In our quasi-capitalist culture, many of us, including me, grew up to be materialistic hyper-consumers. We learned and adapted to the “bigger, better, faster, stronger, prettier, skinnier, richer, and smarter.” Personal self-satisfaction and introspection remained elusive. Over the decades, how did this state of hyper-consumerism turn into debt addiction or debt serfdom? Consumers rarely understand all the taxes they pay. Consumers pay state, local, use, excise, and sales taxes on almost every dollar of purchases or consumption and compound taxation on products, goods, and services. If the consumer borrows funds to purchase things, they pay sales taxes on the original purchase. When they earn income (to pay off the debt), they pay all the related taxes at their highest marginal rate. (A marginal tax rate is the highest percentage rate of tax expected and is provided by a government schedule.) Our current system of taxation comes in multiple forms and is in most cases redundant, and compounding. The primary identifiable taxes include federal income tax, payroll tax, social security tax, unemployment tax, state income tax, property tax, consumption tax, tariffs (tax on international trade), per capita taxes, capital gains tax, recapture tax, use taxes, death tax, multiple add-on fees, “special assessments,” and tolls. 80% of government income comes from the consumer. The more we consume, the more we are required pay in taxes and assessments, and the more indentured consumers will become—debt serfdom. The more houses, furniture, cars, body modifications, pets, vacations, and ornaments we possess, the better. Dinners out, flowers for the wife, purchases of baubles and widgets, all incur taxes. There is no public outcry, or government-sponsored awareness program. Instead, the government encourages excess spending and consumption. The status quo is supported with advertising, media blasting, fear mongering, spreading misinformation, social re-distributive engineering, and appealing to the passions and prejudices of the masses. We are encouraged to keep our eye off the ball, keep spending and to forget about what is important in your life.
Assume that a consumer is considering the purchase of a new automobile. The purchase requires a down payment of $5,000 and a financing of $25,000. The auto loan demands principal and interest payments each month until the debt is repaid. A consumer earning enough to be taxed at the highest marginal rate will have to earn $2.00 for every $1 of principal reduction on the $25,000 loan. Let’s do the numbers:
The real monthly payment, including imputed taxes, meaning the car payment and taxes on the amount earned equals about $888, almost twice the stated monthly payment. This does not include, gas, maintenance, and insurance. Many debt-serfs cannot come up with the $5,000 down payment so they may opt to lease the automobile for 36 to 48 months for only $1,000 up front. The lease payment is about the same as a car payment, at $476 per month. The debt serf must earn income and, be taxed on those earnings to make the monthly lease payment. At the end of the lease term, the debt serf will have done nothing but rented a car, with no equity build-up! Once consumers reach a point of no return, where the only option is to obtain more credit cards and accrue more debt, credit card companies allow the debt serf to make minimum payments on the balance owing, even though the interest accrues at—say, 22%. $30,000 of credit card debt… at an average rate of 22%… trouble in paradise. Minimum monthly payment = monthly annualized interest rate + 1% off balance
If the consumer were to cease using credit cards and changed the payment schedule into a “60-month amortized loan” at 22% annualized interest, the monthly payments would be about the same. To become debt free, all credit card purchases must cease for the full 5 years. Can you hear the screaming and outrage from the willing consumer participants? If you assume that this consumer makes $80,000 per year, after all, federal and state tax deductions and possible pension deduction, he/she nets 60% or $48,000. This reflects a monthly spendable income, sometimes referred to take-home pay, of $4,000. Out of this, the consumer must pay housing costs, transportation costs, family living expenses, medical insurance, and credit card payments. Most times the net spendable is eaten up before the credit card minimum payments can be made. It is common to hear of someone living on 105% of their monthly income. Many consumers may turn daily living expenses into long term credit card debt. The United States has about 153,000,000 workers, of which half could not come up with $500 for an emergency car repair or collision deductible. Hence, more credit card debt, or even worse, taking out a payday loan with a 40% per annum interest charge. In the automobile’s example leased car payment of $476—including gas, maintenance, and insurance—the total cost amounts to $.70 cents per mile. An average of 10,000-miles per year equals $583 per month. 15,000-miles per year would equal $875.00 per month. ✔ Lease Payment–$476.00 ✔ Auto Related Expense–$583.00 ✔ Credit Card Payment–$850.00 ✔ Medical Care–$500.00 (for a bare-bones policy) This leaves a discretionary income of $1,591 from the $4,000 take-home pay, to cover living expenses. Therefore, two-earner families are common. Consider known pockets of debt that will contribute to serfdom. The debt binge encompasses every segment of our society, including government borrowing.
All participants will pay federal and state taxes on most of the principal reductions for all this accrued debt. Most times, business enterprises pass their debt payments on to consumers, or tenants, through higher prices. Almost the entire American enterprise is based on debt which the consumer will be required to pay. What would happen if a major portion of US consumers arrive at a satiation point where they cannot spend any more money? Millions of consumers can never pay off their debt and are insolvent. Welcome to the state of the collective consumerism in the USA. If consumers do not spend, then tax receipts diminish, and the government cannot pay its obligations. Millions of government employee labor union members will scream: “You promised me a big fat pension retirement!” The concept of public service has been reversed. Taxpayers are the public servers, with public employees and labor unions as the protected beneficiaries. You probably know that thousands of retail stores are closing. The common assumption is that web-based, online purchases have displaced brick and mortar retail locations. That is only partially true. Web-based purchases make up only 8% of the total of all retail spending. I believe our society has reached a point where most consumers have spent themselves into the poor house. The fallout is now being felt in many industries, such as retail, automobile/transportation, and food services. Residential rents and house payments have increased to gobble up a much larger portion of disposable income. Remember, the renter first earns the income, pays the required taxes and then makes the rent payment. A homeowner gets only a minor deduction for interest and property taxes. Having and raising children is also a very significant expense that requires income that is taxable. The additional children related expenses include medical, clothes, food, education, and child care. About one-third of families in the US spend 20% of their net household income on daycare, with some being forced to use a credit card to pay for childcare. The only way out of this debt serfdom is to reject the habit of spending, other than the expenses necessary to live. Frugality must become the norm. Easy to say, but hard to do. There is no “Recovering Debt Serf Association” where you may go for the support you need to break the addiction, why not? Because the system is created to keep consumers addicted. Dan Harkey If you find that this article provides value to you and your associates, please forward it to others that may enjoy its contents. Please refer your friends and associates to go online to danharkey.com and subscribe to my future business, finance, and real estate related articles. This article is intended for educational purposes only and is not a solicitation.© Dan Harkey and danharkey.com, 2019. I strictly prohibit unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner. Excerpts and links to the articles may be used in your marketing efforts provided that full credit is given to Dan Harkey and danharkey.com with appropriate and a specific direction to the original content. The credit displayed when you forward an article must include Dan Harkey, danharkey.com Business & Finance consultant. You may not change the content or the title of the article. |
