–How the poor get screwed. Why deficit reduction increases the gap between rich and poor.

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

Every politician claims to love the poor, the downtrodden, the unemployed. Yet, the same politicians vote to cut the deficit, hurting those poor he/she loves so much. Sadly, the poor buy into it.

Both parties claim that reducing the federal deficit will reduce unemployment and benefit the working class and the poor. Exactly how a reduction in net federal dollars flowing into the economy will stimulate employment and benefit the working class, never is explained, because there is no explanation. It is a bogus argument.

To reduce the deficit requires taxes to be increased or federal spending to be reduced. The Democrats want to reduce the deficit by increasing taxes on the “wealthy.” The Tea/Republicans want to cut the deficit through federal spending reductions. Functionally, there is no difference between a tax increase and a spending reduction; both reduce the amount of money being added to the economy.

Traditionally, the Republicans have favored cutting taxes, an act that benefits economic growth. Democrats traditionally have wanted to spend more, which also benefits economic growth. Unfortunately, the Tea Party, a perverted outgrowth of President Reagan’s memorable statement, “. . . government is the problem,” has taken over the Republican Party, who now will do and say anything to get into power.

This has dragged in the Democrats, who will do and say anything to stay in power, so both parties now are preaching an anti growth line, being led by a group of economic know-nothings. Extreme views often gain favor during difficult times, when people are desperate for a solution, and in this case, the extreme views are supported by the wealthy. Note how such luminaries as Bill Gates and Warren Buffet have made statements actually supporting a tax increase! Why do rich people want their taxes raised? Not out of generosity. Read on.

Because a growing economy requires a growing supply of money, a tax increase and/or a spending reduction reduce economic growth. And no matter how it’s done, deficit reduction hurts the lower incomes most. Consider a tax increase on the wealthiest. What does it accomplish? It reduces the amount of money in the economy. A Monetarily Sovereign nation does not spend tax money. It has no need to. The spending itself creates money. So what happens to tax money? It leaves the economy and is destroyed. It simply ceases to exist.

History shows that every depression and most recessions not only have been caused by reductions in the money supply, but even by reductions in money supply growth. See: SUMMARY. Who suffers most during recessions and depressions – the wealthiest or the poorest? Right, the poorest.

Although tax increases will force the wealthiest to pay more taxes, that will not affect their life styles. They’ll find more tax “loopholes.” They’ll get by on two cars rather than three (Dealerships may fire some working salespeople), and the remodeling of the 2nd home may be delayed a year (Some tradespeople will lose their jobs). But life will go on for the wealthy. Not so for the less wealthy who, during a recession, may become unemployed, lose their housing, spend less and cancel plans for children’s college.

According to the IRS, the bottom 50 percent of Americans earned less than $32,879 and paid only 2.9% percent of the nation’s income taxes, down from 3 percent a year earlier. So to reduce the so-called “deficit,” shall we increase taxes on these folks?

Where the lowest paid really get hit is with FICA. In 2010, income taxes totaled $935 billion, and FICA totaled $875 billion – pretty close. But while all income is subject to income tax, only salaries below $100K are subject to FICA – an enormous saving for the wealthy. And, not only does FICA steal 7.65% from every salaried worker, but it steals another 7.65% from his/her boss. Think of it as 15.3% that could have gone to the salaried employee, but instead goes to the government, where it is destroyed. FICA, not income tax, is the big tax burden on working people.

In short, all taxes and tax increases hurt everyone in the economy — they are recessionary — but they hurt the poor more than the wealthy, so by comparison, the wealthy become wealthier. Tax increases make the wealth gap grow.

Now consider a federal spending reduction. Medicare and Social Security are the biggest targets, and who relies most on these federal programs – the 1% of Americans defined as “rich, who earned an adjusted gross income of $410,096 or more and accounted for 22.8% of all wages, while paying 40.4% of total reported income taxes? Or are the 99% defined as “not rich” more likely to need Social Security and Medicare?

Right. If Medicare and Social Security are cut, the rich will hardly notice. Warren Buffet probably doesn’t even know whether he receives Medicare and Social Security benefits. Financially, it is meaningless to him. Cutting social programs hurts the poor more than the rich, increasing the gap between rich and poor.

Or, we could cut military spending. This would cut profits and jobs from all those industries that sell to the U.S. military, and it would cut the number of salaried service people. Cutting military programs hurts the poor more than the rich, increasing the gap between rich and poor.

No matter where you look in the federal budget, spending cuts would hurt the bottom 99% far more than the top 1%.

In summary, federal tax increases and federal spending cuts (i.e. deficit reduction) cause recessions, and all three hurt the middle class and poor far more than they hurt the rich. Deficit reduction will increase the gap between the rich and the poor.

And the wealthy have brainwashed the non-wealthy into thinking this is a good thing.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it ruined my future.”


11 thoughts on “–How the poor get screwed. Why deficit reduction increases the gap between rich and poor.

  1. Democrats, in particular, have brainwashed the working class into thinking they are the party for “the little guy”.


      1. Did you read the post? “How the poor get screwed. Why deficit reduction increases the gap between rich and poor.

        Who did the best job reducing deficit? Bill “I didn’t have sex with that woman” Clinton was so good at it that he became the only President since Nixon who ran a surplus. He destroyed the middle and lower class. Way to go, Democrats!


      2. And who fixed the Clinton surplus and expanded Medicare? Yeah right, those who always hate the government.


  2. I’ve seen charts that say that Democratic presidents reduce the deficit and Republican presidents expand it. I’ve also seen charts that show that the gap between rich and poor shrinks under Democratic presidents and grows under Republican presidents. This doesn’t track with what you’re saying. You’re saying that if a President were to increase the deficit it would decrease the gap between rich and poor. Do you have an explanation for why the data I’ve found don’t match your theory?


  3. Rodger,

    Are you advocating more military spending? I.E. more endless wars, deaths, and empire expansion in order to prop up the economy? Might we consider converting that spending to a more useful and less deadly investment? I’m not arguing the numbers, but the costs coming out on the other side seem worthy of being included in the discussion….


    1. I suspect that wars beget war budgets, and not the other way around. When Bush lied to get us into a useless war in Iraq, he wasn’t thinking budget; he was thinking, “I’ll show my daddy how a real man does it. Who cares if a few thousand young Americans get killed so long as I demonstrate the size of my testicles.” Something like that.

      Personally, I suggest:
      1. Eliminate FICA
      2. Increase the standard tax deduction about $10K per year.
      3. Increase medical and retirement support.
      4. Increase support for the unemployed and the poor.

      Rodger Malcolm Mitchell


  4. Seems to me that if we want higher Medicare and Social Security spending (and want to keep the low marginal income tax rates), we should increase the FICA tax (both medical and old age & survivor portions). Why should the general budget supported by the income tax pay for old-age medical care?

    The medical portion of the FICA tax is clearly too low while the old age/survivor portion must be “almost right”. If the social security tax was running a surplus over decades (building the laughably named “trust fund”), why wasn’t Medicare created in the same manner?


    1. Welcome to the blog, Bill,

      Contrary to popular myth, FICA does not support Social Security or Medicare. See: https://rodgermmitchell.wordpress.com/2009/09/08/ten-reasons-to-eliminate-fica/

      Federal spending is not supported by federal taxes. That is at the heart of Monetary Sovereignty. See: https://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/

      If federal taxes were reduced to $0 or increased to $100 trillion, neither event would affect federal spending by even one penny.

      Rodger Malcolm Mitchell


  5. I think Warren Buffett truly believes that having his taxes raised will help our country. He doesn’t strike me as a bad guy who wants to increase inequality.


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