The moment you apply the rules of balancing your books to a national budget, you have made a colossal mistake. Read on, let me know if agree.
It is Budget season on Washington when various caucuses and even the President all submit a different budget for consideration. And certainly there are many differences between the President’s budget, the Progressive Caucus Budget, the Democratic budget and this year’s winner, the Republican budget; which passed through both the House and the Senate. Now for all the complaints about the Republican budget and the others as well, they all share one very critical trait that deserves closer examination. But before I get to that, there is another item that is very important. A budget for the US Government is just an outline. There is little in there that enforces any cuts or increased spending. And the little that is in there for cuts and increases can be overridden when an actual bill is passed and signed by the President. It is all for show.
Back to that critical trait I mentioned, which is not just for show. All expenditures must be accounted for by taxes, tariffs and fees that the government collects. Any shortfalls are made up by selling Treasury notes that are repaid with interest. Similar to any loan that many of us take to pay for a house, car or college education. I call this method of funding the government Tax to Spend. The term is temporally correct since, first the government sets tax rates, then, as the money is coming into the government coffers, Congress authorizes spending. When there is a shortage, the Treasury Bonds are issued and sold. Those bonds represent what is called the deficit and every budget brought up in Congress targets reducing the deficit until the budget is balanced. In fact a balanced budget is the proclaimed purpose of creating a budget in the first place.
But what happens when there is an economic downturn? When millions of people suddenly turn to government to help fulfill their basic needs. Among those are unemployment payments and since the unemployed have no income they need subsistence assistance like food stamps so their lack of work does not let their families starve. Often economic downturns occurrences are coincidental with changes in the workplace so education and job training assistance are needed to provide access for the unemployed into this modified workscape. But also day care help makes certain that children are cared for when their parents are in a school or training or working at entry level wages. When more persons are suddenly in the low wage end of the income spectrum, how should government pay for it all? Most Conservatives will insist that by supplying people with “free” unemployment checks, education, low cost food and even housing the government is encouraging bad behavior, so just level fund all the programs so people will go get themselves a job. Liberals will usually insist that we raise taxes on those that are still doing real well and use that increased tax income to fund all the programs and also create jobs. Conservatives counter that by taxing the wealthy, the wealthy will be unable to expand their businesses and restore jobs.
Surprise! The Conservatives are correct. Raising taxes in tough economic times increases the pressure on business to contract when demand is shrinking. And taking taxes from persons with no income is very much out of the question. The government could “borrow” more to cover all the increased expenses during a downturn, but that just means that persons of considerable wealth are getting paid (interest) to put their money into the government instead their business. Putting money into funding the government where the interest rate certainty outweighs the risk of investing in any business and profits are not guaranteed. So we are left with a choice of increasing taxes or paying the wealthy to fund government expenses.
But, there is another way that government gets money to pay for implementing all the items in the budget, as they are enacted in law. The US Government and the US Government alone has the authority to actually ‘print’ or coin money. Ever since President Nixon took the US off of the gold standard, the US Dollar is a floating currency. It’s worth is based on what people are willing to pay for it. Just like a Realtor will always tell you that your house is worth what a person is willing to pay for it, the same is true of the US Dollar. What this means is that probably by the stroke of the President’s pen alone all all tax deficits can be funded by the US Treasury requiring the Federal Reserve to “print” the necessary currency. (Side note: Money is not actually printed, it is just an entry typed into the US’s ledger by the Fed)
With the funding question now addressed, what a bout taxes? If we eliminate them entirely why would Americans or American businesses use the US Dollar. That is because, by taxing as well as only accepting the US Dollar as a tax payment a value actually gets assigned to the US Dollar. It also turns out that taxes can be a great tool by which government can implement economic management via the tax collectors. I call this the Tax to Manage economic model. Managing economic conditions is something that all governments do, but with its spending role mostly eliminated the management function grows in importance. For example, historical evidence indicates that income inequality increases as the range of marginal tax rates shrinks. So, it would seem that by raising the highest tax rate over 50%, probably to 75%; income inequality will diminish. Also, since that rate will stay consistent across economic upticks and downturns, the negative impact of raising taxes on the wealthy is minimized. At the other end of the spectrum, taxes on lower income persons can be lowered significantly, especially if no taxes are collected until pay reaches past a living wage.
One last word about what most skeptics will reflexively bring up. Hyper Inflation. And they are right, it is a risk, but not very likely. High inflation will occur when some critical resource that is needed by nearly everyone becomes scarce. The correction, when inflation starts to rise, is to simply manage it away by raising taxes and by addressing the shortage by some reasonable substitute. Once the economy stabilizes, return the tax rates to normal. In the final analysis, we need to alter how we fund government activities, so that government can meet the promise made in the preamble to US Constitution when it declares that the government as defined by the Constitution will “Provide for the general welfare”. By making money collected in taxes the major source of government income the US has weakened itself economically so that money cannot be used to mange the economy.