Taxes and Spending, decoupled

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Qaanol
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Taxes and Spending, decoupled

Postby Qaanol » Tue Dec 20, 2011 9:15 pm UTC

I starting typing this as a reply in the U.S. Republican Primary thread over on News & Articles, but when I finished I realized that what I want to discuss has a broader focus.

The linked thread had gotten onto a discussion of taxes, from income to sales to estate taxes, revolving around how progressive or regressive various taxes are and/or should be. Government spending is, at least in the United States, almost entirely paid for by taxes. Yes, treasury bonds are also sold to raise money, but those must be paid back with interest, from tax money.

As I see it, the “right” way to structure a tax system is to provide disincentives for behaviors that are detrimental to society. For example:

1. Spewing toxic chemicals into the air is detrimental, so some sort of “polluter tax” is desirable. That could include taxes on cigarettes, combustion engines, coal power plants, various factories, and so on.

2. Being greedy and hoarding wealth is detrimental to price stability and the economy, so some sort of “Scrooge tax” is desirable. That could include an estate tax.

3. Drinking corn syrup and eating fiber-less bread is detrimental because it increases long-term healthcare costs, so some sort of “junk food tax” is desirable.

Anything which, in aggregate, detracts from the collective wellbeing of the populace, should be discouraged. Taxation is one way to do so, by hitting people in the wallet. By the same token, anything that provides benefit to society above and beyond that derived by the parties involved, ought to be encouraged. Those things should be subsidized.

Additionally, there are certain basic rights and necessities that everyone should have. These include, among other things, the rights to speak without censorship, to bodily autonomy, to privacy, to safety, to tenable shelter, to clean water and air, to food, and to healthcare.

Such fundamental rights should be upheld and defended by the government. These basic functions of government should be paid for as necessary, by fiat. It is wholly wrong to limit a government’s ability to provide necessary services, because of something so ephemeral as how much revenue was raised through taxes in the last year.

Rather, given that enough food, water, and so forth are being produced, the government should ensure that no one ever need starve, nor go homeless, nor be cut off from medical care. A failure to provide basic services to the people is the greatest failing a government can possibly have.

Additionally, certain classes of industry are natural monopolies, wherein the free market is theoretically and practically incapable of producing the goods and services efficiently. These are primarily infrastructure systems such as transportation, electrical power, telecommunications, and so forth.

When such services are essential for participating in modern life, as those three listed are, the government should step in and either heavily regulate or else take over entirely. Even in non-essential industries, the government should still prevent monopolies, as those detract from overall well-being.

On the other hand, taxes are a tool with which to influence the free market so as to financially incentivize actions of greater societal benefit. They should be wholly dissociated from the services provided by a government.

So much of the political discourse about taxes and spending revolves around how taxes are linked to spending. I posit that is a false, and indeed detrimental, connection to make. Taxes and spending should be decoupled. Taxes should be implemented, along with subsidies, in order to rectify market externalities. Spending should be done to provide basic and beneficial services that the free market is unable to provide equitably.

In thinking this through to the extreme case, if there really were a shortage of food, something would have to give and people would starve. On the other hand, making it so people only starve whether there is in fact not enough food to go around, is vastly superior to the current situation where people are starving even though there is plenty of extra food.

The real questions become: What is a reasonable and future-proof way to decide which things to tax, and by how much? What, if any, limits should be placed on government spending, and why?
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Re: Taxes and Spending, decoupled

Postby Derek » Tue Dec 20, 2011 9:42 pm UTC

If I'm reading you right, you're saying that the government should pay for most services by essentially printing money. The problem is this causes inflation, which is equivalent to a tax on holding cash assets. Such large scale printing would in fact almost certainly lead to hyperinflation, making the currency completely worthless and forcing people to rely on assets that will hold their value better just for everyday transactions, such as foreign currency or precious metals. It would in fact probably be better at this point for the government just to cease the resources it wants and redistribute them as desired, that at least avoids the inflation (this is of course also equivalent to a tax, but a tax payable in goods rather than currency).

To put it another way, in order for the government to add wealth to one area, wealth must be taken from another (the economy is not zero-sum, but neither can it be made to grow arbitrarily fast). Whether the government does this through taxation or inflation does not matter, but it must happen.

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Re: Taxes and Spending, decoupled

Postby TrlstanC » Tue Dec 20, 2011 9:57 pm UTC

I think the problem we actually have is that taxes and spending already are decoupled. Anyone who argues for a small government usually argues for less taxes too, as a way to force the government to stay small. But there doesn't seem to be any connection between taxes and spending, administrations that spend a lot on wars, bailouts or new legislation don't always raise taxes to pay for them (or legislate future tax increases to pay for future costs).

There are some cases where taxes are useful to balance the use of a public good, such as taxing pollution to pay for the cost of cleaning it up (or paying for the damage it causes). But other than that the simplest and fairest tax system would seem to be one that links spending to taxes. Instead of having an "income tax" or "estate tax" that goes in to a generic bucket, we could have those taxes broken up by line item for what they're going to pay for the way social security and Medicare are. So, to make up some numbers, if we had a 25% tax rate than 10% of that would be a "debt interest" tax, and 10% would be "national defense" and 5% "administrative".

That would force congress to explicitly recognize the cost of the legislation it passes, and would work towards balancing the budget (at least in the long term). Of course it doesn't have to be as simplistic as that, but I don't see the benefit of a system where revenue and spending have a very low correlation, it would seem like we would want to enforce spending and tax laws that would bring the correlation between taxes and spending up, not down.

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Re: Taxes and Spending, decoupled

Postby Qaanol » Tue Dec 20, 2011 10:40 pm UTC

Derek wrote:If I'm reading you right, you're saying that the government should pay for most services by essentially printing money. The problem is this causes inflation, which is equivalent to a tax on holding cash assets. Such large scale printing would in fact almost certainly lead to hyperinflation, making the currency completely worthless and forcing people to rely on assets that will hold their value better just for everyday transactions, such as foreign currency or precious metals.

Right, there need to be limits on what the government spends. Additionally, taxes as I describe them are taking money out of the economy, curbing inflation.

When taxes are viewed as simply a revenue source, they do not fulfill their primary purpose. Taxes need to be viewed as a tool for improving the effects of the free market on society. And public spending needs to be viewed as a tool for improving society as a whole.

Once those things are put into effect, the questions of how much inflation is desirable, and how to control inflation, become relevant. But in my view, if a government fails to provide necessary services, it is no government at all. So providing those services has to come first.

If even one person starves who does not want to starve, when there is enough food to feed them; if even one person goes homeless who does not want to go homeless, when there are enough homes to house them, then society has failed itself.

As long as the government ensures that everyone has the basic necessities, then in some sense it does not matter what happens in the “everything else” luxury goods market. The free market is great for things that it’s acceptable for some people to go without. But when there is something it is imperative that everyone have, government intervention is necessary.

There are other methods besides direct spending that can accomplish some of the goals of government. Laws, subsidies, and taxes can all provide some degree of control over private industry. But at the end of the day, the government is obligated to ensure basic quality of life for everyone. Otherwise, it has failed.

So the questions are: What should the restrictions be on how much a government can spend? What regulations should be in place to control what the government spends money on, and what it taxes? What mechanisms, aside from taxation, can be used to control inflation?
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Re: Taxes and Spending, decoupled

Postby Silknor » Tue Dec 20, 2011 11:23 pm UTC

Qaanol wrote:Additionally, taxes as I describe them are taking money out of the economy, curbing inflation.


