Taxes have an effect and taxes have a purpose. There is a difference.
Humans are social animals. All social animals, whether they be ants, wolves or humans, operate on the same principle: A social animal gives to the group, and the group gives to the individual, what the individual cannot accomplish alone.
Humans give taxes and receive government services.
However, “local” (i.e. city, county, and state) taxes are different from federal taxes.
The federal government is Monetarily Sovereign. It has the unlimited ability to create its own sovereign currency, the dollar.
While local governments can and do run short of dollars, and need to collect taxes for spending, the federal government never can run short of dollars, so has no need to collect taxes.
When you pay taxes, you have less money. So, the effect of local taxes, and indeed of all taxes, is to impoverish taxpayers.
Local taxing bodies are similar to you and me, in that they use their income (taxes) to fund spending. Your local taxes are deposited in bank accounts, from which the local governments pay for police and fire protection, roads, water, schools and myriad other services.
So though local taxes take away your money, you receive services in return, and the local tax dollars remain in the economy.
You, being monetarily non-sovereign, sometimes may find that your income is less than your spending, and over time, you run short of dollars. You then may borrow, which temporarily solves the shortage problem.
However, you must pay interest on the borrowing, and eventually must pay back the loan, which together places a greater burden on your income than had you not borrowed.
After you receive the loan, your future spending must decrease or your future income must increase, to pay back the loan and its interest.
Visualize your not being able to survive on your salary. So you don’t pay your full credit card bill. You make only the minimum payment.
Soon, you will have to pay off that loan, plus interest. But if you couldn’t survive on your salary before, how will you survive on your salary now, especially if you have the additional burden of loan payments?
You either must cut spending (which you should have done earlier) or find more income.
Borrowing to meet day-to-day expenses is a recipe for economic disaster.
(Paying for loans on large, infrequent purchases like a house or a car, should have been factored into your anticipated income).
When local governments borrow, it often is because taxes are not sufficient to pay for day-to-day expenses,. Because some tax money goes to lenders, future spending must decrease, or future taxes must increase.
But future spending seldom decreases.
The costs of police and fire protection, roads, water, schools and myriad other services provided by local governments continue to rise, so taxes must rise, and/or there will additional borrowing — an upward helix of spending, borrowing, more and more, until borrowing limits are reached, at which point taxing must increase.
The effect of this borrowing is to transfer interest dollars from taxpayers to lenders, ultimately from the middle class to the rich.
Local taxpayers would have been better served had the local governments never borrowed, but instead used a “pay-as-you-go” system, with taxes paying for spending as needed. In that way, no tax money would be diverted to lenders, and taxes long-term would be lower.
The underlying purposes of local borrowing are:
*To fool taxpayers into believing temporarily that their taxes are lower than they really are, which helps politicians be re-elected
*And to enrich lenders, who because of their wealth, are able to direct local governments.
In short, local borrowing to meet day-to-day expenses cheats taxpayers. Remember that the next time your town asks for approval to borrow.
As we stated previously, the effect of all taxes, local and federal, is to impoverish taxpayers.
But, unlike local governments, the federal government does not need income to pay its bills. The federal government creates dollars, ad hoc, every time it pays a creditor.
(The method is this: To pay a creditor, the federal government sends instructions, not dollars, to the creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account. When the bank does as instructed, dollars are created. Because the federal government cannot run short of instructions, it neither needs to tax nor to borrow.)
What becomes of federal tax dollars? They are destroyed. They disappear from the money supply. Tax dollars are not part of M1, M2, M3 or any other measure of America’s money supply. They simply cease to exist, once received by the Treasury.
Search every possible source, and ask this question, “How much money does the federal government have?” and you never will find an answer. You can learn how much money your city, county or state has, but not the federal government.
In effect, the federal government has no money; it simply instructs banks to create dollars as it pays bills.
If the federal government doesn’t need to tax or borrow, why does it do both, tax and borrow?
The purpose of federal government taxes is economic control.
By impoverishing taxpayers, and then doling out dollars as it sees fit, the federal government exerts powerful control over the lives of taxpayers.
