Tax cuts without Spending Cuts

More for Maggie:

Lowering taxes without a cut in government spending merely moves the expenditure into debt financing.

Currently, the USA is funding most of its new debt by purchases by the Federal Reserve.

If taxes are cut, without at least an equal cut in government expenditure, the loss of revenue would be made up with an equal creation of new money via the FED.

Creation of new money into an economy is inflationary.

There may be a timing delay between a recent creation of money and the subsequent rise in inflation or, as is now, the banks, very fearful of lending into a distressed economy, continue to store this money as excess reserves with the FED thus preventing the release of new money into the economy – thus forestalling inflation.

But, no matter how you cut the cards, it is an inflationary tactic.

I am most certainly not against tax cuts – indeed, all taxes are destructive to an economy – there exists no such thing as a ‘fair’ tax, ‘equal’ tax, or a ‘good’ tax.

However, to properly evaluate a tactic, the consequences must be addressed prudently.

The excess reserves of the banks grew from $2 billion to over $1.2 trillion in a few months. The amount of ’stored inflation’ sitting in excess reserves is staggering. To add to this with tax cuts without budget cuts and a deepening budget deficit wholly dependent on money creation ….. is incredibly disturbing.

We can refer to history and President Harding’s success at reversing economic recession in 1920.

He cut taxes – BUT also cut government spending and paid down the national debt – at the same time.

Quote:
“Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes fell from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding’s policies started a trend. The low point for federal taxes was reached in 1924; for federal spending, in1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930.”

His action was successful.

The tax cuts reduced government burden on the nation – but the tax cut was not replaced by debt – Harding reduced government spending. Without the government competing in the economy for money, enterprises could access these real funds for growth.

Additionally, by reducing government debt, it added to a further increase in available capital for these enterprises. With no surprise, the availability of money allowed economic growth, and reversed unemployment within in a time scale that was amazingly quick.

It was not just one of these tactics, singly, which lifted America out of the recession, it was the cooperation of consequences of all three tactics.

** Ah, the days of merely an annual budget of $6.3 billion – shocking to consider that today, the US government spends that amount of money – the entire nominal budget of the federal government of 1920 – in about 12 hours … non-stop…**

I am not against tax cuts, however, I do not see it providing any possibility of success on its own – indeed, may actually make the situation far worse.

I believe that budget cuts – real cuts – need to be done first.

Without that, any other tactic is merely ‘counter-flooding’ the sinking Titanic – it may level the ship – giving the appearance of recovery – but it most certainly will speed up the sinking.

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9 Responses to “Tax cuts without Spending Cuts”

  1. v. Holland Says:

    Funny how plain old fashion common sense Works. 🙂

  2. USWeapon Says:

    BF,

    The question that I have about this is are there really ways that the federal government could reduce spending to match tax cuts at this point. I know over at SUFA you talked about how cutting programs would raise the ire of the group that benefitted from them, and eventually be repealed. So take something such as welfare as we know it. Could it be replaced with a temporary welfare system such as the reform that Clinton had enacted? It still provided the safety net that keeps the masses happy, but limits the term of benefits so that only a portion of the current spending would be done. Would revising most major programs in a way such as this even begin to be enough to begin to get things done? I am considering an article along this line of thinking that I am sure you will be part of the discussion on, so consider this more of a heads up that it is coming so you can prepare some thoughts!

    USW

    • Black Flag Says:

      USWep,

      I’m sure many great brains are trying to figure it out.

      The challenge with Clinton’s plan;

      – it would work fantastic in a growing economy – where there are plenty of jobs for the welfare/social assisted people to take as their benefits expire. As long as there is a place for them to go, such a plan has merit.

      However, the opposite is true today.

      Job market is not only shrinking – its accelerating in its shrinking. Every month there is a larger number losing their jobs then the months before (generally).

      As such, they lose their benefits with no recourse. That is a problem.

  3. Godless Says:

    “I am most certainly not against tax cuts – indeed, all taxes are destructive to an economy – there exists no such thing as a ‘fair’ tax, ‘equal’ tax, or a ‘good’ tax.”

    Spoken like a true individual that never needed any type of assistance that their family couldn’t provide.

