Mises: Why Taxes Don't Matter Much Anymore

[mediahasyou]

http://www.mises.org/story/3093

Barack Obama's tax advisers recently posted a piece in the Wall Street Journal about their candidate's tax plans. Their article was designed to triangulate, painting their candidate as a tax cutter and the Republican opposition as a secret tax raiser. It was well written and well argued — not that you can really trust anything you read about what candidates will or will not do once in office.

In any case, I was discussing the piece with a person whose politics are certainly left of center. She said to me something along the following lines:

I'm really not sure I understand all this tax talk. The government taxes us to get money to do what it wants to do. But it seems like what they do — whether going to war or funding new projects — is never discussed in terms of money they have or don't have. I mean, Bush cut taxes, right? And the reduced revenue should have restrained him. But he spends on whatever he wants. The tax cuts didn't seem to reduce his power at all. Why is this?

It's a good question. Why is it that talk of tax policy doesn't seem to have a relationship to policy generally? Whether it's a bailout of subprime mortgage holders, large investment banks, or going to war, whether or not the resources exist to do these wonders rarely enters into the equation. Why is it that tax cuts don't curb the government? And why do politicians not feel the need to tax us more when they spend more?

You might at first say that the answer is simple: they just go into debt by running an annual deficit. And the debt today stands at some figure that has no real meaning, because it is too high for us to even contemplate. What does it really mean that the debt is $5 trillion or $10 trillion? It might as well be an infinite amount for all we know. At least that's how the political class acts.

Reference to the debt only begs the question. You and I have to pay our debts. We cannot run up an infinite amount of it without getting into trouble and losing our creditworthiness. In the private sector, debt instruments are valued according to the prospect that the debts will be paid. The likelihood that it will be covered is reflected in the default premium. But the debt of the US government doesn't work that way. The bonds of the US Treasury are the most secure investment there is. It is valued as if it will be paid no matter what.

If not through taxes, and if not through infinite debt, how is it that the US government gets the money it wants regardless of other constraints?

The answer here comes down to the monetary regime, a topic that causes eyes to glaze over but which is central to why the government seems completely out of control. It is not difficult to understand if we think of how a criminal with a counterfeiting machine might behave. Would we see fiscal restraint? Of course not. If a person could create all the money he needs or wants with a printing press, we would expect unlimited profligacy. This is precisely what the Federal Reserve does. It not only acts as the guarantor of the liquidity of the banking system but also functions as the guarantor of the entire government financial system.

Given this, it is hardly surprising that there seems to be a strange disconnect between tax policy and spending policy. The politician isn't concerned about it any more than the counterfeiter worries about the bills coming and going. They know that the money is going to be there if they need it. This is not only bad policy in general, but it introduces an occasion of sin for the political class. It is too much to ask of anyone to be financially disciplined if he has the capacity to create out of thin air all the money he wants.

What is the downside of this type of regime? The bills are ultimately paid by you and me in the form of price increases for goods and services. To make the connection here, imagine the value of money is like lemonade: the more water you add to the fixed amount of lemon juice, the weaker it becomes. We tend to think of inflation as the price of things going up, but in fact inflation is nothing more than a decline of the purchasing power of money itself.

There are other consequences, too. The way the Fed creates money involves manipulation of the interest rate. But the market rate of interest serves a purpose. When it goes up, it rewards saving and discourages borrowing. When it goes down, consumption and investment spending receive a subsidy. When the Fed feeds the popular desire for low interest rates, it is injecting newly created money into the system in a way that creates investment bubbles. These bubbles can be a symptom of a larger problem, namely, the business cycle itself.

Those of a historical bent will note that today's monetary system has features that are essentially unprecedented in American history. The dollar is not backed by anything other than the promise of the state. There is no gold or silver or anything else that the paper represents. Nor is the paper in your wallet convertible into any other monetary unit but more paper.

$50 $45
"It is not difficult to understand if we think of how a criminal with a counterfeiting machine might behave."

The system we have now is about 35 years old, and it began after Richard Nixon declined to pay foreign dollar holders in gold. That was the final end of the gold standard. With that action, he inaugurated the new age of paper money — and ever since, the rate of inflation, the wild swings of business activity, and the growth of government have been completely out of control. It was a disastrous decision, but the unsurprising culmination of a long process of monetary destruction that began just before World War I when the Federal Reserve was created.

