If Government Wants to Spend, It Needn't 'Tax' To Do So

There is a very bad premise operating in economics, specifically in Public Finance. All know the overt blunder, but refuse to act on it. With it identified and erased, the field of economics shall be rendered once again fertile.

The present deficit of the US Federal Government with about $4 trillion in expenditures and $3 trillion in tax revenues is reckoned at $1 trillion. The figures may be more or less, but let’s just work with these. A $1 trillion deficit is an odd calculation given that most people readily concede that the private economy funds government – all of it.

Government is not a Wal-Mart store inviting in and persuading customers of the values inherent in stocked goods with all transactions completed voluntarily. The public has no freedom to depart the government store with money intact. The taxpayer must pay if public goods are plentiful or scarce, exceptional or inferior, cheap or dear, vital or worthless, needed or not.

As government possesses no hoard of money, no assets, no financial instruments with which to meet its daily needs, government cannot fund government. It does not fund public expenditures. It never has and it never will. Its contribution to public expenditures is nil, nada, nothing. To construe the delinquency as the slight gap between the revenues of Taxation and total expenditures, i.e. the borrowed portion, challenges both sense and reason. The Government’s deficit is $4 trillion, not just the misconstrued $1 trillion.

Taxpayers, or more fittingly resident citizens, and further the aggregate of their property, assets, and income comprise the source of outlays for ALL public expenditures. The assorted and bewildering taxes, more correctly fines or penalties, applied thereto supply the Government with the means to contract and disburse for the provision of public goods and services.

With this in mind should a community have its government tax or borrow from the combined or collective assets, property, incomes of resident citizens to fund public expenditures?

For those confident that Taxation is the correct answer a great surprise is to be unveiled.

It has been argued that there is an equivalency between taxing and borrowing in funding public expenditures. The following confirms it.  

Suppose a government requires $5 for some expenditure or public good. It may tax or borrow from resident citizens to fulfill the aim.

An amount of money, $5, leaves the bank accounts of community residents under both scenarios of Taxation and Borrowing. However, in Borrowing there is additional paperwork. Community residents, specifically lenders, are enriched with an asset or IOU of $5, and community residents are burdened with an equivalent liability, an IOU of $5. Both asset and public debt sum to zero leaving the collective finances of all residents unchanged.

After a time, the $5 IOU grows with interest, say to $6. The asset or IOU of $6 held by lenders exactly matches the liability or IOU, now also $6, claimed against residents. As both asset and public debt sum to zero, the collective finances of all residents are unaltered again.

To settle the debt by Taxation, $6 would move from taxpayers to lenders with the outstanding IOU, both asset and liability, erased. Taxpayers are out $6 and lenders have gained $6, leaving collective finances unaltered. The three facets of public borrowing: adding a public debt, adding interest to it, and erasing it leave the collective assets of resident citizens unaltered. Therefore, as $5 initially leaves the bank accounts of citizens in both Taxation and Borrowing, and the added paperwork generated by Borrowing sums to nil, one must conclude that it makes no difference if a government taxes or borrows from resident citizens.  

Thus, a superficial equivalence in Taxation and Borrowing does exist theoretically, and appears irrefutable. However, the equivalence vanishes when one considers certain immense and unaccounted costs inherent in Taxation that disappear with full public Borrowing.

Firstly, bereft of Taxation or the right to take, taxpaying slaves become scrutinizing public bankers, pondering and deciding upon every public expenditure, wherein not only the costs of public investments, but more importantly the benefits shall be rigidly and truthfully assessed and accounted. Public expenditures in Britain in the 19th century, with navy, empire and growth rates at their highest, never rose above 10% of GDP. With Government expenditure presently near 50% of GDP, aggregate income less government's share should rise to 90% of GDP by shedding waste and corruption. Even if public expenditures fell to 20% of GDP, disposable income still would rise to 80% of GDP.

Secondly, Taxation, a penalty upon the productive, greatly deters and curtails worthy economic activity. With crushing penalties lifted those formerly deterred from work or investment shall engage knowing they retain all wages and profits. Let us say the deterrent effect of Taxation is approximately 30% of GDP, more if taxes are punitive and less if moderate. The size of the economy would then grow to 130% of present GDP.

Combining these savings, the institution of full Public Borrowing would turn a taxed economy of 100 units, with 50 allotted to government and 50 to the public, into an economy of 130 units with 10 allotted to government and 120 allotted to the public. This explosion in wealth and prosperity would have no precedent in history.

Some have argued that none would ever lend to a government bereaved of the means of Taxation.

I have never said a government could not tax. I argue it never would tax because the benefit of reducing the public debt through Taxation is nil and the cost immense as demonstrated above. In such circumstances one would never reduce their debt. Government shall always repay its lenders - by finding another lender, much like any bank or most firms.  But reduce the public debt - never!

Remember, by simple calculation, increased wealth of 0.7 GDP far exceeds incurred debts of 0.1GDP.

How is a community so enriched, its Public Credit enhanced by the abolition of all Taxation unable to provide security to its lenders?

Of those who insist that government must pay off the public debt at some point I ask: should a government wait until the country’s life expires to perform a general confiscation to settle all public debts? Or is it better that government tax throughout the life of a nation, the community incurring continuously Taxation’s heavy costs, which greatly impede a prodigious accumulation of wealth?

I think all would agree to wait until the appointed settlement day to perform the confiscation and annihilate all public debts. Government shall tax, but only when that distant point arrives. Until then, all Taxation is dormant.