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writing for godot

The Government Does Not SPEND tax Money

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Written by Charles   
Friday, 25 March 2016 06:20
Americans suffer from a falsehood that permeates our political system. Many in politics are surely aware of this falsehood but I have never heard it mentioned by anyone in active political life. The falsehood is that taxes are needed to pay for government programs. It is totally obvious that the government cannot extract taxes to operate the government before spending money into the economy. The government must first create the money and spend it into the economy before it can be redeemed for taxes. Taxes have a number of functions but paying for government operations is not one of them.
It is not a new idea. The Virginia colonial government was totally aware of this fact in March 1760 when they passed the paper money act, creating money, and in the same legislation, arranging to place tax liabilities on the public to take back a portion of the money and, in their words, "… to preserve the credit of the paper currency…" The legislation required that the certificates that were redeemed "… to be burnt and destroyed." Taxes do give value to paper currency but they are not used to pay for government operations. The notion that taxes are needed to pay for government expenses is a figment of the imagination of book keepers but it is totally divorced from reality.
In January 1946, in a periodical named "American Affairs", Beardsley Ruml, Chairman of the Federal Reserve Bank of New York at that time, published an article entitled " TAXES FOR REVENUE ARE OBSOLETE" in which he explains why taxes do not pay for government operations. As explained in the paper, it started in 1933 when, under FDR, fiat currency was introduced and gold money and gold certificates were all redeemed for the new currency. Noteworthy is the fact the new currency spent by the government was not obtained by taxing. It was printed and spent into the economy to buy gold and gold certificates.
The misunderstanding of the function of taxes in our monetary system is very harmful for two basic reasons. First, it detracts from discussions and action related to the actual function of taxes plus it constrains government actions that are needed and worthwhile.
The actual function of taxes is to maintain price stability (i.e. prevent inflation) and secondly, it enables the government to move money around in the economy by taxing "A" and spending to "B." Tax policy has obviously been one factor in the movement of wealth from the middle class to the 1% over the past few decades.
Additionally, taxes can be a very efficient economic tool. We saw that feature used very sparingly in recent years with the FICA tax holidays which put money in the pockets of consumers who represent the major portion of our economy. It was used very sparingly because of the book keeping fairy tale that the FICA/SS trust fund "pays" social security to seniors, the same fairy tale as the one that taxes pay for government operations. Book keepers can put numbers in columns and add and subtract them but their actions have zero effect on the realities of money. The reality is that all legal money is created by the US Treasury in their Bureau of Engraving and Printing (BEP) and their mints where coins are struck. The fiscal assets of the government are infinite. The only real limits on government spending are availability of real resources to buy and general price stability in the economy.
But what about the national debt? We hear a lot about the debt but again, most that we hear is either untruthful or, like taxes paying for government spending, just a fairy tale. First, having a national debt is a choice that was made by the congress. It is necessary to have a national debt as a tool for our central bank, the Fed. The Fed buys and sells the national debt to manage the money supply. The national debt also serves as a very safe parking place for idle money held by individuals and organizations.
We often hear the cry of anguish that our grandchildren will have to pay for this huge debt that we have. Those who peddle this notion are either deliberately untruthful or just do not understand the mechanisms of the national debt. The fact is no tax payer has ever paid a cent to retire the national debt. When treasury bonds becomes due, the bank account of the bond holder is increased by a computer by the principal amount plus interest and then that amount is added to bonds available for sale by the US Treasury. The debt is continuously rolled over in that way. The debt can be retired in thirty years, the longest term of a treasury bond, at any time the congress wishes to do so. All congress needs to do is prohibit the sale of additional treasury bonds. The other way to retire the debt can be done by the executive branch under current law. The treasury could mint a few multi T$ coins as proposed by Joseph Firestone. With say 50T$ added to the treasury's account at the Fed, the treasury can spend all the money the congress and the president wish to spend without borrowing any more.
Bottom line: Our nation and our economy should not be run by bean counters (accountants) but by people who understand economics and sovereign monetary systems.
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