Whipping a horse while reining it in.

What happens when you spur the economy and rein it in at the same time.

Imagine you and me debating quantum chromodynamics.

I know nothing about the subject, and in all probability, you know virtually nothing, too.

So, our debate would be meaningless.

And yet, this is precisely what is happening in America, with regard to federal taxes: Debates by people who know nothing.

Consider excerpts from the following article:

The Memo: Biden tries to flip the script on taxes, by Niall Stanage
President Biden’s plan to increase taxes on wealthy Americans is reigniting one of the fiercest divides in politics: How much should the government do, and who should foot the bill?

Immediately you see the first bit of ignorance, with the words, “who should foot the bill?”

No one “foots the bill” for federal government spending.

The federal government creates new dollars, ad hoc, every time it pays a creditor.

Unlike state and local government taxes, which do fund state and local government spending, federal taxes do not fund federal spending.

This is basic economics that Biden and most in Congress surely must understand.

They understood it when they passed earlier trillion-dollar stimulus bills without tax increases. So how could they not understand it for the proposed trillion-dollar stimulus bill?

Biden this week will propose a massive boost to social infrastructure spending on things such as paid leave, child care and tuition-free community college.
To pay for it, according to multiple media reports, he will nudge up the highest rate of income tax and dramatically hike the capital gains tax paid by top earners.

Biden claims that the purpose of his proposed tax increase is to “pay for” his proposed spending boost. If he truly believes that, he is ignorant about federal financing.

More likely, he doesn’t believe it, which would mean he is lying. So, why?

The plan is expected to call for an approximate doubling of the capital gains tax, from its current level of 20 percent, for Americans with incomes of over $1 million.
At the heart of the plan is a key question: whether income derived from the sale of assets should be treated basically the same as income in the form of a paycheck.
Biden and his backers answer with an emphatic yes. Wealthier Americans derive a greater proportion of their overall income from investment, they note.
The beneficial treatment of capital gains, they say, has the effect of further helping those who are already in a privileged position – and therefore exacerbating wealth inequality and social incohesion.
A Gini ratio of 0 indicates perfect equality, where everyone has the same income. A Gini ratio of 1 indicates total inequality, where one person has all the income. Inequality in America has grown substantially.

Could it be that the real purpose of Biden’s tax proposal is to narrow the income/wealth/power Gap between the very rich and the rest of us?

Could it be that he is using the need for infrastructure and other spending, as an excuse to tax the rich more, while benefiting the “not-rich”?

If that is his motive, then I bow to him as a genius, and I pray he succeeds.

The wide, and widening, income/wealth/power Gap between the relative handful of Americans and the rest of us, is the single biggest, most corrosive economic problem facing America.

But there are counterarguments, too.
Those who favor keeping the capital gains tax low insist that it is a key driver of investment and that high rates encourage people to hold on to their assets rather than incur a high tax bill, thus diluting economic dynamism.

That “key driver of investment” line is utter nonsense.

All investment begins in the short term, and only after a year of inactivity does it become long-term and earn the lower tax rate.

In that sense, yes, it “dilutes economic dynamism.” But, is that a good thing?

Is there an economic benefit from encouraging people to hold on to their investments for a year or more?

I don’t see it. That phrase “dilute economic dynamism” is another way to say, “reduce speculation,” which the public has been taught is a bad thing.

Some economists hate “speculation,” which is short-term investing. But speculation is what grows America.

Every entrepreneur is a speculator, i.e. one who invests in businesses, stocks, property, or other ventures in the hope of gain but with the risk of loss.

That is how new businesses are created. “Economic dynamism” built the American dream, and now some stodgy, old economists want to tax it?

No, I hope the real reason for Biden’s tax proposal is to narrow that debilitating Gap between the haves and the have-lesses.

Then there are the politics to consider. Democrats up until recently were petrified of being labeled the “tax-and-spend” party by conservatives – a fear that was rooted in the knowledge of how effective such attacks had been in the 1980s and early ’90s.
Given the razor-thin Democratic majorities on Capitol Hill, whether Biden can even get his proposals passed will depend upon his ability to corral moderates such as Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.).

