Is that true? Can lowered taxes lead to reducing economic inequality, more opportunity for all, an end to hunger and homelessness, a revitalization of the entire US infrastructure, and all while making green energy the most prevalent source of energy; with enough left over for full employment? I’ll let you decide. But first lets take some things into consideration. Just lowering taxes will not create the opportunity to do anything constructive, at least not until our monetary system is radically revamped. You see, the trickle down folks actually are like a clock running backwards; it’s correct if you look at it from the other side. And doing that means a lot of other things get changed as well. But more precisely, our economy is mixed. There are services performed by the private sector and services performed in the public sector. The same is true for goods as well. Although the private sector provides mostly goods and the public sector provides mostly services. These two sectors are intertwined so tightly, that putting everything into one or the other causes major disruptions in both. The recent economic crises is an example of try to fix a crises by moving everything entirely to the private sector does not facilitate recovery. But our economy also has mixed economic models. We have both socialism and capitalism. This is a healthy that can do much to keep the economy balanced and on an even keel. Less bubbles, more opportunity; less inequality, larger wealth for everyone. But, there is one thing that no matter if the economy is managed by the private sector, the public sector or by no one; there is one commodity they all have in common. Money.
What is money? There are a couple of ways to think about money. First, it is a medium of exchange. I go over to your farm and tend your pigs every day. Each day I get paid for taking care of your pigs. Most times you pay me with some milk and other dairy products, or maybe a chicken. And every now and then I get a whole pig; and that is a week’s pay. But eventually I have to pay the man at the store for my clothes, and he doesn’t want 2 dozen eggs for a shirt. No, he wants cash. And why not? How is he going to buy that shirt to sell to me, or pay the rent on his store. So I ask you to start paying me in cash and If want a chicken or even a pig; then I will pay you back some of that same cash. But, you don’t keep that kind of cash in the house, it is in your bank which is downtown right next door to the clothing store. So you give me a piece of paper, bearing your signature, every week for the same amount of money that you would get for selling one of your pigs. Then, when I buy the shirt, I give the owner of the clothing store another signed piece of paper for the price of the shirt. The banker keeps track of it all.
Soon, I get a second client taking care of his pigs. So, I go to the banker and tell him I want to buy a house, so can you lend me the money to buy a house? Now I am paying a mortgage every month to the banker. And every month he gets back some of his money; plus interest. Whoa! Where did that interest come from? We know where my money came from. When I worked, I got paid. I spent some of that pay for items, such as a shirt. But I also saved some money. The banker gave me some extra cash for allowing him to hold my money. And I give the banker some extra money every month just because he let me borrow some of the money he was holding for me and you.
This example shows two critical aspects of money. First, money can represent a trade value. I get paid the same amount of money each week that is the going price of a pig. (Sorta the pig standard!) And that is payment for a service, taking care of your pigs every day. The shirt or the price of the pig are both examples of using money to represent something tangible. Time = 1 pig/week ; Shirt = 24 eggs; house = 1 pig paid monthly?. But how about the interest earned? There is no tangible item for it to represent, other than money itself. That money was just added into all the money that represents all real items and services, even though money is not real.
The second definition is simpler to say, but much harder? to comprehend. Money is just another unit of measure, like inches for example. How many inches are there? Unless I restrict that to an ‘how many inches long is item X’ query the answer can only be that there are an infinite number of inches.
Money is a unit of measure that is used to establish value of any item or service, even money itself. And when money is referencing itself, then more money is added to the potentially infinite supply. So what the heck, just put together a printing press or invent a secret algorithm and create all the money you may ever need. Wrong. Why should I take your freshly printed currency to pay for tending your pigs? Taxes are due this month and the IRS only accepts US dollars. Taxes! Did you read the title carefully? If not, go look; I’ll wait.
OK, did you catch that it said Lower Taxes not No Taxes? Good, because unless there are taxes being collected, there is no reason to trust even the US Dollar. Everything has its limit, and taxes cannot even approach zero let alone become zero without major, major economic disruption.