Unless you're burning the revenue, taxing doesn't work like this; it doesn't change the money supply. Regardless, just printing money to pay for things is not a sustainable long-term strategy, especially after eviscerating the tax base (how much are you expecting to raise through narrow taxes on externalities?).

Yes, some taxes are more economically efficient* than others, with the best example being taxes on externalities like pollution, whereas taxes on income create a deadweight loss. But unless you can raise enough through these efficient taxes, you can't get around the fundamental problem: in the long-run, taxation must equal spending. If your tax system brings in less than what you want to spend, you can make up for that in the short term by borrowing/printing (and indeed, that's the right thing to do in a recession!).

Printing new money to make up for structural shortfalls doesn't get you out of this. Instead it just replaces an explicit tax with a hidden tax: inflation, and more likely hyper-inflation. Inflation is a tax on currency-denominated wealth. And it's not a very good one either, high levels of inflation (and large uncertainty regarding future inflation) are very damaging to the economy.

You give lip-service to the idea that spending would have to be limited while simultaneously proposing what appears to be a large expansion of social safety net spending.

*The general example of a more economically efficient tax system that could raise a substantial amount of revenue is a broad-based consumption tax (or, alternatively, a VAT). Taxing consumption is more efficient than taxing income because it encourages investment, which is what drives long-term growth. The principle objection is that simple consumption taxes are inherently regressive, but it is easy to avoid this. For example, you could create a flat rebate combined with a very progressive income tax, with the goal of the income tax more to ensure the system is progressive than to raise much of the revenue. Or you could simply implement an inherently progressive consumption tax by abandoning the idea of treating it like a sales tax or VAT (collected at register/built into price of product) and instead have people report their income and savings:

The simplest step would be to scrap the current progressive income tax in favor of a much more steeply progressive tax on each household’s consumption. Families would report their taxable income to the IRS (ideally under a tax code that greatly simplifies the calculation of taxable income), and also their annual savings, as many now do for IRAs and other tax-exempt retirement accounts. The difference between those two numbers—income minus savings—is the family’s annual consumption expenditure. That amount, less a large standard deduction—say, $30,000 for a family of four—is the family’s taxable consumption. Rates would start low and would then rise much more steeply than those under the current income tax.

http://www.slate.com/articles/business/ ... lity_.html
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Re: Taxes and Spending, decoupled

Postby distractedSofty » Tue Dec 20, 2011 11:36 pm UTC

Qaanol wrote:It is wholly wrong to limit a government’s ability to provide necessary services, because of something so ephemeral as how much revenue was raised through taxes in the last year.
If a goverment spends money it doesn't have, it will create inflation. Too much inflation, and your money is worthless(Or in other words, you have no money) If you have no money, you can't provide the services.

Why don't you consider it wholly wrong to provide a service now, knowing full well that by doing so you are preventing future governments from providing any services at all?

TrlstanC wrote:Of course it doesn't have to be as simplistic as that, but I don't see the benefit of a system where revenue and spending have a very low correlation, it would seem like we would want to enforce spending and tax laws that would bring the correlation between taxes and spending up, not down.

There is very likely a psychological benefit: when money goes to a general pool, and then expenditures are pulled from that pool, there is a level of indirection that stops people from thinking: well, $100 of my income tax is allocated to NASA, space is stupid, so I don't want to pay for it. (I wish that much of my yearly income was allocated to NASA.)

Organisations like planned parenthood already have a huge challenge collecting money: imagine if everyone got a statement telling them how much money they paid to PP.

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Re: Taxes and Spending, decoupled

Postby Derek » Wed Dec 21, 2011 3:50 am UTC

Silknor wrote:*The general example of a more economically efficient tax system that could raise a substantial amount of revenue is a broad-based consumption tax (or, alternatively, a VAT). Taxing consumption is more efficient than taxing income because it encourages investment, which is what drives long-term growth. The principle objection is that simple consumption taxes are inherently regressive, but it is easy to avoid this. For example, you could create a flat rebate combined with a very progressive income tax, with the goal of the income tax more to ensure the system is progressive than to raise much of the revenue. Or you could simply implement an inherently progressive consumption tax by abandoning the idea of treating it like a sales tax or VAT (collected at register/built into price of product) and instead have people report their income and savings:

The simplest step would be to scrap the current progressive income tax in favor of a much more steeply progressive tax on each household’s consumption. Families would report their taxable income to the IRS (ideally under a tax code that greatly simplifies the calculation of taxable income), and also their annual savings, as many now do for IRAs and other tax-exempt retirement accounts. The difference between those two numbers—income minus savings—is the family’s annual consumption expenditure. That amount, less a large standard deduction—say, $30,000 for a family of four—is the family’s taxable consumption. Rates would start low and would then rise much more steeply than those under the current income tax.

http://www.slate.com/articles/business/ ... lity_.html

This is an interesting idea I've never heard before. It sounds like a pretty good idea, although I expect the author of that article is at least somewhat biased. I would be curious to hear any counter-arguments.

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Re: Taxes and Spending, decoupled

Postby Silknor » Wed Dec 21, 2011 4:47 am UTC

Well the author mentions one possible objection: even if it would decrease post-tax income inequality, it might make wealth equality worse since the rich (even without the progressive tax structure) would likely save a larger amount than those with less income. Thus he recommends a stronger estate tax to go along with it.

The other problem I can think of off the top of my head (as long as you make it progressive enough) is that switching from an income based tax system to a consumption tax means a double taxation on any savings. This hits particularly hard on the retired, so you would have to be careful with how you do it (phase it in slowly, grandfather in existing retirement savings like IRAs at a lower tax rate, or make it opt-in for a while, for example) to avoid problems.
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Re: Taxes and Spending, decoupled

Postby pizzazz » Wed Dec 21, 2011 6:03 am UTC

Health care, food, shelter, etc. are goods and services, not rights. There's a whole thread here discussing what rights are, but essentially, I don't see any reason for the government to provide these things, least of all giving them the same status as freedoms of speech, press, assembly, etc.

Taxing and subsidizing externalities is a good idea, one that politicians rarely consider, but implementation is difficult, and between the two you're unlikely to have enough revenue left over to have an effective government.

Taxation and spending are already de facto separate due to the ease with which the federal government can move money between departments. That being said, I think the tax code needs to be far simpler; it doesn't matter how "efficient" your deduction system is in theory if you have to pour billions of man-hours per year (not to mention the money and time spent trying to get extra deductions, and the money and time spent checking and enforcing everyone else's self-reporting) into complying with the tax code, like the US does now.

I like the idea of taxing consumption, because it encourages saving, which drives growth, rather than taxing income, which tends to double dip on savings. Also,income tax is very easy to avoid (that's really how Warren Buffet has low tax rates--he doesn't earn a salary, so he's only really paying capital gains rates on investments, which is around 15% (though that is actually also a double dip, and I could explain more if I had my econ notebook with me)); in contrast, taxing consumption only needs to be enforced on the final sale. Frankly, if we have sufficiently efficient taxation, then progressiveness is of secondary concern to me.

One such proposed system is the fairtax.

The other particularly destructive taxes are, ironically enough, so-called "protective" tariffs that increase the price of imports. This just discourages innovation and raises prices for consumers to the benefit of the politically connected.

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Re: Taxes and Spending, decoupled

Postby Qaanol » Wed Dec 21, 2011 1:58 pm UTC

Silknor wrote:in the long-run, taxation must equal spending.

This is exactly the misconception I’m trying to correct here.

There are other ways to control the money supply besides taxing and spending. For example, the Federal Reserve does most of the inflation-control in the United States, albeit with a heavy slant toward favoring the large banks.