    The nations with some of the highest tax rates also seem to be the happiest places, the healthiest places, and the least stressful places. Taxation is used to create programs that are beneficial to individuals and businesses.

    Happiness – http://www.forbes.com/2009/05/05/world-happiest-places-lifestyle-travel-world-happiest.html

    Healthiest – http://www.forbes.com/2008/04/07/health-world-countries-forbeslife-cx_avd_0408health.html

    Less Stressful – U.S. ranks #2 MOST – http://www.easier.com/58853-most-stressful-countries-to-move-to.html

    If American corporations didn’t commit fraud when filing taxes, the budgetary issues may not even exist.

    http://www.washingtonpost.com/wp-dyn/content/article/2008/08/11/AR2008081102324.html

    While many corporations use the resources of America and Americans and profit from those resources, they continuously and essentially steal money from the American tax payer every year. Worst is that many of these corporations also receive government subsidies; further theft of the American people.

    Taxation also provides for our National Defense, or would you prefer private armies roaming America that had no loyalty or allegiance to our great nation? I can recall another military that was privately paid; Caesar’s shortly before he declared himself a GOD and life-long emperor of Rome. Not everything should be privatized.

    • Black Flag Says:

      I extend a Hearty Welcome – glad you reciprocated my visit to your site!

      Spoken like a true individual that never needed any type of assistance that their family couldn’t provide.

      Your argument – rephrased – is that stealing is a right as long as the situation merits it.

      But whose measure of merit? Yours? Mine? Other disinterested people?

      Civilization exists because such taking of other people’s property is theft and is never justified. The core of society will collapse if theft (or any and all other forms of violence) can be justified upon innocent people.

      You cannot solve human suffering by transferring the suffering onto other, innocent people

      The nations with some of the highest tax rates also seem to be the happiest places, the healthiest places, and the least stressful places. Taxation is used to create programs that are beneficial to individuals and businesses.

      People who benefit from theft rarely complain about it.

      These nations have suffered, but it is unseen by you – because the theft is small upon a broad base and rewards a small group disproportionate to the population. The governments gain tremendous support from the latter with mere grumbles from the former.

      Regardless of the (mis)perceived benefit – one does not justify the deeds of a bank robber by his donations to the Red Cross.

      If American corporations didn’t commit fraud when filing taxes, the budgetary issues may not even exist.

      Taxation as a funding tool is secondary.

      It’s primary use is for the exertion of public policy. The act of taxing “things” causes people to avoid such interests or actions, whereas tax breaks or credits promote other political interests.

      Taxes are a ‘nose ring’ for the masses – pulled hither and fro by the fickle politics of the day.

      While many corporations use the resources of America and Americans and profit from those resources, they continuously and essentially steal money from the American tax payer every year. Worst is that many of these corporations also receive government subsidies; further theft of the American people.

      I always smile at Statists who rage against Corporations – an abstraction created solely by government!

      Corporations exist because of Government directly. You must believe that Government would forsake its precious creation and it surprises you that Government feeds it!

      There is no surprise. Government is the God to the Corporation and the Corporation pays homage to its creator.

      Taxation also provides for our National Defense, or would you prefer private armies roaming America that had no loyalty or allegiance to our great nation?

      Or prefer neither? False dichotomy.

      Free men organize themselves for their mutual defense.

      Government-funded Standing Armies – in contradiction to the founding principles – remain the greatest threat to freedom and liberty of the People.

      Not everything should be privatized.

      In all things, Free men should be free to voluntary chose what goods and services they wish to buy – or not.

      To believe that an Elite – the Statists – know better than another man about that man’s life is egotistical – and dangerous. Such a belief is the fuel of tyranny.

      Cheers!

  4. Godless Says:

    Theft is taking a country’s natural resources for a single companies gain. Your comment is void of any acknowledgement that my statement was or wasn’t accurate. Come on, be honest, you’ve led a financially privileged life, huh? That’s not to say that maybe other aspects of your life weren’t missing.

