Gov’t spending vs. tax rates, what’s more important?
I usually don’t blog too often about politics or macro-economic issues but I came across this article in Barron’s written by Gene Epstein and wanted to share it with some of my friends and family.
For me, I have always placed a higher priority on a politician’s stance on taxes than on their stance regarding government spending. However, as this article points out I should be prioritize my attention in the inverse because if government spending exceeds government’s tax receipts I will end up paying for it in higher future taxes or via inflation.
Here are a few points from the article that I found interesting:
· Friedman’s Law (famous economist Milton Friedman): “The real cost of government…is measured by what government spends, not by the receipts labeled taxes. The goods and services it buys are not available for other use.” So, for example, however the war in Iraq has been funded, its direct cost is measured by the men, women and material that otherwise would have been available for peacetime uses, not by the receipts labeled taxes.
· When a tax cut is REALLY a tax cut?: Again, quoting Friedman- “When the so-called tax cut is accompanied by a larger rise in government spending than in prices.” By this reasonable standard, over the past half-century, at least, there have been no real federal tax reductions. The Kennedy, Reagan and more recent Bush tax cuts were all accompanied by a larger rise in federal spending than in prices.
· Which party is more fiscally responsible?: I have always thought that those in the “conservative” republican party were the ones I could trust with cutting back on “wasteful” government spending. However, according to this chart, since 1960 the 3 democratic administrations have managed to cut back on government spending as a percentage of GDP during their time in office while the 3 republican administrations each worked to increase it.
· The most insidious tax: Perhaps the most insidious tax of all is the sheer printing of money, produced through three main channels.
→The first is by selling Treasury bonds not to the public, but to Uncle Sam’s own central bank (a process often called the “monetization of debt”). From September 2001 to September 2007, the Federal Reserve “bought” an additional $217 billion of Treasury paper, for which it cut a check to the Treasury via its unique powers of money creation.
→A second channel of monetized financing arises from the fact that the Federal Reserve holds approximately $750 billion in Treasury debt, and as such is entitled to the coupon payments on those holdings. But while it keeps some of this to finance its own operations, it doesn’t need most of it. So what it does each year is “return” the unused funds by cutting yet another check to the Treasury.
→Since the central bank is, after all, just a part of the federal government, the whole process is rather as though an individual were to put his own personalized IOUs into one pocket, while paying himself the interest on those IOU’s into the other. For the government, what prevents this exercise from being a wash is that the pocket from which the payments come has the power to create money. According to the Office of Management and Budget, these “Deposits of earnings by the Federal Reserve System” totaled $173 billion from 2001 through 2007.
→The third, more subtle way the government prints money is by inflating receipts via the larger process of monetary inflation. Through the printing of money by the central bank, wages, salaries, prices and asset values are all pushed up, inflating government receipts. The yield from this process was greater prior to 1985, when income-tax brackets were first indexed to prices. But there is still a kind of “bracket creep,” as people earn more money within higher brackets. In any case, no other part of the tax code is indexed in this way.
Needless to say during this election cycle I will be spending more time reviewing the candidate’s spending plans rather than their taxing plans.
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