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Tuesday, April 15, 2014

Purpose of Taxation

My own personal feelings on budgets as it relates to government is more nuanced than the traditional conservative (I hate government spending and taxes) versus liberal (I love - or at least support - government spending and taxes).

I generally lean slightly conservative when it comes to my own personal budget.  I've never been one to use a credit card much or to hold a large balance (I once did that, but I learned my lesson).   I spend within my means.   My means being my take home income.   My means would be nearly infinite of course if I had a printing press and could otherwise create "Garth bucks" and get people to accept those as currency.  But alas I don't have that power.  

States, like my home state of Indiana, are in similar boats.   Indiana is quite a bit larger than me though financially speaking and has a lower credit risk and it can issue its own bonds for funding in times where taxes may not be strong enough to support government spending, but long-term, State governments have to balance their books (either by statute, or out of necessity because they have limited credit availability).  Like me, Indiana can't create and issue its own "Indiana bucks."   Because of this, I generally prefer my State to be a bit conservative when it comes to its spending habits.   

Then there is the federal government.  The federal government is massive - it's a fifth of our entire economy (give or take).  It makes spending decisions, but almost always runs a deficit.  And it can do so into perpetuity.   Like States, it issues bonds, but unlike a State the US government has its own monopoly control of its currency that it itself issues, which has a significant demand on the market because it is accepted as currency - the most powerful currency on Earth.   Because of this monopoly control of its own currency, the Federal government does not need to "fund" its spending via taxation.   In fact, in general, the decision to spend federal funds is made independently from the decision to tax.   That may sound odd to people that think that our taxes go directly to 'fund' our federal spending, but that's the way it is.   The use of taxes to fund spending is an optical illusion that gets perpetuated in the media - liberal or otherwise.  

So what purpose does taxation at the federal level serve?  Well, largely it's to modulate private spending demand.   (I would argue a secondary but significant purpose is income redistribution to regulate economic inequality)  When taxes rise, resources are taken from me, Indiana, and other entities that have limited funding sources because we don't control our own currency.   Because of that, our spending demand shrinks.  Contrarily, when taxes fall, resources are given to me, you, and Indiana, and our demand to spend some or all of that money rises.  The fact that the government has changed the taxation level at the federal level need not have any bearing whatsoever on the federal decision to spend - it effects the private decision to spend greatly however, and in that way, regulates spending demand and inflation.   This is a fundamental difference between the US government compared to individuals and States (and even the European Union countries like Greece that also do not have control of their own individual currency).   

I feel like many of our political disagreements would be better served by understanding these nuances as it relates to taxation.  My fear is that the media and political extremists have made it virtually impossible to have an honest examination on the different role of taxes at different entity levels.   It's just all black and white to them.   Taxes are good or evil depending on the political persuasion, and that unfortunately does nobody any good at the end of the day. 

Sunday, February 23, 2014

History of Jobs Guarantee Program

The idea that a buffer stock of employed citizens be created by the government as a kind of 'employer of last resort' is not a new concept but I've been wondering exactly how old an idea it is.  I at the same time was reading exerts from my copy of Thomas Paine's "Rights of Man" 1791 for a completely unrelated reason, and came across this section which sketches an outline of what such a program might look like (at his time). I know of no other such outline (be they from a political persuasion as below or an economic persuasion) written earlier than this (consider this a challenge!): 

Many a youth comes up to London full of expectations, and little or no money,
and unless he gets employment he is already half undone; and boys
bred up in London without any means of livelihood, and, as it often
happens, of dissolute parents, are in a still worse condition, and servants
long out of place are not much better off. In short, a world of little
cases is continually arising, which busy or affluent life knows not of, to
open the first door to distress. Hunger is not among the postponable
wants, and a day, even a few hours, in such a condition, is often the
crisis of a life of ruin. These circumstances, which are the general
cause of the little thefts and pilferings that lead to greater, may be

The plan then will be: First, to erect two or more buildings, or take
some already erected, capable of containing at least six thousand persons,
and to have in each of these places as many kinds of employment
as can be contrived, so that every person who shall come, may find
something which he or she can do. Secondly, to receive all who shall
come, without inquiry who or what they are. The only condition to be,
that for so much or so many hours work, each person shall receive so
many meals of wholesome food, and a warm lodging, at least as good
as a barrack. That a certain portion of what each person’s work shall be
worth shall be reserved, and given to him, or her, on their going away;
and that each person shall stay as long, or as short time, or come as often
as he chooses on these conditions.

If each person staid three months, it would assist by rotation twenty four
thousand persons annually, though the real number, at all times,
would be but six thousand. By establishing an asylum of this kind, such
persons, to whom temporary distresses occur, would have an opportunity
to recruit themselves, and be enabled to look out for better employment.
Allowing that their labor paid but one-half the expense of supporting
them, after reserving a portion of their earnings for themselves,
the sum of forty thousand pounds additional would defray all other
charges for even a greater number than six thousand.