Because federal taxing does not fund federal spending, Democrats should become the “spend-and-don’t-tax” party.

Manchin and Sinema probably are not moderate in their beliefs. They are Democrats who won in historically Republican-leaning states.

So to maintain office, they must appear to be moderate. Yet, they probably are are social spending, economic-growth Democrats at heart.

Success is far from guaranteed. Progressives are adamant that the time is right for Democrats to cast off their traditional timidity about taxation and push a more egalitarian agenda.
Conservatives are equally emphatic that doing so would be a huge mistake. “This is how you stall an economy,” said Grover Norquist, the president of Americans for Tax Reform and perhaps Washington’s best-known anti-tax campaigner.

Norquist is absolutely correct when it comes to federal taxes.

Unlike state/local taxes, federal taxes do not provide spending money to the federal government, which has infinite spending money. Federal taxes, absolutely, positively are an anchor slowing the U.S. economy.

Most federal taxes should be eliminated, altogether. The sole purpose of federal taxes is to control the economy by taxing what the government wishes to discourage and giving tax breaks to what the government wishes to encourage.

Think of federal taxes as reins on a horse. They steer the horse, but reins do not make a horse go faster.

A problem occurs when taxation is linked with federal deficits and debt, both of which erroneously are decried as economic negatives. But deficit spending grows the economy.

Combining federal deficit spending with federal taxes is like spurring a horse while reining it in.

Biden, Norquist insisted, “could just have sat back because you are going to see this surge in the second quarter.
“There could be this incredible growth. You could be coasting on that, but instead what you are doing is chasing investment away from the United States, telling people, ‘You don’t want to get capital gains in the U.S.'”

Norquist is wrong about “sitting back” and “coasting.” In this competitive world, that is no way to win a race against other nations. Winning jockeys do not sit back and coast.

The Biden plan, Norquist argued, “is a boat anchor on economic growth when, going into 2022, you would want to be going gangbusters.”

The best way to “go gangbusters” (a phrase from the dark ages) is for the federal government to spend more and tax less.

Biden aides have been stressing how few people would be affected by the new top rate of capital gains tax.
Jen Psaki, the White House press secretary, emphasized the $1 million income threshold for the top rate on Friday, and added, “The president’s bottom line is that people making under $400,000 a year should not, will not, have their taxes go up.”

Is it $1 million or is it $400,000? A bit of confusion, here.

Ron Klain, Biden’s chief of staff, tweeted that the plan was one Biden had “campaigned on extensively.”
Klain added that it “changes the tax rate for less than 1% of Americans (in fact, less than 1/2 of 1% of Americans).”

If that is the case, then Biden would be using the federal tax for exactly what it is designed to do: Narrow the Gap between the rich and the rest.

Conservatives such as Norquist argue this framing is misleading.
They say, for a start, that a capital gains tax hike would have a detrimental impact on the stock market, thus affecting the huge number of Americans who have individual investments, 401(k) accounts or IRAs.
“If a 1 percent fall in stock prices is all that you get from a really major increase in capital gains taxes, that’s not a big problem,” Paul Krugman, the Nobel Prize-winning economist and liberal New York Times columnist, told Bloomberg TV.
More broadly, progressives are scathing of the predictions of doom from what they see as a basic move toward a more equitable tax structure.

Yes, that is exactly what America needs: A more equitable tax structure.

The current tax system disadvantages the middle- and lower-income groups, while providing massive tax breaks to the rich.

Donald Trump apparently paid no taxes at all in eight of the last ten years, and most business owners pay taxes at a lower rate than do their employees.

Begin with the FICA tax, which ostensibly supports Social Security and Medicare, but does neither.

It is a 15.3% tax on lower salaries. Then there are the business owners tax breaks on “business” (i.e. personal) expenses like vacations, yachts, clubs, meals, cars, planes, etc.