    A civil society, guided by “common sense”, is one that looks after its own members. By your reasoning, there is no reason for government, countries, laws, regulations, or anything that isn’t specifically meant to bring in further profit for the rich; there is no endeavor worth taking if it doesn’t make a profit and there are no principles higher than the desire to make more money. You’re idea of the perfect world is a slave colony. The problem is that you’ve always been a member of the slave drivers or their cronies, thus have no understanding of what a hard days work actually means or what money REALLY means. It means life to many people and you’re defending people’s right to take as many lives as they want; hey, if it’s a fair fight/free market.

    Labor is the backbone of any economy, your economic ideals destroy labor and turn man into slaves of the wealthiest of citizens. Ergo, fascism. The extremely wealthy would continue to gain riches at the expense of the rest of the population. Why don’t you just say you support feudalism and be honest about it. You want royalty and serfs, not a “free” anything.

  5. Black Flag Says:

    Theft is taking a country’s natural resources for a single companies gain.

    Theft is man taking what does not belong to him from another man.

    Perverting definitions to fit your argument is a fallacy.

    Your comment is void of any acknowledgement that my statement was or wasn’t accurate.

    My life and its adventures neither prove nor disprove a truth.

    A civil society, guided by “common sense”, is one that looks after its own members.

    A civil society is not guided by “common sense” – either the actions of the individuals enhance or detract from the sustainability of society.

    We have achieved civilization by the understanding that certain actions – violence upon other men – degrades society and is unsustainable.

    By your reasoning, there is no reason for government, countries, laws, regulations, or anything that isn’t specifically meant to bring in further profit for the rich;

    That is your reasoning, not mine.

    There are two methods a man obtains the resources for his survival and his desires:

    (1) Earns it – this is the economic way.

    (2) Steals it – this is the political way.

    Path #1 leads to civilization and human rights.

    Path #2 leads to Government and tyranny and “Might is Right”

    there is no endeavor worth taking if it doesn’t make a profit

    A man makes a profit by supplying goods or services at a cost lower than his customer can do it himself.

    There are many endeavors that are unprofitable. Many of those are known as “hobbies” and are a fine choice for an individual to undertake.

    But we have discovered that under the Free Market system and Capitalism that the Division of Labor creates the greatest prosperity. Specialization of effort increases efficiencies and effectiveness while lowering the costs of production.

    If a man can do the work of 10, he reaps a profit of 9.

    This creates wealth.

    and there are no principles higher than the desire to make more money.

    Money is simply another economic good. More goods in a society increases the wealth of that society.

    There is no evil in making money as there is no evil in producing more bananas.

    You’re idea of the perfect world is a slave colony.

    Slaves can only exist is a society dedicated to imposing upon other men for their needs and desires. Indeed, Socialism is pervasive slavery as Socialism requires such impositions.

    The problem is that you’ve always been a member of the slave drivers or their cronies, thus have no understanding of what a hard days work actually means or what money REALLY means.

    You are the confused one regarding money. It is apparent that your definition of money and wealth has been distorted.

    It means life to many people and you’re defending people’s right to take as many lives as they want; hey, if it’s a fair fight/free market.

    I defend freedom from all those that wish to take it away, including from those like you.

    Labor is the backbone of any economy, your economic ideals destroy labor and turn man into slaves of the wealthiest of citizens.

    Wisdom is the backbone of the economy.

    Digging a hole in the ground and refilling it is hard work – but accomplishes nothing.

    Knowing what hole to dig, when and where with what tool means everything.

    Ergo, fascism. The extremely wealthy would continue to gain riches at the expense of the rest of the population. Why don’t you just say you support feudalism and be honest about it. You want royalty and serfs, not a “free” anything.

    Your belief system can only lead to the very thing you wish to avoid – government controlled economy – Fascism.

    The contradictions in your beliefs are huge. However, I do not believe you will spend any time dealing with them.

  6. Godless Says:

    Your reasoning is seriously flawed.

    government = power of the people

    economy = the exchange of assets and wealth

    People SHOULD have power over the economy.

  7. Black Flag Says:

    Your definitions are incomplete.

    “Government” is not power of the people.

    Government is the the monopoly on initiating violence in a specific geographical area.

    Economy – is the consequenceo of human action.

    People DO have power over the economy – and it rests in you wallet.

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