Spending, not Taxation, Is the Problem

Thursday, February 23, 2012
Spending, not Taxation, Is the Problem
by Jacob G. Hornberger

With President Obama and various Republican presidential candidates competing to reduce corporate income taxes, it must be election time. Do you ever feel like you're living in a Latin American country, where the presidential candidates are notorious for offering all sorts of political candy to the voters during the campaign season?

The whole notion of reducing taxes is, of course, ridiculous. Why? Because as Milton Friedman pointed out, the real level of taxation is the amount of money the government is spending. Whatever the government is spending is what the government must collect in taxes. Thus, when spending exceeds tax revenues and the government lowers taxes on one group, another group will have to make up the difference with increased taxes.

Suppose, for example, the government is spending $100,000. Suppose that there are three groups in society. Group A is paying $50,000 in taxes. Group B is paying $30,000. Group C is paying $20,000. The amount of ax revenues equals the amount of federal spending.

During campaign season, in the attempt to garner votes, presidential candidates promise to lower taxes for people in Group A by $20,000.

But that's not all. The candidates also promise to deliver additional government welfare to all three groups, the total cost of which will be $30,000.

The mainstream media cheers! The voters are ecstatic. This is absolutely fantastic! Reduced taxes and increased benefits! Would could be better than that? We have the best presidential candidates in the whole world!

But there is obviously a big problem. With the campaign promises, government expenditures will total $130,000 (including the additional $30,000 in welfare benefits) while tax receipts (including the $30,000 reduction in taxes for Group A) now total $70,000. That's a $60,000 deficit..

Since government gets its money through taxation, that's obviously a problem. The government must get the additional $60,000 from someone. By lowering taxes on Group A, the government must increase taxes on Groups A or B to cover the difference.

Of course, the government could go into the capital markets and borrow the money, which is what the U.S. government, the Greek government, and many other governments have been doing for a long time. But that only delays the inevitable. When the bonds come due, taxes must be imposed on people to pay off the amount borrowed.

Another course of action, one that the U.S. government has used for decades, is simply to print the money rather than impose higher taxes on those people in Groups B and C. That's where the Federal Reserve, or central bank, comes into play. Its job is to enable public officials to pay off government debt in money that then constantly falls in value due to its ever-increasing supply.

That's, in fact, why the value of the U.S. dollar is worth only a fraction of what it was worth when the Fed was established. It's also why Americans are now relegating to using coins consisting of cheap alloys rather than gold and silver. The bad money drove out the good money.

The obvious benefit to inflation is that it enables politicians to promise tax cuts and welfare increases without overt tax increases to make up the difference. Politicians know that the mainstream media and most voters will look upon them as fantastic magicians who clearly love the people. When prices begin rising in response to the debased currency, the politicians know that the mainstream media and most people will never figure out that it is the government's doing. They'll inevitably blame the rising prices on "big corporations," "greed," or "market forces."

The real problem facing our nation is the out-of-control spending ­ spending that far exceeds the amount of taxes being collected. That has led and continued to lead to out-of- control debt, which inevitably leads to inflationary debasement of the money supply by the Federal Reserve.

As long as spending continues to soar, the economic problems facing the American people will continue to grow, just as they will continue to grow for the people of Greece.

The best solution out of this morass, however, is not just to cut federal spending so that it equals tax revenues. Instead, the time has come for Americans to challenging the entire welfare-state paradigm and warfare-state paradigm that have brought us so many problems.

Repealing and dismantling both the welfare state and the warfare state would mean no more socialist programs, including Social Security, Medicare, and Medicaid, and no more overseas military empire or domestic military industrial complex. It would mean no more Federal Reserve. And it was mean no more income taxation, rendering moot political promises to reduce income taxes at election time.

http://www.fff.org/blog/jghblog2012-02-23.asp