How might money work in a perfect world? We have to look back at earlier times and see that central banks are not necessary. Banking, like any business, can be a market institution and manage itself just like the shoe or coffee industry. Money need not be paper, which can be infinitely reproduced. It can be gold and silver, which have a fixed supply. When the government wants to spend money, it has no choice but to persuade people to fork over the money. The citizenry, under these conditions, tends to pay closer attention to what its masters are planning.

With sound money and no central bank, the debate over our country's future would take on new meaning. Politicians would feel the constraint — the same as all individuals. It would be a more peaceful world, surely, with far less political meddling at home and abroad. And we might actually start taking public affairs seriously again.

[Kalifornia]

I once heard a commentator suggest that the income tax is totally unnecessary. Rather than bother with a tax structure, the government could just print and spend new money each year.

In this case, it would in effect steal from everyone according to the ration that they HAVE (or earn) dollars, as it would water the value of money across the board.

Honestly, if you are going to have a fiat currency, why not take advantage of its efficiencies? How much effort is wasted on income tax calculation and reporting, for example? And this shit where we privatize the money to the fed, who prints it, charges its member banks a small premium, and then the member banks turn around and buy T-bills at a higher rate of interest is asinine (profit with ZERO risk, and zero invested capital). The whole thing is just a huge wealth transfer from taxpayers to bankers.

Honestly, I have come to the conclusion that the best solution is always the free market solution, followed by a completely socialized (and therefore at least in theory accountable via the ballot box) solution. Think .mil, public ed, road funding (with open bidding), etc. The service isnt great, but it gets delivered universally in a not totally inefficient manner, with checks and balances to minimize corruption.

This hybrid shit where the .gov colludes with special biz partners, giving them monopolies or oligopolies in markets, and no one else can compete are by far the LEAST efficient solution.

[Fox McCloud]

I think the reason why Congress doesn't just print up the money to pay for everything is that they don't fully understand the system--if they realized that most of their spending was being funded via inflation and not taxes, they'd probably cut taxes (Dem's and Repub's)....but they don't realize it yet....besides, even if they did, there still is no guarantee that they'd cut taxes either; after all, the illusion has to be kept up (pay no attention to the man behind the curtain who's REALLY running the show...and that's the Fed in this case).

Not only that but the Fed is a cartel....it's more than just Congress that benefits; all the banks benefit; especially the big ones (at the new "rogue" banks who want to do something different).

I do think though, that eventually, it'll be figured out and everything will be payed for via inflation...but it'll be so hard to know how much money there really is, and it'll be so difficult to do anything about it (ie: one world currency stored on a card, chip, or other media), that people won't be the wiser.

[NMCB3]

I once heard a commentator suggest that the income tax is totally unnecessary. Rather than bother with a tax structure, the government could just print and spend new money each year.

In this case, it would in effect steal from everyone according to the ration that they HAVE (or earn) dollars, as it would water the value of money across the board.

Honestly, if you are going to have a fiat currency, why not take advantage of its efficiencies? How much effort is wasted on income tax calculation and reporting, for example? And this shit where we privatize the money to the fed, who prints it, charges its member banks a small premium, and then the member banks turn around and buy T-bills at a higher rate of interest is asinine (profit with ZERO risk, and zero invested capital). The whole thing is just a huge wealth transfer from taxpayers to bankers.

Honestly, I have come to the conclusion that the best solution is always the free market solution, followed by a completely socialized (and therefore at least in theory accountable via the ballot box) solution. Think .mil, public ed, road funding (with open bidding), etc. The service isnt great, but it gets delivered universally in a not totally inefficient manner, with checks and balances to minimize corruption.

This hybrid shit where the .gov colludes with special biz partners, giving them monopolies or oligopolies in markets, and no one else can compete are by far the LEAST efficient solution.I`m for the free market and no socialism what so ever. Socialism does not work, the evidence is abundently clear and on display for all to see, yet the herd still craves it....we are a hopeless slave race.

[Kalifornia]

I`m for the free market and no socialism what so ever. Socialism does not work, the evidence is abundently clear and on display for all to see, yet the herd still craves it....we are a hopeless slave race.


Obviously, the free market is the most efficient. Unfortunately NO nation is totally socialism free, and its arguable that in some circumstances where the vast majority of the population desires a service to be 'free' (funded by socialized expenditures), that if done correctly, those systems do work at a low level of efficiency, but they do provide a fair amount of universality, which the free market generallly does not.

