Are Taxpayer Dollars Really Funding the Bailouts?

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Taxpayers' rage over bailouts, TARPs, and daring housing rescue plans continues unabated. The nation's ire seems largely centered on the idea that our tax dollars are directly rescuing Wall Street banks like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) and subsidizing underwater homeowners.

Rabble rabble rabble
The problem with this argument is that our tax dollars have already been spoken for, and have been for quite some time. According to The Heritage Foundation, from 1965 to 2007, government tax revenues grew $1.9 trillion, but spending rose $2.1 trillion, resulting in average annual deficits of $167.8 billion on an inflation-adjusted basis. So even before the bailouts began, formal income tax dollars alone didn't fully pay for the government's spending. It's somewhat fascinating that it's taken us taxpayers some forty years to finally demand fiscal responsibility in Washington.

But now that we're tacking on a few more trillion in 2009 and beyond for various forms of government economic intervention, how will our government bridge the even bigger gap?

Not with higher income taxes across the board -- we Americans have never really cared for taxes (see: Revolution, American). At best, we consider them a necessary evil. Instead, it will all be paid for with more debt, in the form of U.S. Treasury securities.

In a twisted way, the global stock market panic has actually helped the government borrow at better rates -- since the Treasury is the largest liquid market in the world, backed by the full faith and credit of the U.S. government, panicked investors have flooded the Treasury markets for relative safety, driving down yields and jacking up prices. Today, the 10-Year T-bond yields just 2.7%, so the government would be crazy to not want to finance its projects at such low rates.

Eventually, however, this sweet arrangement will change, as all things must. Income-thirsty investors may begin to nibble on higher-yielding-but-investment-grade corporate debt issued by names like Xerox (NYSE: XRX  ) , Home Depot (NYSE: HD  ) , and Caterpillar (NYSE: CAT  ) . Doomsayers may cash in their T-bonds to plant potatoes, stock up on canned soup, and buy ammunition. And enterprising investors may even -- dare I say it -- retest the stock markets for better returns. However it plays out, as investors flock out of Treasuries, they will drive up yields and drive down prices, forcing the government to borrow at higher interest rates. 

What it all means
In 10 years, as entitlements like Medicare, Medicaid, and Social Security begin to ramp up for the baby boomers, the government will have no choice but to print more dollars to fund all its projects and pay for its liabilities. This, my friends, means inflation and the gradual devaluation of the dollar, which will serve as a "backdoor tax" for future generations of Americans.

Our frustrations as taxpayers regarding the bailouts, therefore, shouldn't be based on our formal income taxes, since they amount to just a drop in the bucket. No, our concerns should be with the massive government borrowing and its negative effects on the long-term value of the dollar, which would levy an especially heavy tax on savers and fixed-income investors, and make investing in the U.S. less attractive to foreign investors.

Do something about it
If you're concerned about our country's fiscal health, make your voice heard by contacting your representatives in Congress (you can find them at and let them know that you care about this issue.

Todd Wenning owns shares of Home Depot, which is a Motley Fool Inside Value pick, but of no other company mentioned in the article. The Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (44)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 20, 2009, at 3:42 PM, FinancialFellow wrote:

    Excellent point on devaluation of the dollar being a "backdoor tax" for future generations. If the U.S. were an average American household it would have been foreclosed on years ago, had all of its accounts sent to collections, and be living off government programs.

    The bottom line is that America is on a decline. We spend way more money than we have and in the process devalue our currency - the Dollar. I wouldn't be surprised if within a matter of several years the Dollar is overthrown as the dominate world currency.

    The current market has produced many good investing opportunities and I plan to cash in on them via online trading:

    That said, all of my potential proceeds will be bought with Dollars - which are on a long, steady decline. I plan to gain exposure to foreign currency by investing international, however, when you earn dollars it puts you behind the 8-ball. Even more so over time...

  • Report this Comment On February 20, 2009, at 3:58 PM, Snertie wrote:

    Absolutely right on. Anyone with any brains at all knew that the President's "Tax Cuts for 95%" was complete nonsense. The %5 who were supposedly to be taking on the burden for the rest of us are the same people who can best afford the mechanisms to not pay, either by engaging high-priced legal and accounting talent or just not playing here anymore.

    Long before inauguration day, even the Marxists knew that raising taxes was out of the question. All that was left was to print money. Ironically enough, inflation is probably a far more fair method of taxation than the previous regime of special interest tax credits, cuts, and rebates. It attacks everyone, and effectively undoes the trend of the last several decades of removing nearly half of wage earners from any income tax liability. The bad part is that it decimates savings, and makes the economically most vulnerable even more so.

    The question is: Will the 95% who actually thought they were getting a tax cut realize that they've been had?

  • Report this Comment On February 20, 2009, at 9:57 PM, AtlasAynRand wrote:

    Contact our Congress???

    Are you serious? What are they going to do that they haven't already done.....more spending, more bailouts, more government fixes?

    Congress is nothing more than a bought and paid for lobby machine of special interests.

    Anyone who still believes that Congress actually represents the people is quite naive and foolish.

    The only Congressperson anyone thinks is doing a good job is the one in their personal district. Unfortunately, when you add up all the districts you get the US Congress.

    Good luck suckers.

