The Big Lie in economics is:
Federal Taxes Fund Federal Spending
Unlike state and local governments, whose taxes do fund spending, the federal government is Monetarily Sovereign. It has total sovereignty over the dollar. It can create as many dollars as it wishes, any time it wishes.
You read and hear the Big Lie almost every day.
Each time someone asks “Who’s going to pay for that?” when discussing a federal program, they express the Big Lie. The answer to their question is: The federal government will pay for it by creating dollars, ad hoc.
Obamacare is based on the Big Lie because it requires people to pay the federal government for services. The federal government neither needs nor uses such payments.
The Big Lie hides the fact that all federal tax dollars are destroyed upon receipt.
The federal government “has” no dollars. Rather it sends instructions to banks (in the form of checks or wires), telling the banks to increase the balances in checking accounts. When the banks do as instructed, dollars are created.
The concept, “federal taxes destroy dollars,” is counterintuitive and difficult to explain, particularly since state and local taxes do not destroy dollars. At first blush, the average person cannot imagine why the federal government taxes, if it destroys tax dollars.
(The reasons are psychological, and allow the government to control the citizenry by rationing services.)
Interestingly, I’ve found that everyone knows federal taxes destroy dollars, without knowing they know it.
Here’s the essence of a conversation I had just yesterday, with a friend:
RM: Federal tax dollars are destroyed as soon as they are received by the government.
Friend: No they aren’t. They are spent by the federal government. Taxes are how the government pays for spending.
RM: Do you think the federal government can run out of dollars?
F: No, the government always can print more dollars.
RM: If that is the case, the federal government doesn’t need to tax. It could stop taxing tomorrow and simply create the dollars it needs.
F: But that would cause inflation.
RM: Why would the end of federal taxation cause inflation?
F: Because if the government simply printed dollars, the dollar supply would go up, which would cheapen the dollar, and that’s inflation.
RM: So what you’re saying is: Federal spending causes inflation by increasing the dollar supply, and federal taxes prevent inflation by reducing the dollar supply.
RM: Which shows you understand that federal tax dollars are destroyed upon receipt. If they still existed, they wouldn’t offset federal spending, and couldn’t prevent inflation.
And by the way, this isn’t true of state and local taxes, which are deposited in banks. Dollars exist only when they are circulating in the economy. The federal government has no dollars. It destroys every dollar it receives.
The fact that the federal government not only has no need for taxes, but actually destroys tax dollars upon receipt, is the single most important concept in all of economics.
It is the foundation of Monetary Sovereignty. It is what makes the Ten Steps to Prosperity (see below) possible.
Not understanding why the Big Lie (Federal Taxes Fund Federal Spending) is in fact, a lie, has led to the euro disaster. It’s why many states, counties, and cities teeter on the edge of financial disaster, while the federal government never has any difficulty paying its bills.
It’s why the UK was wise in retaining its pound, and not surrendering to the euro.
It’s why many states, counties, and cities teeter on the edge of financial disaster, while the federal government never has any difficulty paying its bills.
In short, everyone believes federal tax dollars are destroyed upon receipt. They just don’t know they believe it.
To claim that eliminating federal taxes would cause inflation is simply another way to say federal taxation destroys dollars.
It’s the first big step toward understanding economics.
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 EVERYONE Five 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.