Currently what happens is that when Congress spends, the US Treasury draws from it’s account at the Federal Reserve Bank to pay the bill. Occasionally, the Fed will notify the Treasury that the account is about to run out of money. The Treasury then instructs the Fed to issue bonds to any interested buyer. The income from those bonds are deposited into the Treasury’s account and the bills can be paid. When the bonds become due, the original purchase price plus interest is paid back to the investors. They are always paid back in US Dollars. The numbers also show that most of the persons investing in America are actually members of those that are part of the upper 2% of Americans with regard to income. The relatively small amount that actually goes to China, is still paid out in US Dollars. If the Chinese don’t want to lose money, they would not do anything to jeopardize their investment in the US. Progressives (like yours truly) generally want to gain access to those investor’s dollars by taxes, instead of borrowing it from them. And overall, that is true. it certainly is a better solution than lowering their taxes without paying for all those items I noted earlier. Besides, it is actually good to run an economy at a deficit, as doing so helps the private sector continue to grow. As I noted, it is one way to keep US Dollars intact and thereby maintain the currency’s value, so that holders of that currency, upon spending it , or even saving it; strengthen the dollar. Foreign nations such as China investing in the US Dollar, keep the dollar strong. By the way, foreign investment is the only debt we actually have to be concerned with. And that debt is perfectly OK to carry as long we can pay it back and as long as it remains in US Dollars.
But, there is actually a better solution than raising taxes so wealthy Americans and others don’t finance the nation, even if a dose of that is good. Remember I noted a mixed economy, what I am proposing is a change in the how the mix is allocated on the fiscal side. It would allow taxes to be cut and everything paid, it also defines exactly what our taxes do pay for and even what part of the budget is done through deficit spending.
The Treasury must take back from the Fed the ability to “print’ money as needed with a few very notable exceptions. It is important to note that money is not printed, it is actually just entries in a super secure spreadsheet. What this means is that Congress can allocate as much money as it takes to reinvent our infrastructure and provide for the hungry and the homeless. There are real world limits on how much Congress can spend however. But the limit is not infamous wheelbarrows of money from Post WW I Germany, just printing money alone will not create that kind of inflation. That inflation was caused by the incredible cost of reparations placed upon Germany by the Allies after the War. The reparations drained Germany of a large portion of it’s resources, leaving the private sector competing over scarce resources leading to inflation. But right now the US has tremendous resources, people, land, abandoned properties waiting to be rebuilt, and natural resources as well. And Congress can accomplish the list of goals that I started this post with tax free.
So, what do we pay taxes for? The first one is the safety switch in case Congress does over reach the limits of our resources, and inflation starts to rise. To stop the inflation, just raise taxes and it will slow it down . But raising taxes, implies that taxes are in place; so during times when inflation is not a problem. So, we maintain a Progressive income tax rate to manage income inequality. No matter what the economic situation is, keeping the top rate well over 50% has been shown to serve as a brake on income inequality; in other words, taxing the wealthy is good for the economy whether need their money or not, as it forces a better distribution of income. The next tax item, serves a social good. The entire military budget must be paid only from tax collections. By hitting persons with a potential tax increase every time we decide to halt the boogie man of the Century, (20th Century boogie man were Communists; 21st Century has Terrorists) it is very unlikely that people will jump at the opportunity to go into undeclared wars without cause. Of course, an actual declared war would be exempt from this requirement. Historically, the US Government has “printed’ money to support declared wars. Also, any expenses directly paid to the 3 branches of government and their staffs would be paid from tax revenues as well as paying down any foreign debt. Last of all, the US Government can continue to maintain fiscal balance by borrowing any money that is sent to the states.
So, yes it is possible to achieve full employment and reinvigorate the entire economy and there will be no excuses not to lead the world on the issue of Climate Change, with lower taxes. If you agree, please like this blog entry and share it as well. Thank You.
I would like to acknowledge the scholars at Modern Money Theory, who regularly blog on this subject. They are centered at University of Missouri – Kansas City. The overall framework is mainly drawn from their writings; the ideas and concepts regarding which categories of expenditures should be paid via printed money, taxes, or debt are my own.