So I’m opening that question too: How can inflation be controlled, aside from linking spending to taxes?

In the extremely long run, it may well turn out that some years the taxes bring in far more than needs to be spent. And in other years the taxes are only a fraction of total spending. The exact rates of taxation, however, should be set at a level that cuts deadweight loss and optimizes societal wellbeing, not at a rate expected to offset spending.

Spending does pump money into the economy, and in order to prevent inflation there needs to be either a corresponding increase in total utility, or a sink that removes money from the economy. Runaway, uncontrolled spending is not likely to be easily stabilized. However, regular, predictable and consistent levels of spending, that provide the same services from year to year, actually reduce uncertainty.

The questions of how to decide what should be government funded, and what should be taxed, need to be addressed. Those include within them, how to let those things be adjusted in the future without breaking the system.

pizzazz wrote:Health care, food, shelter, etc. are goods and services, not rights.

Terminology. At the very least, such things are “essential” goods and services. If you truly believe it’s right and proper for a government to allows some of its people to starve, when there is enough food for all of them, then we’re just going to have to disagree on that.

Even so, that actually does not affect my broader point in the slightest. There are some things the government should be doing. Whatever those specific things happen to be is rather immaterial at this point. What I am saying is that, when you write down a list of what the government definitely needs to do, you’ll find that list is non-empty. So there are some things that must get done, as long as there are enough resources and labor available to do them.

You may disagree that “food” should be guaranteed to all, but I believe it is and I’m going to use it as an example nonetheless. You may substitute in the government service of your choice if you prefer.

It does not matter what happens in the economy at large, nothing short of a crop failure is actually going to affect whether or not there is enough food to go around. Whether there is runaway inflation and the price of bread goes up to $10,000 a loaf, or whether there is a massive depression and bread goes for 10 loaves to the penny, or anything in between, these things do not affect how much bread exists. If there is enough bread to go around, then the government should make sure no one has to starve.

Controlling inflation is important. I’m not denying that. Price stability leads to less risk and thus greater investment and productivity. But tying taxes and spending to each other is not the right way to do it. That leads to uncertainty as to what things will actually get funded, and what taxes will be raised or lowered, because those decisions are made somewhat arbitrarily.

Far better, I claim, is to tie spending to the things that government needs to spend on. And tie taxes to things that need to be taxed. If the only objection being raised has to do with inflation, then it remains to find a separate way to control inflation.

This gives us three points:
1. What system allows for taxes to be levied in an efficient manner? It would be nice to let doctors decide how much to tax cigarettes, but the method needs to be future-proof so that big tobacco can’t stack the committee with bought-and-paid-for shills.

2. What system allows for spending to be allocated in an efficient manner? We don’t want to let the coal lobbyists thwart investment in wind turbines, solar concentrators, and off-shore hydroelectrics, for example. We do want to limit spending to only those things that are net-beneficial for the government to provide.

3. If spending is at reasonable levels, and taxes are in place to streamline the economy, how much does this affect inflation, and what if anything needs to be done about it?
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Re: Taxes and Spending, decoupled

Postby Silknor » Wed Dec 21, 2011 6:36 pm UTC

Qaanol wrote:
Silknor wrote:in the long-run, taxation must equal spending.

This is exactly the misconception I’m trying to correct here.

There are other ways to control the money supply besides taxing and spending. For example, the Federal Reserve does most of the inflation-control in the United States, albeit with a heavy slant toward favoring the large banks.

So I’m opening that question too: How can inflation be controlled, aside from linking spending to taxes?


Taxation does not control inflation. Nor does taxation in someway reduce the money supply (again, unless you're burning what you collect). You seem to be writing as if taxation removes money from the economy, when the relationship between taxation and inflation is more complex (with some taxes reducing consumer income, lessening pressure on aggregate demand while others, particularly excise taxes, push prices up). However this really doesn't matter that much because:

If you have a large deficit and try to print money to pay for it, that causes inflation! You can't "control" this with inadequate taxation, and there's really nothing else you can do. Printing large amounts of money causes inflation, and printing large amounts year after year just makes it worse.

And what's worse is should be clear. If people know that every year they're going to face a massive decrease in the value of their currency holdings, they're less likely to want to take cash as payment, pushing more and more transactions into barter, and further reducing revenues (thus causing even more inflation!). This is the spiral of hyper-inflation. Oh, and with a large tax on holdings and capital investment, along with the increase in bartering, you can say goodbye to any economic efficiency gains from smarter taxes.

It's of course a good idea to use smarter taxes. But large year after year inflation is not a smart tax. It's an economically destructive tax, one which is far more problematic than just taxing income or consumption at sufficient levels. If smart taxes* can provide enough, that's great. If not, it's much better to use some less than ideal taxes than promise to print as much money as it takes to make up the difference.

Finally, certainly there is value in ensuring that the federal government has the revenue needed to provide basic services. But there's already a way to do this, and it's exactly what we're doing now! The answer to cyclical fluctuations in revenue and spending is to borrow during the bad years and pay it back during the good years. The reason our government doesn't provide everything you think it is necessary to provide isn't because spending is tied to taxes (it's really hasn't been this last decade) or because we're using inefficient taxes. It's because the government disagrees with you on what is necessary. Radically changing how the government collects revenue, and how shortfalls are dealt with, is neither necessary nor sufficient to fix that.

*Easy examples are taxes on carbon emissions, cigarettes, and pollution. Possible other taxes (depending on evidence on how smart they actually are) might include things like certain types of unhealthy foods or a tiny tax on financial transactions. A general consumption tax, adjusted to be progressive as noted in my last post, wouldn't be as good as taxes on things with negative externalities, but would be better than taxes on income or especially payroll.

Your questions 1 and 2 are interesting, but they're interesting in any system, and seem worthwhile to discuss outside the context of this only tax bad things and print the rest idea.
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Re: Taxes and Spending, decoupled

Postby Glass Fractal » Wed Dec 21, 2011 6:48 pm UTC

pizzazz wrote:Health care, food, shelter, etc. are goods and services, not rights. There's a whole thread here discussing what rights are, but essentially, I don't see any reason for the government to provide these things, least of all giving them the same status as freedoms of speech, press, assembly, etc.


I would love leave you to starve to death at the bottom of a pit while standing at the top proudly defending your right to free speech.

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Re: Taxes and Spending, decoupled

Postby Qaanol » Wed Dec 21, 2011 7:42 pm UTC

Silknor wrote:Taxation does not control inflation. Nor does taxation in someway reduce the money supply (again, unless you're burning what you collect).

Tax revenue comes into the government. Full stop. That money disappears. No longer exists. Is wholly removed from the economy.

Government spending puts money into the economy. Full stop. That money comes into existence. Is spontaneously created.

The government is not some “normal” player in the economy like everybody else. The money collected by taxes can be written out of existence just fine. The money spent on things worth spending on, can be created just fine. If one of these processes happens faster than the other, then the amount of money in existence will grow or shrink accordingly, causing inflation or deflation, unless some other factor controls inflation independently of taxes and spending.

There is currently a widespread notion that the government must “earn” (by collecting taxes) the money it spends. That is utterly false. It is imperative that the government provide the necessary and essential services it is responsible for, whatever those services happen to be. It is desirable that taxes be levied so as to maximize societal benefit from the free market.

By pretending that the government spends money that it collects, whether from taxes or loans, we achieve a system wherein the government acts like a regular player in the economy. The illusion can be very convincing, what with all the bookkeeping. But it is still an illusion, perpetuated solely by the decision of the government to play along with it. That decision is greatly simplified when those within government are themselves convinced by the illusion.