Because the federal government is controlled by the rich, tax laws are designed to widen the Gap between the rich and the rest.
The Gap is what makes the rich rich. Without the Gap, no one would be rich, and the wider the Gap, the richer they are. Thus, the fundamental purpose of federal taxes is to make the rich richer, and to help the rich control the lives of the rest.
The federal government does not “borrow” and the federal debt is not “debt” as you may understand borrowing and debt.
The federal government issues T-securities (bills, notes, and bonds) the payments for which are deposited into holders’ T-security accounts at the Federal Reserve Bank — similar to bank savings accounts.
Unlike local governments, the federal government neither uses nor even saves these deposited funds. Instead, the funds remain in T-security, Federal Reserve Bank deposit accounts, earning interest for the holders of T-securities, until the accounts reach maturity and are paid off by the Federal Reserve Bank.
(As an aside, in a process known as “Quantitative Easing,” the Federal Reserve Bank buys T-securities from the holders, by transferring the dollars that exist in those accounts to the holders’ checking accounts.
The ostensible purpose is to add liquidity to the economy, as dollars in T-security accounts are less liquid than dollars in checking accounts.)
Federal “debt” (i.e. deposits in T-security accounts), is paid off by transferring dollars from the T-security accounts to T-security holders’ checking accounts. No new dollars needed.
Contrary to popular myth and misleading “debt clocks,” there is no reason for the government ever to pay down the federal “debt,” because T-security accounts neither are a burden on the federal government, nor on taxpayers, nor on future generations of taxpayers.
By law, the federal government can issue platinum-based coins in any stated value. To counter the above-mentioned popular myth (that the federal debt is a burden), some people have suggested that the federal government issue one platinum coin with a face value of $20 trillion, and deposit this coin with the Federal Reserve bank.
That officially would end the so-called “debt,” and in fact, create a surplus. This process would demonstrate the meaningless of the federal “debt.”
The government has resisted that solution to the mythical problem of excessive debt, because promulgating the myth allows the rich to claim that social benefits (Social Security, Medicare, Medicaid, etc.) are “unsustainable,” thereby maintaining or increasing the Gap between the rich and the rest — exactly what the rich want.
The best solution simply would be to ignore the “debt” deposits, in the same way you ignore the size of total deposits in your local bank. (When was the last time you worried that your local bank had too many deposits?)
The government’s purpose for issuing T-securities is two-fold:
1. To provide wealthy investors with a risk-free place to invest dollars, especially amounts greater than are insured by the FDIC (Federal Deposit Insurance Corporation) and:
2. To assist in inflation control. Inflation is controlled via interest rates, and controlling the rates paid by T-securities is one method for setting a floor under rates. This allows the Fed to raise this floor at a moments notice, thereby cutting off inflation, quickly.
- The effect of all taxes, local and federal, is to impoverish taxpayers.
- Local tax payments recirculate and never leave the economy’s money supply. Thus local taxpayers fund local government spending. To fund local government spending is the primary purpose of local taxes
- In effect, however, local taxes are regressive and therefore widen the Gap between the rich and the rest.
- Federal tax payments disappear from the economy’s money supply. The federal government creates new dollars by paying bills. Federal taxpayers do not fund federal spending.
- Federal debt is, in reality, the total of deposits in T-security accounts at the Federal Reserve Bank, and is not owed by present or future taxpayers.
- The rich run the federal government by bribing federal politicians (via campaign contributions), which is why tax laws favor the rich. The primary purpose of federal taxes is neither to pay for federal spending nor to prevent inflation, but rather to widen the Gap between the rich and the rest, thereby controlling the not-rich.
- Reducing all taxes, federal and local, would grow the economy and narrow the Gap.
Rodger Malcolm Mitchell
Ten Steps to Prosperity:
1. ELIMINATE FICA (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
This article addresses the questions:
*Does the economy benefit when the rich afford better health care than the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE AN ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA, AND/OR EVERY STATE, A PER CAPITA ECONOMIC BONUS (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:
Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012
Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONEFive reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefiting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
5. SALARY FOR ATTENDING SCHOOL
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
6. ELIMINATE CORPORATE TAXES
Corporations themselves exist only as legalities. They don’t pay taxes or pay for anything else. They are dollar-tranferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the government (the later having no use for those dollars).
