April-May 2008

Alfred Mariani

          As we approach a serious economic downturn, economists site specific causes including the weakening dollar, the real estate crisis and increasing fuel costs. Yet, no one is talking about the common denominator that goes to the heart of root cause, and that is disposable income. Americans are the highest taxed consumers in the world. If we combine federal tax with state income tax, social security, Medicare, property taxes, personal property taxes, sales tax, utility tax and gasoline tax, disposable income is down to 40%-45% of gross income. Consumers must live on the balance, which becomes increasingly difficult, particularly when trying to adjust for inflation. Working families are also trying to keep up with college tuition costs, which run at three times the rate of inflation. To survive, consumers have been relying on the equity in their homes to supplement a decrease in positive cash flow. In other words, our so-called economic growth has relied upon debt-financed consumer spending. As we all know, consumer spending is 67% of GDP. With the current housing crisis, equity is evaporating and banks are tightening credit. Therefore, consumers no longer have the option of debt-financed consumer spending, and they are out of options. The only remaining option is to lower the tax burden on the middle class. If consumers have more disposable income, they can better manage adjustable mortgages rates, and increasing gasoline prices, without relying on debt financing. If the tax burdens on consumers remains at its present level, real economic growth will be impossible.