Where Does The Money Come From?

Some fairly interesting numbers were released last week by the Bureau of Economic Analysis concerning the American public's income. Their statement showed that personal income from private wages (money earned through working at non-government jobs) has fallen from 47.6% at the turn of the century to 41.9% last quarter while income from government transfer payments (Social Security, Food-Stamps, Unemployment Insurance, etc.) has risen from 12.1% to 17.9% in the same period. Simply, less money is earned from private employment while much more comes from the government.

Such an income shift is potentially very troubling for the US economy. The key problem is that most of the government's spending comes from revenue generated by taxing private income. At a time when the share of privately generated income is falling by almost 5%, the government's share has increased by almost 6%. The government is paying a significantly higher share while its pool to tax is shrinking precipitously. Additionally, the government is also paying out another roughly 10% in wages for public sector employees.

Overall, out of every $1 in American income, over $.27 is paid by the government. So, the government must tax an average about 1/3 of Americans income just to pay for its workers and transfer payments. This excludes the costs of goods it much purchase to be used by their workers and in what they produce on behalf of the government. In total, for the government to pay for its obligations and services it needs to tax at a prohibitively high rate. Additionally, this would also need to include extra money to service existing debts.

In sum, the government is spending huge sums of money in proportion to what the rest of the economy is generating for personal income. Obviously, with a recession, incomes decrease and the government has stepped in to fill the gap. But, over the long run this is not sustainable. If the US government spends at an elevated rate for a brief time, there will be little overall effect on the economy. However, should such dependence on the government last for an extended period, the country will be forced to become increasingly dependent on financing itself through debt instead of taxation. Ultimately, this will lead to insolvency and economic collapse.