  • Report this Comment On February 21, 2009, at 9:42 PM, brwn8484 wrote:

    I have been calling 2-3 times/week for last 2-3 months and only once have my reps really listened. As a matter of fact, the Democrat gov of Ohio, Strickland has proposed a new budget which will probably bankrupt my family, He wants to create a 2 tier education system in OHIO. Charter school students will only receive 1/2 the money of a brick and mortar school. What makes this even worse, our brilliant leaders are going to force all the students being educated for less money back into higher cost (brick & mortar) schoos ..costing state over $500,000,000. My wife works 11 months out of the year which exceeds brick anf mortar school teachers by several months. In addition the pay scale for non union charter school teachers puts my wifes salary lower. My wife will lose her job and we will probably be bankrupt.

    Welcome to the new America where we will &*(*&*( anyone who is honest, works hard and tries to use common sense. Oh well, I guess we wont have to worry about taxes anymore. Hope you all can pick up the slack. I have never taken govt aid, but I may be asking you all for some extra tax money, since you are all so wealthy. And dont worry, I will be sure to send a thank you note for all your kindness. Have a good day and see you in the soup line!

  • Report this Comment On February 21, 2009, at 9:54 PM, brwn8484 wrote:

    P.S. dont worry - we wont be taking any Tarp or Balout money. That should allow plenty of Tax receipts to go around for all the charter school teachers. Thanks again for all your help!

  • Report this Comment On February 22, 2009, at 3:30 PM, Sridhartoronto wrote:

    Wow! What negativism from a population which had it great for the last three decades!

    The truth is , the whole WORLD was paying your country's taxes for these thirty years letting you citizens have a virtually free ride.

    Been to any country in Asia or Africa recently and moved out of the major cities? The people there would really love to get the guaranteed electricity , water supply , good schools that they subsidized for you through their low cost labor.

  • Report this Comment On February 22, 2009, at 5:29 PM, kerg01 wrote:

    Its very simple, gold in 2000 was $280, it is now $1000. Throughout history gold has more or less maintained its value vs real goods. So in essence if you kept your $1000 in a savings account since 2000 you would have $280 (more or less) real dollars now. (assuming you made 0% interest) So the Federal Govt through the FED has stolen $720 since 2000, you get to keep the gravy of your investment minus capital gains tax...

    If you total it all up you have been robbed and are about to be robbed like you have never been robbed before...

    How else do you think they pay for all this spending?

    I wish they would just get rid of the income tax and use inflation, then we could all see it for the demon it is..... oh wait then how would politicians get away with this robbery?

  • Report this Comment On February 23, 2009, at 1:38 AM, redneckdemon wrote:

    Easy: by virtue of nobody having the authority to stop them. Except the voters, in theory. But our votes don't seem to matter much, and neither do our opinions.

    I don't think America has fi tthe definition of a "Democracy" since the Constitution created the 3 branches of Federal Government.

    The voters in this country only get a say in who represents them, not HOW they are represented. If you had a few tens of thousands of people march on Washington and demand they do as they are told by the majority of U.S. Citizens and refused to leave until they did, you would most likely be detained/disbanded by the local and state police, with military back-up.

    Your opinions don't matter in how our country is run. Believing otherwise is an exercise in self-delusion. The only real way to see the changes you want is to get elected and make them yourself.

    P.S. Change is not always for the best, and changes for the worst are often the most realistic and believable. "Change you can believe in!", especially if you make a habit of asking questions people don't want to answer.

  • Report this Comment On February 23, 2009, at 7:31 AM, brwn8484 wrote:

    It's interesting... when the Republicans were in office, all the problems were due to criminal behavior and free market and low taxes.

    Now that the democrats are in power, all the blame goes to negativity and lack of support.

    Regardless of whom you believe, none of what is being proposed is in our best interest! And if you believe that anything is being done to help the middle class or poor, you need to wake up and read your history book. Read about every major civilization and you will see a decline related to greed, abuse of power and lack of morality. Welcome to America!

  • Report this Comment On February 23, 2009, at 9:32 AM, Colorator wrote:

    Holy cow... I'm going to have to agree with Sridhartoronto (by the looks of your ID you're probably living in Canada and have a whole different view on taxes and healthcare!)

    I mean, for those of us who live in the US who enjoy relatively low unemployment, high wages, low taxes, and a pretty low cost of living, we should be ashamed of ourselves.

    We certainly didn't complain when we were allowed us to buy a house with 0% down. No money down, no credit... NO PROBLEM.

    We are Americans!! It is not OUR fault that I own a large house worth less than I owe or drive an expensive car. I can't live without cable, flat screens, a new kitchen, four-wheeler... We've forgotten all of the advice of our grandparents. That is, we live past our means and we spend too much. Can you believe the credit card companies gave me that card?? What was I supposed to do? NOT use it?!

    If it's THAT bad, leave the US, go live somewhere and learn what bad really is. Heaven forbid that those of us who haven't lost our jobs pull together and help out those who have.!

  • Report this Comment On February 24, 2009, at 10:00 AM, TMFTomGardner wrote:

    Colorator, have you compared our tax rates by category to those of other industrialized nations? Or are you just assuming we must pay low tax rates because we're Americans?

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