And while a home renter gets no tax breaks on rent, a home owner receives various tax breaks.

Jonathan Tasini, a Democratic strategist who backed Sen. Bernie Sanders (I-Vt.) in the 2016 presidential race, argued that any assertion about the dangers of hiking the capital gains tax rate “is greed dressed up as economic argument.”
“There is no rich person in the world who will honestly tell you that he … would not have invested money in a company because of capital gains rates.
You are making a profit already! What we are saying is you have to give back,” he added.

Correct. The tax is on profits. And, in fact, if there are losses, they lead to tax breaks (which is why Trump avoided taxes)

Tasini also argued that debates about taxation in general often proceed along false lines – as if the tax revenue simply disappears into the ether rather than being used for public benefit.

Here, Taxini veers into an area of which he knows little. Federal tax revenue does, in fact, “disappear into the ether.

It is not “used for public benefit.” When the U.S. Treasury receives tax dollars, those dollars disappear from any part of any money measure (M1, M2, M3, etc.) They simply are destroyed.

Federal taxes are destroyed upon receipt.

That is why federal taxes are, as Norquist describes them, a boat anchor on economic growth.” A growing economy requires a growing supply of money. Federal taxes reduce the supply of money.

(By contrast, state and local government taxes, do not disappear into the ether. They are deposited into commercial banks where they become part of the M1 money supply and bank reserves.)

“Nobody who makes money, whether you become rich or less than that, does so entirely on their own or because of their own genius.
All taxes are about giving back to pay for everything that society provides that allows you to make money and invest – and that includes having the roads and bridges that take you to the office where you make a living,” he said.

No, federal taxes do not pay for roads and bridges, although state and local government taxes do pay for these things.

The above is where Tasini confuses federal (Monetarily Sovereign) finances with state/local (monetarily non-sovereign) finances.

He now has moved into what we mentioned in the very first sentence of this post” Pontificating about quantum chromodynamics when he doesn’t even understand the basics of physics.

Mark Zandi, the chief economist of Moody’s Analytics, argued that the overall impact of Biden’s proposals was likely to be fairly modest, especially when the benefits of infrastructure spending are factored into the equation.
Taxpayers in the million-dollar-plus bracket are “a very rarefied group,” Zandi said. If the Biden plan were to pass, he added, then maybe in a decade “an econometrician would be able to tease out some negative effects, all else being equal.
But I think it is going to be very much on the margins.

Zandi is correct. The sole effect of the tax on the rich will be, to some very slight degree, narrow the income/wealth/power Gap.

The real narrowing device will be the increased spending for benefits to the middle- and lower-income groups.

The problem is that the Republican Party has become “the Party of the rich,” so it opposes taxes that affect the rich while supporting taxes that affect the not-rich, like FICA increases.

This is revenue that is going to presumably pay for the American Family Plan, which is child care and family leave, and some of it is going to less wealthy households who are going to use it and spend it.
It could help them go to work and so raise labor force participation.”
Overall, Zandi predicted, the plan would be “a tailwind rather than a headwind” for economic activity.
Even so, Biden faces a pitched political battle to get his plan passed. And opponents such as Norquist insist the American public is on their side. 

Biden faces a pitched political battle for two reasons:

  1. The rich, who run America, have bribed the media (via advertising and ownership), the politicians (via political contributions and promises of employment, later), and the university economists (via contributions to the universities and promises of lucrative employment in think tanks). They are the ones who fight against taxes on the rich.
  2. Economic ignorance afflicting the public and some in Congress.

If Biden simply cut taxes on the not-rich, he wouldn’t have to ask for a tax increase on the rich, and he still could pay for everything while narrowing the income/wealth/power Gap. That would be ideal.

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Rodger Malcolm Mitchell [ Monetary Sovereignty, Twitter: @rodgermitchell, Search: #monetarysovereignty Facebook: Rodger Malcolm Mitchell ]

THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE. The most important problems in economics involve:

  • Monetary Sovereignty describes money creation and destruction.
  • Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually.
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY