Monday, February 9, 2009

A Short Course in Government Economics

So, how does the government make money? They have to make money, after all -- they spend it, so obviously they make it, too. How do they make money? Most people would say "by taxes." That's what I used to think. It's true that the US government has always made money from tariffs and other market-style taxes, but most people think that the major portion of government money comes in from the annual April 15 billing cycle. It's surprising to realize that, for well over a hundred years, the US government was able to operate and pay expenses without taxing the income of its own citizens. In fact, I believe that the US government still operates independently from the taxation of citizens.

We have believed for at least two generations that we faithfully pay our taxes to the government, and the government then responsibly uses it to pay the bills and housekeeping. The truth, of course, is that taxation has practically nothing to do with raising revenue, and practically everything to do with controlling business, education, religion, commerce, and our private lives. If taxation were just to raise revenue, the process would not be nearly as complicated as it is. Most average Americans can take their tax data to three different, licensed tax preparers and they will get three different statements, three different amounts, three different sets of figures. There is nothing simple about paying American taxes.

In a nation where officially no one has the right to force us to be accountants, much less even to be able to read and write, we are expected every year to set up bookkeeping, calculate our finances, and using a book of charts provided by a para-government agency, determine what we "owe" our nation and then send it in. It is probably the hardest, least objective, most confusing thing any American is called on to do. Most of us are forced to spend even more money to hire someone who can prepare a vaguely readable return and get it to an agency that will then cash our checks and hopefully not bother us again for a year.

Why not just have a straight percentage? Some think that a varying scale is "fair" for the "poor," but if it's just a percentage, wouldn't it still be that the poor pay less and the rich pay more? Most people understand this; unfortunately, there's something in the Washington water or air that causes them to forget it. However unfair it might be to some people, even a "graduated" scale would be fairly simple to figure out. First you would find out how much you made; then, using the scale, you could figure out if you owed ten percent, fifteen percent, eight percent, thirty percent, or "no" percent. But it's not that easy, either. If it were, you wouldn't get those mythical three figures mentioned above.

So why is it so complicated? Because it's all about control. By giving tax advantages for some things and tax penalties for others, government is able to "modify" behavior of both corporations and individuals. When a school, a business, a church, or a family has "been bad," according to government standards, they suffer a tax problem. They are penalized and it perhaps puts them on the straight and narrow for the next year.

The "Internal Revenue Service" is the oxymoron of all oxymorons: it is neither internal (it is a private agency contracted by the government), nor a "service," in the strictest sense of the word. Who depends on them to help anyone? And it does not raise "revenue." It is the enforcement arm of a federal government grown big and overblown like Jabba the Hutt. The IRS goes way beyond raising money. In the 30's the feds could not find enough proof of an actual crime to jail the mobster Al Capone. Everyone knew he was bootlegging, killing, and extorting, but for some reason, that was not enough. Enter the IRS, and the crook was locked up for life. A church in middle America has admittedly strange ideas about something or other. Unfortunately, there's that pesky first amendment, as well as the fourth and others. Fortunately, there's the IRS, entering where angels fear to tread, and there's a padlock on that church door. When the IRS finally comes in and breaks the ice, the ATF, FBI and NSA can meekly follow and sweep up the mess.

Where does the government get money, then, if not from income taxes and the IRS? Well, when you are the government, you can print more. How do you get 700 billion dollars, then get 800 billion more? Simple! You just get out the plates with George Washington's -- or better yet, Benjamin Franklin's -- picture on them, and you slap some green ink on some treasury paper and -- Viola! -- instant money! In this electronic age, you don't even have to waste all that ink and paper. Our government also prints "virtual" money! It's so easy even a freshman congressman can do it!

How can I make such a claim? Mathematics helps somewhat. The two latest "stimulus" plans -- the adopted one and the proposed one -- total $1.5 trillion dollars. That's one million times one million dollars, and then add half of that again. Let's go wild and say that every man, woman, and child in the US could be a wage earner and tax payer. Split a trillion and a half up into three hundred million payments, and each of them would be responsible for five thousand dollars. That means that the IRS would have to clear -- show a profit of -- five thousand dollars for taxing every man, woman, and child in this country. That's not going to happen, of course. Most Americans' tax bills are not that high.

Then, consider that it's more like only one hundred million households or less that will file a tax return, and that perhaps a fourth of them will not have to pay taxes. That gets us to about $18000 dollars from every tax paying household in this country. Now, realize that this money is not to pay the ongoing operation of congress, the maintenance of roads, the salaries of government agencies, regulatory commission employees, medicaid, or welfare. Oh, yes, we are also fighting two wars overseas, and maintaining the peace in several countries. I think that costs a dollar or two. Then there are things like PBS, the National Endowment for the Arts, and other subsidized agencies. Don't forget our education system, primary, secondary, and post secondary. Highways, airports, and everything related to them -- all of this is paid for by government.

Do you see that there is no possible way that what is collected by the IRS even starts to pay for most of this? Oh, I'm sure there are some "token" amounts that go to government programs. But the idea that the two "stimulus" packages are being paid for with tax dollars is impossible to anyone that does the math. That money will be printed, electronically transferred, or borrowed from our great-great-great grandchildren, since we've already borrowed from all the generations leading up to that.

It doesn't matter if you are a Democrat or a Republican, a conservative or a liberal. The fact is, we have elected some people who are spending money that they don't have, money that doesn't exist. Several years ago, the Peruvian government had a unit of currency called a "Sol," roughly equivalent to a dollar. When that money was devalued severely, they developed a new unit called an "Inti," that was the equivalent of a million "Soles," and roughly the equivalent of -- a dollar. Later, Peru developed the "Nuevo Sol," worth a million "Intis," and worth about -- a dollar. That was fifteen years ago, more or less, and I didn't even want to research what the "new" Soles are worth now. However, I know they are worth a trillion of the old ones. That's called "printing your own revenue," and it makes your currency worth approximately what Monopoly money is worth. The only thing that has preserved our dollar so far has been an American economy that can swim upstream in an adverse, spending-gone-wild climate.

Please don't think your tax dollars will go to the "stimulus" package. Your tax dollars are a drop in the bucket. They just make you behave yourself. No, this money will be manufactured. No gold to back it up, no securities to make it worth anything. You could print paper that was worth as much. But we continue to believe that it is real money, and as long as congress continues to spend it, we will continue to stretch it thin. A day is coming when the stretching will stop, and the "snap" will affect all of us.

It's not about taxpayers anymore. It's about devaluation, and it will cost us in the future. The world once coveted our green paper. The time is coming when we won't be able to give it away.

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