Higher Taxes or Higher Interest Rates: If You Had to Choose

The government has spent a tremendous amount of money–up to $23 trillion, according to one estimate–on bolstering the financial system. The banks still haven’t dealt with the “toxic asset” problem that precipitated much of that government spending going to banks. Investors continue to buy U.S. Treasury bonds, but there are sellers, too.

Popular wisdom is that, at some point, either taxes or long-term interest rates will have to go up. What would be preferable, higher taxes or higher interest rates?

Higher Taxes a Known Reality

The choice is somewhat false because income taxes are set to rise in 2011 as the Obama Administration lets the Bush tax cuts expire. So it’s really not a matter of either/or, then, but both/and, possibly.

Higher Interest Rates Not Yet Accepted

If you are looking for the best CD rates or best rates paid on savings accounts, you most likely assume that interest rates will go up. Perhaps little by little, but all the same, up.

Therefore, you keep an eye on interest rates, prepared to move your money into higher interest deposit accounts whenever you find one. That’s smart.

It would be interesting to know how large this smart group of people is relative to the millions who assume that the government (or China) is “responsible,” eternally, for interest rates not going up signficantly, ever, no matter what.

This second group is large, to be sure.