Sunday, August 5, 2012

Debating Taxes

Josiah wrote a couple of posts on facebook about taxes and since this is the Internet, I immediately thought everyone should know what I think about it. In my last post I gave an illustration of why deficit spending doesn't really matter; any burden placed on the nation by the government is a result only of spending. I want to try and explain that a little better and point out something most people miss when they debate taxes and spending.

Every time the government spends a dollar, it literally spends a dollar bill. In other words, the government, for the most part, does not buy on credit. I'm sure there are some small counter examples, but in the scheme of the trillion-plus dollar budget, they are minuscule. The government has to raise money for everything it spends. Dollars in equals dollars out. So how does it do it?

The federal government has 4  ways of financing its spending:
1) collecting taxes
2) selling treasury bonds
3) printing more dollars
4) taking by force

No matter which of the four ways the government chooses to use, it has to raise exactly the same amount of dollars. In other words, the magnitude of the burden created is exactly the same. What determines the size of that burden? Spending, and spending alone.

The only difference between the four financing options is who the burden is placed on. This a fundamental point I think people miss when they debate taxes. Too often I see in debates people debating taxing and spending at the same time, when it would be much more productive to debate the two parts individually. The debate should be

1) Does the benefit of this particular spending outweigh the burden? For example, is the benefit from this road worth the burden of paying for it, or is this aircraft carrier worth how much we are paying? Whether a particular program or purchase is "paid for" with taxes does not matter. The only point to argue here is if the costs outweigh the benefits.

2) How should the burden be distributed? The important point here is that the burden we are talking about is the entire burden. It is meaningless to say that we will make the rich spend for something and the middle class pay for something else. Dollars are fungible. When debating this topic, we are talking about distributing the entire burden of government spending.

In my next post, I'll discuss how the four ways of federal financing place the burden on different people. As always feel free to comment.

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