer to keep the "dime." If you tax away the "dime," you tax away the job. In the 1970s, we taxed away the "dime," (inflation raised income taxes and the government raised social security taxes) and businessmen quit hiring. Although Ronald Reagan didn’t cut federal spending, he did cut tax rates, encouraging us all to earn more money (and incidentally to pay more taxes). So the question becomes, "What rules give people the greater incentive to produce and earn more – and to spend more effectively?" Based in my observations in the essay Muhlenkamp’s Musings on Economics,  I have concluded that personal and national wealth production is managed in the private (non-governmental) market.

The most obvious example of this is in food production and farm policy. The consumer is quite willing to pay for food, and therefore, to pay farmers to grow food -- only a government would pay farmers to not grow food. By giving incentives to not produce goods and services, the government actively lowers the total wealth of the nation.

(Table updated March, 2005)

Employer’s Costs	0	0
Gross Wages	$40,000.00	$40,000.00
FICA Contribution (Social Security and Medicare)	$3,060.00	0
Health Insurance	$11,635.92	0
Unemployment Taxes	$266.94	0

Employee’s Deductions (Married With Two Children)	0	0
FICA Contribution (Social Security and Medicare)	0	$3,060.00
Federal Withholding (Zero Exemptions)	0	$4,080.00
State Withholding	0	$1,228.00
State Unemployment	0	$36.00
Occupational Tax	0	$10.00
Employee Cost to Company	$54,962.86	0
Employee Take Home Pay	0	$31,586.00
Pension Contribution	$4,000.00	0
Profit Sharing Contribution	$6,000.00	0
Employee Cost to Company after Year 1	$64,962.86	0

Ron Muhlenkamp
©1996 All Rights Reserved