But the government is perfectly capable, if it so chooses, of instituting vastly higher taxes, and drastically cutting spending, thereby collecting far more than it pays out. And simply writing that money out of existence. Doing so in a short timespan would almost certainly crash the economy into a severe depression (but it still would not reduce the amount of food that gets grown.)

Silknor wrote:If you have a large deficit and try to print money to pay for it, that causes inflation! You can't "control" this with inadequate taxation, and there's really nothing else you can do. Printing large amounts of money causes inflation, and printing large amounts year after year just makes it worse.

I understand that pumping money into the economy tends to cause inflation. Some moderate level of inflation, generally 1-5%, is considered “healthy” for an economy. Whether or not that is correct is a matter for some other debate. For now, we recognize that some level of inflation (or lack thereof) is a desirable target in the long term.

It may turn out that it is beneficial to have some taxes with the specific goal of curbing inflation. Or some taxes might have that effect by coincidence. For example, it is societally beneficial in the long term to conserve our natural resources. This means wanton consumption in the present is detrimental to future generations. Therefore one might institute some sort of “decadence tax”, so people dropping millions on luxuries that don’t benefit society would be taxed for their wasting of natural resources. Since people with gratuitous wealth are nevertheless still likely to spend at least some large amounts on themselves, this can serve to both combat inflation, as well as improve market behavior.

Silknor wrote:And what's worse is should be clear. If people know that every year they're going to face a massive decrease in the value of their currency holdings, they're less likely to want to take cash as payment, pushing more and more transactions into barter, and further reducing revenues (thus causing even more inflation!). This is the spiral of hyper-inflation. Oh, and with a large tax on holdings and capital investment, along with the increase in bartering, you can say goodbye to any economic efficiency gains from smarter taxes.

It's of course a good idea to use smarter taxes. But large year after year inflation is not a smart tax. It's an economically destructive tax, one which is far more problematic than just taxing income or consumption at sufficient levels. If smart taxes* can provide enough, that's great. If not, it's much better to use some less than ideal taxes than promise to print as much money as it takes to make up the difference.

I think we have drastically different conceptions of how much the government should be spending, and how much taxation is necessary to improve the economy. You seem to be operating from the viewpoint that very little would be collected in taxes, and vast sums would be spent on government services.

I’m rather of the opinion that government spending should be as low as possible, to accomplish its basic responsibilities. I think the government should be a lot smaller than it is now. Military, spy, and paramilitary anti-drug budgets could stand to be slashed by substantial fractions, for instance. A simplified tax code by itself would cut down on expenditures to lawyers and accountants, not just by the government but by private corporations and individuals as well. Most lawyers and accountants could then switch to jobs that actually produce something useful for the economy.

And taxes on things that are harmful should be much, much higher. No one should be getting rich by damaging society.

Silknor wrote:Finally, certainly there is value in ensuring that the federal government has the revenue needed to provide basic services. But there's already a way to do this, and it's exactly what we're doing now! The answer to cyclical fluctuations in revenue and spending is to borrow during the bad years and pay it back during the good years. The reason our government doesn't provide everything you think it is necessary to provide isn't because spending is tied to taxes (it's really hasn't been this last decade) or because we're using inefficient taxes. It's because the government disagrees with you on what is necessary. Radically changing how the government collects revenue, and how shortfalls are dealt with, is neither necessary nor sufficient to fix that.

I am not trying to change what the government thinks is necessary. I am trying come up with “the best of all possible” ways for the government to decide what is necessary, while guaranteeing that such necessities are provided. Similarly, I’m saying taxes can be used directly to make the country better, and they are not being used for that now.

In other words, “changing how the government collects revenue, and how shortfalls are dealt with” is the end goal in itself as far as discussion in this thread is concerned. I am saying revenue should be collected in the way that most benefits the country. And shortfalls should be dealt with by providing the services that it is necessary to provide. Those are the starting points for the discussion.

So far, we have seen two answers to the question, “What limits should be placed on government spending?” These are my own answer, “The government should only spend what is necessary to provide essential services,” and the answer, “Government spending should not cause hyperinflation.”

One proposed mechanism for preventing hyperinflation is our current system, where taxes and spending are coupled together. However, that has the problem of leading to inefficient taxes, and as much spending as the public will bear in tax burden. I think the government is currently spending a lot of money on a lot of non-essential things, which means, seeing as the public is willing to bear the current tax burden, it is definitely possible to run an efficient government providing essential services, and collect more revenue than there are expenditures.

Since the ends can be made to meet, they can be made to meet with a better, more efficient tax structure. What I am proposing, overall, is a way for the government to say, “Here are the essential services, we are going to provide them, and nothing else.” And I’m looking for ideas on how such a list can be devised and updated as necessary, without devolving into the current system of lobbyists pushing special interests.
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Re: Taxes and Spending, decoupled

Postby pizzazz » Wed Dec 21, 2011 8:04 pm UTC

Qaanol wrote:
Silknor wrote:in the long-run, taxation must equal spending.

This is exactly the misconception I’m trying to correct here.

There are other ways to control the money supply besides taxing and spending. For example, the Federal Reserve does most of the inflation-control in the United States, albeit with a heavy slant toward favoring the large banks.

So I’m opening that question too: How can inflation be controlled, aside from linking spending to taxes?

In the extremely long run, it may well turn out that some years the taxes bring in far more than needs to be spent. And in other years the taxes are only a fraction of total spending. The exact rates of taxation, however, should be set at a level that cuts deadweight loss and optimizes societal wellbeing, not at a rate expected to offset spending.

Except you can't do that. It doesn't matter what tricks you pull with the money supply; dollars are units whose value can change, and rapidly. You cannot, in the long run, consume more than you produce without getting further and further into debt. Yet you propose exactly that: you want the government to provide more goods and services than it can possibly pay for, so that together the government and private sector are spending far more than the country produces. This is impossible.
Spending does pump money into the economy, and in order to prevent inflation there needs to be either a corresponding increase in total utility, or a sink that removes money from the economy. Runaway, uncontrolled spending is not likely to be easily stabilized. However, regular, predictable and consistent levels of spending, that provide the same services from year to year, actually reduce uncertainty.

In the long run, spending does not pump money into the economy, it just takes it out and puts it back in. "Pumping money into the economy" is a useless, meaningless, and impossible goal. Money has variable value. Little paper rectangles have almost no utility, and digital information even less, so trying to increase total wealth by adding money to the system is absurd. Giving people more money doesn't encourage spending if prices increase to match.
You could temporarily increase local wealth by borrowing from elsewhere, but that's really just moving money around, and obviously not a long-term solution.
You could also try to save money when times are good to put back into the economy when times are bad, but this of course slows growth when times are good, and it's not clear to me if the net effect is positive.
Finally, you could try pretending really hard that you have more wealth than you do, and proceed to destroy your entire country.

The questions of how to decide what should be government funded, and what should be taxed, need to be addressed. Those include within them, how to let those things be adjusted in the future without breaking the system.

pizzazz wrote:Health care, food, shelter, etc. are goods and services, not rights.

Even so, that actually does not affect my broader point in the slightest. There are some things the government should be doing. Whatever those specific things happen to be is rather immaterial at this point. What I am saying is that, when you write down a list of what the government definitely needs to do, you’ll find that list is non-empty. So there are some things that must get done, as long as there are enough resources and labor available to do them.

You may disagree that “food” should be guaranteed to all, but I believe it is and I’m going to use it as an example nonetheless. You may substitute in the government service of your choice if you prefer.