Any tax on corporations reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all corporate taxes come around and reappear as deductions from your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.)
Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and corporate taxes would be an good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.
10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt
THE RECESSION CLOCK
Recessions begin an average of 2 years after the blue line first dips below zero. A common phenomenon is for the line briefly to dip below zero, then rise above zero, before falling dramatically below zero. There was a brief dip below zero in 2015, followed by another dip – the familiar pre-recession pattern.
Recessions are cured by a rising red line.
Vertical gray bars mark recessions.
As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.
•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money.
•The more federal budgets are cut and taxes increased, the weaker an economy becomes..
•No nation can tax itself into prosperity, nor grow without money growth.
•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)
•Deficit spending grows the supply of money
•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.
•The limit to non-federal deficit spending is the ability to borrow.
•Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
•The single most important problem in economics is the Gap between rich and the rest..
•Austerity is the government’s method for widening the Gap between rich and poor.
•Until the 99% understand the need for federal deficits, the upper 1% will rule.
•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..
8 thoughts on “The effect of taxes vs. the purpose of taxes”
Will like to add another great article:
Then you will have a great solution to the “National Debt and Its Fatal Flaw” the paying of taxes from the 90%ers to the 10%ers, (BTW, thats $728 Billion in the 2016 budget)!
While I agree with your statement “Federal debt is, in reality, the total of deposits in T-security accounts at the Federal Reserve Bank”
Where can we find evidence for this? The Fed balance sheet that it reports only shows the T-securities that are held by the Fed, which is about $2.4T – https://research.stlouisfed.org/fred2/series/TREAST
Where can we see a report of all the T-securities deposit accounts at the Fed.
I do know that our Treasury puts out their Daily Treasury Statement that details the holdings, but they do not also saw where these holdings are held, It should be on someone’s books as an Asset/Liability.
Would be helpful to find this information.
The “FRB-to-private-bank” analogy is used for simplicity, which is difficult enough for people to understand.
Unfortunately, federal financing is quite complex in that funds flow back and forth, from one account to another, all under the control of government agencies. (Visualize 1,000 jugglers, standing in a circle, all tossing balls to each other.)
The T-security funds are shown on the U.S. Treasury’s balance sheet, and the Treasury maintains an account at the FRB.
I doubt that telling people the dollars exist at the Treasury and flow through the FRB, will help people to better understand. It will just lead to the “print the money” and “Zimbabwe” myths.
Even when you go to federal websites, you’ll find such nonsense as, “The federal government sells T-securities to help finance its spending.”
If you have a simpler, more convincing descriptive method, please let me know. I have bright, college-educated friends I’ve not been able to educate, even in one-on-one discussions.
Bottom line: Your T-security dollars are in a TreasuryDirect account. Try explaining that one to your friends.
I did some digging and I finally found the Flow of Funds report on the Federal Reserve’s web site that references the treasury accounts at the Fed and public “debt” on its books –
The Financial Accounts also break down holdings of federal debt by sector. https://www.federalreserve.gov/econresdata/notes/feds-notes/2015/federal-debt-in-the-financial-accounts-of-the-united-states-20151008.html
Which then refers to this PDF that breaks down the Asset and Libiality side of the balance sheet.
Click to access P_115_coded.pdf
Demonstrating the government’s efforts to confuse the public, you’ll find the following on the TreasuryDirect web site:
” some people have suggested that the federal government issue one platinum coin with a face value of $20 trillion, and deposit this coin with the Federal Reserve bank.”
I would like to see the above be done, and not be announced for a year. Then after the announcement, declare it as proof that it is not inflationary, since no inflation would have occurred. Opponents would say it will be inflationary in 2, 5, 10 or 100 years and they can never be proven incorrect.
I agree with you in that the purpose of taxes is to impoverish the taxpayer. Taxes also proffer rewards and punishment for activities we deem as good or bad. The question I have is why not transfer the costs of local government to the MS federal government and make taxes a thing of the past?