I honestly dont mind socializing certain markets (roads, school funding (I think that providers should be allowed to compete tho), and even a basic level of healthcare) if I cant get away from it. They just have to structure it in a way that it is minimally intrusive. Like a blanket tarriff or sales tax. Id prefer not to have it, but its a compromise I can live with.

[NMCB3]

Obviously, the free market is the most efficient. Unfortunately NO nation is totally socialism free, and its arguable that in some circumstances where the vast majority of the population desires a service to be 'free' (funded by socialized expenditures), that if done correctly, those systems do work at a low level of efficiency, but they do provide a fair amount of universality, which the free market generallly does not.

I honestly dont mind socializing certain markets (roads, school funding (I think that providers should be allowed to compete tho), and even a basic level of healthcare) if I cant get away from it. They just have to structure it in a way that it is minimally intrusive. Like a blanket tarriff or sales tax. Id prefer not to have it, but its a compromise I can live with.The problem is socialism is incompatible with personal liberty. It is compulsory cooperation, for the man who want`s to opt out has his property taken by force.Minimal intrusion is subjective, any intrusion on my liberty I consider an act of aggression, however minimally intrusive you may think it is. "Universality" as you call it is unnatural, wealth will always be unevenly distributed. History has shown that socialist and fascist countries are the worst in this regard. So in the end it boils down to this; I wish for you and everyone else to be free, you wish for everyone to be a slave for the mythical "common good" We will never agree.

[Kalifornia]

The problem is socialism is incompatible with personal liberty. It is compulsory cooperation, for the man who want`s to opt out has his property taken by force.Minimal intrusion is subjective, any intrusion on my liberty I consider an act of aggression, however minimally intrusive you may think it is. "Universality" as you call it is unnatural, wealth will always be unevenly distributed. History has shown that socialist and fascist countries are the worst in this regard. So in the end it boils down to this; I wish for you and everyone else to be free, you wish for everyone to be a slave for the mythical "common good" We will never agree.

Do you sit and smell your own farts as well? I have already said that I prefer NO socialism, and only prefer the socializing of markets (courts, defense, police, roads, etc.) over government/corporate collusion, rent seeking, corruption, etc. Quit attacking points that I am not making.

Minimal Government must exist, and as such, it must be paid for. Ideally, they can be paid for in ways that are self actualized. (tarrif, sales tax, perhaps property tax for holdings above a homestead exemption, etc) so that people can opt out of those. OR in a fiat currency system, the issuing government can merely tax via inflation. All of these are relatively unintrusive means of financing the burden.

The world you seek (anarcho capitalism) will never exist, and if it did, it would quickly devolve into either economic feudalism or real feudalism as strongmen scrambled to control resources.

the socialization of some services is here to stay. The two questions are, will they be socialized in a way that minimizes inefficiencies, corruption, and wealth transfers inherent in government/corporate collusion? and which services will be socialized?

Personally, I prefer none be, that that isnt ever going to happen, unless you plan on shooting everyone who votes for social programs. It is better to decide what you can live with and what you cant.

[NMCB3]

Do you sit and smell your own farts as well? I have already said that I prefer NO socialism, and only prefer the socializing of markets (courts, defense, police, roads, etc.) over government/corporate collusion, rent seeking, corruption, etc. Quit attacking points that I am not making.

Minimal Government must exist, and as such, it must be paid for. Ideally, they can be paid for in ways that are self actualized. (tarrif, sales tax, perhaps property tax for holdings above a homestead exemption, etc) so that people can opt out of those. OR in a fiat currency system, the issuing government can merely tax via inflation. All of these are relatively unintrusive means of financing the burden.

The world you seek (anarcho capitalism) will never exist, and if it did, it would quickly devolve into either economic feudalism or real feudalism as strongmen scrambled to control resources.

the socialization of some services is here to stay. The two questions are, will they be socialized in a way that minimizes inefficiencies, corruption, and wealth transfers inherent in government/corporate collusion? and which services will be socialized?

Personally, I prefer none be, that that isn't ever going to happen, unless you plan on shooting everyone who votes for social programs. It is better to decide what you can live with and what you cant.Oh but it has existed ! You slave masters will defend your cherished delusions to the end. Quit trying to reinvent the wheel. Your socialist utopia has at all times throughout human history resulted in nothing but human misery and death. Fiat money systems have failed throughout history everywhere they have been tried, yet you Marxists still cling to the delusion that it can work. The experiment in minimal government has been a complete failure as well, the Constitution is a dead letter, mostly because of people like you. I have decided what I can live with and what I cant, I cant live with people like you practicing tyranny over me through the ballot box. All the while proclaiming its for my own good and that it`s just, because the criminal enterprise you loving refer to as "minimal government" says it is.