It does not matter what happens in the economy at large, nothing short of a crop failure is actually going to affect whether or not there is enough food to go around. Whether there is runaway inflation and the price of bread goes up to $10,000 a loaf, or whether there is a massive depression and bread goes for 10 loaves to the penny, or anything in between, these things do not affect how much bread exists. If there is enough bread to go around, then the government should make sure no one has to starve.

In other words, the government should have the ability to simply confiscate grain if there is "enough" to go around but too expensive for the government to buy it? Because that has all sorts of problems you're just ignoring.
Controlling inflation is important. I’m not denying that. Price stability leads to less risk and thus greater investment and productivity. But tying taxes and spending to each other is not the right way to do it. That leads to uncertainty as to what things will actually get funded, and what taxes will be raised or lowered, because those decisions are made somewhat arbitrarily.

I thought I understood what you meant by disconnecting taxes and spending, but now I don't. At first I thought you just meant that we should have one big pool of government revenue that everything goes into and comes out of. But now it seems that you're saying that total revenue and total expenditure should not be in anyway dependent on each other. Which is so obviously ridiculous that it doesn't even merit consideration.

Far better, I claim, is to tie spending to the things that government needs to spend on. And tie taxes to things that need to be taxed. If the only objection being raised has to do with inflation, then it remains to find a separate way to control inflation.

The only objection is not inflation. My objection is, where does the wealth (not money!) come from?
This gives us three points:
1. What system allows for taxes to be levied in an efficient manner? It would be nice to let doctors decide how much to tax cigarettes, but the method needs to be future-proof so that big tobacco can’t stack the committee with bought-and-paid-for shills.

2. What system allows for spending to be allocated in an efficient manner? We don’t want to let the coal lobbyists thwart investment in wind turbines, solar concentrators, and off-shore hydroelectrics, for example. We do want to limit spending to only those things that are net-beneficial for the government to provide.

3. If spending is at reasonable levels, and taxes are in place to streamline the economy, how much does this affect inflation, and what if anything needs to be done about it?


1. There is no easy solution that will just keep out special interests forever. It requires constant vigilance from the public to keep elected officials honest.

2. As it turns out, the free market is pretty good at figuring out which investments are economical. Here's a hint: if you need massive government spending to keep your investment from just utterly collapsing, it's not individually economical. It might be slightly better from society's perspective if there is a real positive externality, but that's hard to measure.

3. What is your obsession with inflation? I don't think that's the main problem here.

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Re: Taxes and Spending, decoupled

Postby pizzazz » Wed Dec 21, 2011 8:29 pm UTC

Qaanol wrote:
Silknor wrote:Taxation does not control inflation. Nor does taxation in someway reduce the money supply (again, unless you're burning what you collect).

Tax revenue comes into the government. Full stop. That money disappears. No longer exists. Is wholly removed from the economy.

Government spending puts money into the economy. Full stop. That money comes into existence. Is spontaneously created.

The government is not some “normal” player in the economy like everybody else. The money collected by taxes can be written out of existence just fine. The money spent on things worth spending on, can be created just fine. If one of these processes happens faster than the other, then the amount of money in existence will grow or shrink accordingly, causing inflation or deflation, unless some other factor controls inflation independently of taxes and spending.

I don't have time to respond to your entire latest post now, but:

Saying the government is "not normal" does not allow you to break simple arithmetic! It is impossible for a country to consume more than it produces in the long-run without leading to an eventual state of crushing debt. You are just trying to pull tricks with the value of currency, but this doesn't allow you to violate this simple truth. Just saying "ok, so we get inflation, w/e" does not solve the problem. Sleight of hand does not allow you to pull goods and services from thin air.

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Re: Taxes and Spending, decoupled

Postby Turtlewing » Wed Dec 21, 2011 8:38 pm UTC

Qaanol wrote:Tax revenue comes into the government. Full stop. That money disappears. No longer exists. Is wholly removed from the economy.

Government spending puts money into the economy. Full stop. That money comes into existence. Is spontaneously created.


While that is one way to look at it, I suspect you'll find that in actuality if you don't keep tax revenue and spending balanced in the long term, your economy will fall apart due to excessive inflation/deflation.

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Re: Taxes and Spending, decoupled

Postby Silknor » Wed Dec 21, 2011 8:49 pm UTC

Rather than going line by line, I'll just try to focus on the big issues, since while I disagree with much of what you're saying, focusing on that doesn't seem to be going anywhere.

If you are spending more than you raise in revenue, and printing money to make up the difference, you will cause inflation. There is no way to "control" this.

But the government is perfectly capable, if it so chooses, of instituting vastly higher taxes, and drastically cutting spending, thereby collecting far more than it pays out. And simply writing that money out of existence. Doing so in a short timespan would almost certainly crash the economy into a severe depression (but it still would not reduce the amount of food that gets grown.)


The part in italics is not true. The amount grown is based on both supply and demand. Raising taxes while slashing spending reduces consumer income (and gov't purchases, though that matters less), thus reducing demand, while shifting the supply curve by making each unit less profitable. Each reduces the amount grown.

I’m rather of the opinion that government spending should be as low as possible, to accomplish its basic responsibilities. I think the government should be a lot smaller than it is now. Military, spy, and paramilitary anti-drug budgets could stand to be slashed by substantial fractions, for instance. A simplified tax code by itself would cut down on expenditures to lawyers and accountants, not just by the government but by private corporations and individuals as well. Most lawyers and accountants could then switch to jobs that actually produce something useful for the economy.


Something like 2/3rds of primary government spending is on the social safety net. You can cut the military and other things all you like, as I understand it you're still proposing a radical expansion of government spending. Unless you think that the government is meeting almost all of it citizen's basic needs right now, spending is going way up (just as one example, current total, private and public, health care spending is higher as a percent of GDP than tax revenue, not that covering all basic needs covers even most of that, just a point of reference). Are you planning on raising at least a couple trillion from taxes on harmful things?

One proposed mechanism for preventing hyperinflation is our current system, where taxes and spending are coupled together. However, that has the problem of leading to inefficient taxes, and as much spending as the public will bear in tax burden.


Except taxes and spending aren't coupled together, if you want to see what that actually looks like, you should be looking at the state governments. And the reason we don't have rampant inflation is because we borrow, not print, the difference between taxes and spending. We don't have inefficient taxes because of some supposed coupling, we have it because of political reasons and because efficient taxes, outside of a broad based consumption tax, just don't raise that much revenue.

Since the ends can be made to meet, they can be made to meet with a better, more efficient tax structure.


Yes, they can, for some tax structures. "Lets only tax what is harmful" is not one of those. I'm all for a more efficient tax structure. That doesn't mean I pretend we can raise trillions by taxing pollution, carbon, and fatty foods.
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Re: Taxes and Spending, decoupled

Postby Qaanol » Wed Dec 21, 2011 10:51 pm UTC

pizzazz wrote:You cannot, in the long run, consume more than you produce without getting further and further into debt. Yet you propose exactly that: you want the government to provide more goods and services than it can possibly pay for, so that together the government and private sector are spending far more than the country produces. This is impossible.

What on earth do you mean by this? If there is enough labor and material to produce all the basic necessities for a country, then those necessities ought to be the first things produced. Then all the other luxury items can also be produced.

In the United States we produce way more than we “need”. We have vast amounts of luxury items. We are not even close to a situation where guaranteeing basic amenities to everyone would somehow cast the country into an abyss.

pizzazz wrote:In the long run, spending does not pump money into the economy, it just takes it out and puts it back in.

This is the first thing I’m trying to say. “Spending” puts money into the economy. “Taxing” takes money out of the economy. In order to take money out and put it back in again, taxing and spending would need to be coupled.

pizzazz wrote:"Pumping money into the economy" is a useless, meaningless, and impossible goal.

It’s not the goal at all. It’s a statement of fact about what happens when the government spends money.

pizzazz wrote:trying to increase total wealth by adding money to the system is absurd. Giving people more money doesn't encourage spending if prices increase to match.

I am not “trying to increase total wealth by adding money to the system”. I am saying money should be spent in the way that maximizes societal wellbeing. And I’m not talking about “giving people money”, I’m talking about paying people to perform jobs that are more beneficial to society when performed on the government’s terms than on the terms the private sector would perform them.

pizzazz wrote:In other words, the government should have the ability to simply confiscate grain if there is "enough" to go around but too expensive for the government to buy it? Because that has all sorts of problems you're just ignoring.

The government can and does have that power, so long as it provides fair compensation. It’s called eminent domain.

But that’s not even what I’m talking about. I’m saying the government should, if necessary, pay farmers to grow enough grain so that no one will starve, not even people who are unable to purchase grain at the free market price. If you check the supply and demand curves, you’ll find that some people definitely will be unable to afford food in an unregulated free market. And it’s the government’s responsibility to prevent that. And it’s not even particularly expensive to do.

pizzazz wrote:I thought I understood what you meant by disconnecting taxes and spending, but now I don't. At first I thought you just meant that we should have one big pool of government revenue that everything goes into and comes out of. But now it seems that you're saying that total revenue and total expenditure should not be in anyway dependent on each other. Which is so obviously ridiculous that it doesn't even merit consideration.

I’m glad you now understand what I’m saying. It does merit consideration, and so far the only objection raised has been with regard to inflation. Is that also your objection, or do you foresee other issues unrelated to inflation?

pizzazz wrote:
Far better, I claim, is to tie spending to the things that government needs to spend on. And tie taxes to things that need to be taxed. If the only objection being raised has to do with inflation, then it remains to find a separate way to control inflation.

The only objection is not inflation. My objection is, where does the wealth (not money!) come from?

The real wealth comes from the real work and the real productivity of the real people in the real world. When farmers plant seeds, tend crops, and harvest food, that creates real wealth. They have an incentive to do so, because they get to sell that food at profit. The free market, however, while maximizing utility for the farmers and their customers, would leave some segment of the population without food—to starve. The government can prevent that by stepping in and paying the farmers for food that otherwise would not have been grown, and giving that food to people who otherwise could not have afforded it.

The real wealth comes from the same place as ever: work done by people. The money comes from the government. If the government pays the farmers $1 million dollars, then there is an extra $1 million dollars in the economy.

If taxes and spending are coupled, as in a balanced budget, then the government also takes $1 million out of the economy somewhere else. So far, the only reason suggested as to why the government should remove that other $1 million from the economy, is to curb inflation.

pizzazz wrote:1. There is no easy solution that will just keep out special interests forever. It requires constant vigilance from the public to keep elected officials honest.

Right. So what sort of system allows constant vigilance? Certainly some systems are better than others. Perfect government transparency would be a good start. If the government exists to serve the people, then the people deserve to know exactly what the government is doing in their name.

pizzazz wrote:2. As it turns out, the free market is pretty good at figuring out which investments are economical. Here's a hint: if you need massive government spending to keep your investment from just utterly collapsing, it's not individually economical. It might be slightly better from society's perspective if there is a real positive externality, but that's hard to measure.

Right, that’s why the role of government ought to be limited to exactly those things that must get done, which the free market fails to do, plus encouraging those things the free market does not do enough. We already have “Feeding the people who are cut off by the supply-demand curve”, and “Regulating natural monopolies”. There are likely a fair number of things that it is essential for the government to do. I want a mechanism to identify those things.

pizzazz wrote:3. What is your obsession with inflation? I don't think that's the main problem here.

So far it is the only problem that has been raised.

Turtlewing wrote:
Qaanol wrote:Tax revenue comes into the government. Full stop. That money disappears. No longer exists. Is wholly removed from the economy.

Government spending puts money into the economy. Full stop. That money comes into existence. Is spontaneously created.


While that is one way to look at it, I suspect you'll find that in actuality if you don't keep tax revenue and spending balanced in the long term, your economy will fall apart due to excessive inflation/deflation.

Right, so far inflation is the only problem that has been raised. If it turns out that there is no other way to control inflation besides taxation to reduce the money supply, so be it. If there are other ways, then those need to be explored. In either case, the effect on taxation is one of scale rather than purpose.

Once society has identified behaviors with negative externalities, those can be taxed. If it is necessary to remove extra money from circulation, either those taxes can be raised, or new taxes can be instituted, or bank lending rates can be adjusted, or perhaps other actions can be taken.

Silknor wrote:Rather than going line by line, I'll just try to focus on the big issues, since while I disagree with much of what you're saying, focusing on that doesn't seem to be going anywhere.

If you are spending more than you raise in revenue, and printing money to make up the difference, you will cause inflation. There is no way to "control" this.

Again, inflation appears to be the only issued raised. The ways to control inflation include decreasing the money supply, and increasing the total real value of goods to keep pace with the money supply. That is to say, as long as real wealth increases, an equal rise in the money supply yields zero inflation.

Additionally, under the current system most money is not created by the government. Instead it is created by private banks, and regulated by the Federal Reserve. Money can thus be taken out of circulation by having the Fed raise interest rates, so banks give out fewer loans. When done properly, this keeps inflation in check. If done to excess it has the potential to produce deflation, but again that can be corrected by either lowering the interest rates or increasing government spending (aka. “printing money”).

Since there are two ways to cause inflation, namely having low interest rates, and printing money; and there are two ways to cause deflation, namely having high interest rates, and raising taxes; it follows that printing money and collecting taxes need not be coupled. However, in the long term, high interest rates that reduce lending still do not keep the money supply in check when faced with perpetual printing of money. So there either needs to be a sink on the money supply, such as taxes, or an acceptance of regular, slow inflation.

Taxes can be adjusted rather straightforwardly. By (hypothetically) listing all activities in terms of how negative or positive are the externalities they cause, we achieve a continuum of things to tax on the one hand, and subsidize on the other. By sliding the cut-off points between “tax”, “leave alone”, and “subsidize”, and by what amounts to do each, the same relative incentives can be maintained while varying the level of tax revenue that is brought in.

At such times as it becomes necessary or desirable to decrease the money supply, shifting the equilibrium further toward the “tax” end of the scale can do so. Furthermore, that picture of the tax/leave alone/subsidize continuum is a good way to visual my overall point. What we think of as “government spending” in whatever forms it takes, are really nothing more nor less than subsidies. For example, the government heavily subsidizes military service.

With this view, having taxes and spending coupled means that the government neither adds money to nor takes money from the economy. Having them decoupled means the government could be adding or removing money in any given year. The goal of the system as a whole, in either case, is to make the country as good as possible, for some definition of “good” to be determined.

By allowing taxes and spending to be decoupled, the government can better utilize each of those tools. If there are other ways to control inflation, so much the better. If taxing and spending are the only ways to control inflation, then in the long term they will need to have at least some coupling, so the money supply can be increased or decreased as necessary and proper.

Silknor wrote:The amount grown is based on both supply and demand. Raising taxes while slashing spending reduces consumer income (and gov't purchases, though that matters less), thus reducing demand, while shifting the supply curve by making each unit less profitable. Each reduces the amount grown.