You say that you "prefer" the free market, then you state it cant work and that socialism is inevitable and here to stay. They said Rome was here to stay also but we all know how that worked out...or do we? YOU SAY YOU JUST WANT TO SOCIALIZE THE MARKETS, ROADS AND HEALTH CARE... WHAT THE HELL WOULD BE LEFT!? WHY ARE SOCIALISTS INFESTING THE RON PAUL FORUMS?

[Conza88]

O.P great article that elaborates as to why I.O.U.S.A fails, and the clowns that love it because they think it fully addresses the problems of today are and remain totally clueless..

[VoteForRonPaul]

I mean, Bush cut taxes, right? And the reduced revenue should have restrained him. But he spends on whatever he wants. The tax cuts didn't seem to reduce his power at all. Why is this?

He clearly fooled the people because when he needs money he cut taxes and borrow what he wants from China.

[Kalifornia]

Oh but it has existed ! You slave masters will defend your cherished delusions to the end. Quit trying to reinvent the wheel. Your socialist utopia has at all times throughout human history resulted in nothing but human misery and death. Fiat money systems have failed throughout history everywhere they have been tried, yet you Marxists still cling to the delusion that it can work. The experiment in minimal government has been a complete failure as well, the Constitution is a dead letter, mostly because of people like you. I have decided what I can live with and what I cant, I cant live with people like you practicing tyranny over me through the ballot box. All the while proclaiming its for my own good and that it`s just, because the criminal enterprise you loving refer to as "minimal government" says it is.

You say that you "prefer" the free market, then you state it cant work and that socialism is inevitable and here to stay. They said Rome was here to stay also but we all know how that worked out...or do we? YOU SAY YOU JUST WANT TO SOCIALIZE THE MARKETS, ROADS AND HEALTH CARE... WHAT THE HELL WOULD BE LEFT!? WHY ARE SOCIALISTS INFESTING THE RON PAUL FORUMS?

Meds. Get back on them.

Truly free markets work, but we must have a majority vote to maintain them in our current system of law. There will never be a majority who votes for free market roads, security, schools, etc. As I said, unless you plan on killing millions, you cant escape having some markets socialized. It just isnt going to happen.

The key is to show them that free markets work. The way to do that is to get rid of government/corporate collusion. Calling that a 'free market' solution is a big part of the reason why the sheep call for socializing markets in the first place.

No true anarcho capitalism has ever existed. The closest thing to it is tribalism, which is in fact, a form of communism.

[NMCB3]

Meds. Get back on them.

Truly free markets work, but we must have a majority vote to maintain them in our current system of law. There will never be a majority who votes for free market roads, security, schools, etc. As I said, unless you plan on killing millions, you cant escape having some markets socialized. It just isnt going to happen.

The key is to show them that free markets work. The way to do that is to get rid of government/corporate collusion. Calling that a 'free market' solution is a big part of the reason why the sheep call for socializing markets in the first place.

No true anarcho capitalism has ever existed. The closest thing to it is tribalism, which is in fact, a form of communism.Our current system of law is corrupt, majority votes are for tyrants. Corporatism is impossible without government. Iceland was a stateless society for over 300 years. Anything is possible if you think outside the box. http://www.lewrockwell.com/orig3/long1.html

[Pauls' Revere]

http://www.mises.org/story/3093

Barack Obama's tax advisers recently posted a piece in the Wall Street Journal about their candidate's tax plans. Their article was designed to triangulate, painting their candidate as a tax cutter and the Republican opposition as a secret tax raiser. It was well written and well argued — not that you can really trust anything you read about what candidates will or will not do once in office.

In any case, I was discussing the piece with a person whose politics are certainly left of center. She said to me something along the following lines:

I'm really not sure I understand all this tax talk. The government taxes us to get money to do what it wants to do. But it seems like what they do — whether going to war or funding new projects — is never discussed in terms of money they have or don't have. I mean, Bush cut taxes, right? And the reduced revenue should have restrained him. But he spends on whatever he wants. The tax cuts didn't seem to reduce his power at all. Why is this?

It's a good question. Why is it that talk of tax policy doesn't seem to have a relationship to policy generally? Whether it's a bailout of subprime mortgage holders, large investment banks, or going to war, whether or not the resources exist to do these wonders rarely enters into the equation. Why is it that tax cuts don't curb the government? And why do politicians not feel the need to tax us more when they spend more?

You might at first say that the answer is simple: they just go into debt by running an annual deficit. And the debt today stands at some figure that has no real meaning, because it is too high for us to even contemplate. What does it really mean that the debt is $5 trillion or $10 trillion? It might as well be an infinite amount for all we know. At least that's how the political class acts.

Reference to the debt only begs the question. You and I have to pay our debts. We cannot run up an infinite amount of it without getting into trouble and losing our creditworthiness. In the private sector, debt instruments are valued according to the prospect that the debts will be paid. The likelihood that it will be covered is reflected in the default premium. But the debt of the US government doesn't work that way. The bonds of the US Treasury are the most secure investment there is. It is valued as if it will be paid no matter what.

If not through taxes, and if not through infinite debt, how is it that the US government gets the money it wants regardless of other constraints?

The answer here comes down to the monetary regime, a topic that causes eyes to glaze over but which is central to why the government seems completely out of control. It is not difficult to understand if we think of how a criminal with a counterfeiting machine might behave. Would we see fiscal restraint? Of course not. If a person could create all the money he needs or wants with a printing press, we would expect unlimited profligacy. This is precisely what the Federal Reserve does. It not only acts as the guarantor of the liquidity of the banking system but also functions as the guarantor of the entire government financial system.

Given this, it is hardly surprising that there seems to be a strange disconnect between tax policy and spending policy. The politician isn't concerned about it any more than the counterfeiter worries about the bills coming and going. They know that the money is going to be there if they need it. This is not only bad policy in general, but it introduces an occasion of sin for the political class. It is too much to ask of anyone to be financially disciplined if he has the capacity to create out of thin air all the money he wants.

What is the downside of this type of regime? The bills are ultimately paid by you and me in the form of price increases for goods and services. To make the connection here, imagine the value of money is like lemonade: the more water you add to the fixed amount of lemon juice, the weaker it becomes. We tend to think of inflation as the price of things going up, but in fact inflation is nothing more than a decline of the purchasing power of money itself.

There are other consequences, too. The way the Fed creates money involves manipulation of the interest rate. But the market rate of interest serves a purpose. When it goes up, it rewards saving and discourages borrowing. When it goes down, consumption and investment spending receive a subsidy. When the Fed feeds the popular desire for low interest rates, it is injecting newly created money into the system in a way that creates investment bubbles. These bubbles can be a symptom of a larger problem, namely, the business cycle itself.

Those of a historical bent will note that today's monetary system has features that are essentially unprecedented in American history. The dollar is not backed by anything other than the promise of the state. There is no gold or silver or anything else that the paper represents. Nor is the paper in your wallet convertible into any other monetary unit but more paper.

$50 $45
"It is not difficult to understand if we think of how a criminal with a counterfeiting machine might behave."

The system we have now is about 35 years old, and it began after Richard Nixon declined to pay foreign dollar holders in gold. That was the final end of the gold standard. With that action, he inaugurated the new age of paper money — and ever since, the rate of inflation, the wild swings of business activity, and the growth of government have been completely out of control. It was a disastrous decision, but the unsurprising culmination of a long process of monetary destruction that began just before World War I when the Federal Reserve was created.

How might money work in a perfect world? We have to look back at earlier times and see that central banks are not necessary. Banking, like any business, can be a market institution and manage itself just like the shoe or coffee industry. Money need not be paper, which can be infinitely reproduced. It can be gold and silver, which have a fixed supply. When the government wants to spend money, it has no choice but to persuade people to fork over the money. The citizenry, under these conditions, tends to pay closer attention to what its masters are planning.

With sound money and no central bank, the debate over our country's future would take on new meaning. Politicians would feel the constraint — the same as all individuals. It would be a more peaceful world, surely, with far less political meddling at home and abroad. And we might actually start taking public affairs seriously again.

That said,

How can we start to introduce a competing currency? Ron Paul has always talked about that how on Earth do we do that?
btw- Great article! Thanks

[Conza88]

That said,

How can we start to introduce a competing currency? Ron Paul has always talked about that how on Earth do we do that?
btw- Great article! Thanks

Now that's a good question. :) There is literature out there.

But the process needs to be filled... blueprints etc. The best way to go about it.

I am going to / plan to do work in this area. Rothbard called for help / others to join the cause in his "What has Government Done to our money?"

I assume since writing there have been attempts, well - someone needs to go collect them then. Cus I can't find many.

There needs to be a solid doctrine for what happens when we take over.