That is true for luxury items. But for necessities, the government provides the demand, by spending money to ensure everyone has what they need. With the demand in place, the supply will match, all the more so because the government is specifically paying for that supply to exist.

Silknor wrote:Something like 2/3rds of primary government spending is on the social safety net. You can cut the military and other things all you like, as I understand it you're still proposing a radical expansion of government spending. Unless you think that the government is meeting almost all of it citizen's basic needs right now, spending is going way up (just as one example, current total, private and public, health care spending is higher as a percent of GDP than tax revenue, not that covering all basic needs covers even most of that, just a point of reference). Are you planning on raising at least a couple trillion from taxes on harmful things?

In my opinion, health care is probably the single biggest area in which the US government is currently not fulfilling its duty to provide necessary services to the people. But again, I’m not pushing my own views on which things are necessary, I’m trying to come up with robust ways to identify those things in perpetuity. Once the necessities are enumerated, the next logical step would be to consider what are the best and most efficient ways to ensure they are provided.

If it turns out that the cost of providing some necessities is unachievable, meaning real wealth cannot support it, then the country is in serious trouble. But for a normal country in normal times, everyone should easily be able to afford the necessities, with plenty of real productivity left over for luxury items.

Seriously, look around you. I don’t think we’re living so close to the knife-edge that providing medical services to the poor would irreparably damage our economy. If anything, encouraging more people to become doctors and nurses would make us all significantly better off.

Silknor wrote:Except taxes and spending aren't coupled together, if you want to see what that actually looks like, you should be looking at the state governments. And the reason we don't have rampant inflation is because we borrow, not print, the difference between taxes and spending. We don't have inefficient taxes because of some supposed coupling, we have it because of political reasons and because efficient taxes, outside of a broad based consumption tax, just don't raise that much revenue.

Fair points. However, there has not recently been, to my knowledge, much public discourse regarding which taxes are “good” on account of their discouraging detrimental behavior. I’d like to see that brought more into the national conversation. Additionally, the government borrowing at interest is a great way to funnel future tax money away from valuable goals and toward the coffers of the lenders.

Silknor wrote:
Since the ends can be made to meet, they can be made to meet with a better, more efficient tax structure.


Yes, they can, for some tax structures. "Lets only tax what is harmful" is not one of those. I'm all for a more efficient tax structure. That doesn't mean I pretend we can raise trillions by taxing pollution, carbon, and fatty foods.

For any given activity which, when performed, makes society better off, that activity should not be discouraged. There may be a slight overlap where the benefit of reducing inflation by taxing something is greater than the benefit of that thing itself. But before any tax be implemented for that reason, it would be best if all things detrimental were taxed “at capacity”. Meaning, for a harmful activity, the taxes would need to be high enough that raising them more would neither discourage its use, nor increase revenue.
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Re: Taxes and Spending, decoupled

Postby Silknor » Wed Dec 21, 2011 11:39 pm UTC

That is true for luxury items. But for necessities, the government provides the demand, by spending money to ensure everyone has what they need. With the demand in place, the supply will match, all the more so because the government is specifically paying for that supply to exist.


This is not an accurate description of supply and demand. The government saying we'll buy up to X items at $Y each does not mean that X number of items will be produced. In other words, you can have as much demand as you want, that doesn't put the supply curve where you want it to be. And no, you can't just keep increasing $Y until you get to the point on the supply curve where X number of items will be produced, unlike in a normal market, because the higher $Y is, the less valuable each dollar is (since you're printing more and more), at least without true inflation, or hyper inflation.

Fair points. However, there has not recently been, to my knowledge, much public discourse regarding which taxes are “good” on account of their discouraging detrimental behavior. I’d like to see that brought more into the national conversation. Additionally, the government borrowing at interest is a great way to funnel future tax money away from valuable goals and toward the coffers of the lenders.


I can think of plenty of examples of such taxes. Cap and trade (equivalent in effect to a carbon tax), financial transactions (Tobin) tax, state-level taxes on sugary drinks, and the tax on "Cadillac" health insurance plans in the ACA for example. On a broader level there's not much talk about switching from an income-tax based system to a VAT or consumption tax because it's not politically practical at this point (though Rivlin-Domenici had a 6.5% national sales tax). What there is lots of talk about though is making the existing tax system more efficient by lowering deductions and marginal rates, aka tax reform (Simpson-Bowles, Obama's plan, talk of comprehensive corporate tax reform).

And the government borrowing at interest is not a loss for the nation. We borrow because we believe we can invest that money at higher rates of return (not literally), and given how low those rates are, that's a pretty safe bet during economic downturns.
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Re: Taxes and Spending, decoupled

Postby Derek » Thu Dec 22, 2011 5:49 am UTC

Qaanol wrote:The government can and does have that power, so long as it provides fair compensation. It’s called eminent domain.

But that’s not even what I’m talking about. I’m saying the government should, if necessary, pay farmers to grow enough grain so that no one will starve, not even people who are unable to purchase grain at the free market price. If you check the supply and demand curves, you’ll find that some people definitely will be unable to afford food in an unregulated free market. And it’s the government’s responsibility to prevent that. And it’s not even particularly expensive to do.

When you print money you cause inflation, eventually your currency becomes worthless. What do you do when the farmer refuses to grow more grain for any amount of currency, and demands to be paid in gold? Do you pay him in gold? Then your taxes and spending are now coupled, since gold is a finite resource. Do you force him to grow the grain anyways? Then you're now a totalitarian regime and the farmer is now a slave.

You must control inflation, and that means that your taxes and spending must be at least somewhat coupled.

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Re: Taxes and Spending, decoupled

Postby pizzazz » Thu Dec 22, 2011 6:17 am UTC

Qaanol wrote:
pizzazz wrote:You cannot, in the long run, consume more than you produce without getting further and further into debt. Yet you propose exactly that: you want the government to provide more goods and services than it can possibly pay for, so that together the government and private sector are spending far more than the country produces. This is impossible.

What on earth do you mean by this? If there is enough labor and material to produce all the basic necessities for a country, then those necessities ought to be the first things produced. Then all the other luxury items can also be produced.

In the United States we produce way more than we “need”. We have vast amounts of luxury items. We are not even close to a situation where guaranteeing basic amenities to everyone would somehow cast the country into an abyss.

Only because you, for some reason, bizarrely insist on making the invalid assumption that you can do so without affecting overall production or pricing in the long run or short run.

pizzazz wrote:In the long run, spending does not pump money into the economy, it just takes it out and puts it back in.

This is the first thing I’m trying to say. “Spending” puts money into the economy. “Taxing” takes money out of the economy. In order to take money out and put it back in again, taxing and spending would need to be coupled.

I don't understand this statement. Unless you propose the government make its money by starting its own business(es), that's all it can do, no matter what.
pizzazz wrote:"Pumping money into the economy" is a useless, meaningless, and impossible goal.

It’s not the goal at all. It’s a statement of fact about what happens when the government spends money.

No, because the government had to take that money from somewhere in the economy. It might have taxed it, or borrowed it (which is just taxing the future), or printed it (which is effectively a tax because it decreases the value of everyone else's money).
pizzazz wrote:trying to increase total wealth by adding money to the system is absurd. Giving people more money doesn't encourage spending if prices increase to match.

I am not “trying to increase total wealth by adding money to the system”. I am saying money should be spent in the way that maximizes societal wellbeing. And I’m not talking about “giving people money”, I’m talking about paying people to perform jobs that are more beneficial to society when performed on the government’s terms than on the terms the private sector would perform them.

You can say that you aren't, but it doesn't change the fact that is basically what you are trying to do. You can't only tax a little bit and still have enough revenue to pay for lots of things. It just. Doesn't. Add. Up.

pizzazz wrote:In other words, the government should have the ability to simply confiscate grain if there is "enough" to go around but too expensive for the government to buy it? Because that has all sorts of problems you're just ignoring.

The government can and does have that power, so long as it provides fair compensation. It’s called eminent domain.

Which, as far as I am aware, it rarely uses. Moreover, it is most commonly used to confiscate land. These help avoid any problems with supply. But even in those cases, letting the government determine what is "fair" compensation has proved risky at best.

But that’s not even what I’m talking about. I’m saying the government should, if necessary, pay farmers to grow enough grain so that no one will starve, not even people who are unable to purchase grain at the free market price. If you check the supply and demand curves, you’ll find that some people definitely will be unable to afford food in an unregulated free market. And it’s the government’s responsibility to prevent that. And it’s not even particularly expensive to do.

Firstly, there is a difference, in my opinion, between it being a responsibility of one party to do provide something, and it being a right of the recipient to receive it.
Secondly, why must it be the government's job. Private citizens and charities were very effective for a long time. It wasn't perfect, but neither is the government, it's nowhere close.

pizzazz wrote:I thought I understood what you meant by disconnecting taxes and spending, but now I don't. At first I thought you just meant that we should have one big pool of government revenue that everything goes into and comes out of. But now it seems that you're saying that total revenue and total expenditure should not be in anyway dependent on each other. Which is so obviously ridiculous that it doesn't even merit consideration.

I’m glad you now understand what I’m saying. It does merit consideration, and so far the only objection raised has been with regard to inflation. Is that also your objection, or do you foresee other issues unrelated to inflation?

You could in some sense reduce my objection to inflation, because you could always claim to "solve" my objection by printing money. But of course, if you consider my objection carefully, you realize that it's an absurd notion. All you're really doing is replacing the difference between taxes and spending with a change in the value of people's money, instead of less spending or more of the usual taxation. And since you're decreasing the value of every dollar by the same portion, this is a proportional tax. Not regressive, but not progressive either.

pizzazz wrote:
Far better, I claim, is to tie spending to the things that government needs to spend on. And tie taxes to things that need to be taxed. If the only objection being raised has to do with inflation, then it remains to find a separate way to control inflation.

The only objection is not inflation. My objection is, where does the wealth (not money!) come from?

The real wealth comes from the real work and the real productivity of the real people in the real world. When farmers plant seeds, tend crops, and harvest food, that creates real wealth. They have an incentive to do so, because they get to sell that food at profit. The free market, however, while maximizing utility for the farmers and their customers, would leave some segment of the population without food—to starve. The government can prevent that by stepping in and paying the farmers for food that otherwise would not have been grown, and giving that food to people who otherwise could not have afforded it.

What? That doesn't answer my question. I asked you how the government gets the wealth to compensate those farmers if revenue and expenses are not linked. Providing the original source of that wealth doesn't answer this, unless you are implying the government then takes it from them. Which is of course what has to happen, as the government is no more capable than any other entity of spending wealth it does not possess.
The real wealth comes from the same place as ever: work done by people. The money comes from the government. If the government pays the farmers $1 million dollars, then there is an extra $1 million dollars in the economy.

Technically true, but meaningless. The total wealth value of those dollars cannot exceed the total wealth value that the government obtains from various sources. If you just print a bunch of money and stick it in the economy, all you have done is sheer some sheep.
If taxes and spending are coupled, as in a balanced budget, then the government also takes $1 million out of the economy somewhere else. So far, the only reason suggested as to why the government should remove that other $1 million from the economy, is to curb inflation.

So then what's your point? Sure, the government could take tax X dollars, spend Y dollars, and print/destroy the difference, instead of taxing and spending X dollars, but this doesn't change the wealth produced or taxed or consumed or spent. It just juggles some bookkeeping, and in a rather confusing manner.

Either that, or you're trying to do what the EU did with the Euro by not controlling fiscal and monetary policy, and instead control the exchange rate; in their case, because they didn't have a central government to do so, your case because I have no idea. Of course, you can probably see how well that worked.
pizzazz wrote:2. As it turns out, the free market is pretty good at figuring out which investments are economical. Here's a hint: if you need massive government spending to keep your investment from just utterly collapsing, it's not individually economical. It might be slightly better from society's perspective if there is a real positive externality, but that's hard to measure.

Right, that’s why the role of government ought to be limited to exactly those things that must get done, which the free market fails to do, plus encouraging those things the free market does not do enough. We already have “Feeding the people who are cut off by the supply-demand curve”, and “Regulating natural monopolies”. There are likely a fair number of things that it is essential for the government to do. I want a mechanism to identify those things.

Such a mechanism is in place. It is most commonly referred to as, "economics."

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Re: Taxes and Spending, decoupled

Postby Silknor » Thu Dec 22, 2011 7:01 am UTC

pizzazz wrote:And since you're decreasing the value of every dollar by the same portion, this is a proportional tax. Not regressive, but not progressive either.


I agreed with the rest of your post, but I believe this is inaccurate. Remember that while inflation is a tax on holdings of currency and creditors, it also decreases the real value of debts*, so it helps net debtors (and has a smaller impact on those with large amounts of debt relative to their income and overall wealth). I don't have any statistics to back up this, but I believe that on average, this makes it at least somewhat progressive.

*Across the board inflation tends to increase wages along with prices, so it becomes easier to repay debts.
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Re: Taxes and Spending, decoupled

Postby Zamfir » Thu Dec 22, 2011 8:59 am UTC

pizzazz wrote:No, because the government had to take that money from somewhere in the economy. It might have taxed it, or borrowed it (which is just taxing the future), or printed it (which is effectively a tax because it decreases the value of everyone else's money).

Because something is like taxation doesn't make it taxation. Taxation is just one among many ways how the government can direct productive facilities in a country towards its goals. Using its position as currency supplier is simply another way to do that. It can also directly conscript labour or facilities, or write laws and regulations that tell non-governmental actors to take certain desired measures, or shape markets to make such measures profitable. Or claim ownership of land and mineral resources.

Different governments rely on a different mix of such methods. Each method has it own peculiarities, and saying that they are all effectively taxation obscures those peculiarities. Taxation it's not the single magic tool in the toolbox. Taxation is useful, because it allows a relatively close and detailed bookkeeping of who is paying. But the complexity of tax incidence means that this bookkeeping can be misleading.

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Re: Taxes and Spending, decoupled

Postby marky66 » Thu Dec 22, 2011 4:12 pm UTC

Qaanol wrote:
pizzazz wrote:Health care, food, shelter, etc. are goods and services, not rights.

Terminology. At the very least, such things are “essential” goods and services. If you truly believe it’s right and proper for a government to allows some of its people to starve, when there is enough food for all of them, then we’re just going to have to disagree on that.

Just to be clear: you support the government taking food from my pantry because they decide that I have more than my family needs and someone else does not have enough.
If that is not what you mean, kindly explain how your scenario differs.

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Re: Taxes and Spending, decoupled

Postby Qaanol » Fri Dec 23, 2011 3:07 pm UTC

marky66 wrote:
Qaanol wrote:
pizzazz wrote:Health care, food, shelter, etc. are goods and services, not rights.

Terminology. At the very least, such things are “essential” goods and services. If you truly believe it’s right and proper for a government to allows some of its people to starve, when there is enough food for all of them, then we’re just going to have to disagree on that.

Just to be clear: you support the government taking food from my pantry because they decide that I have more than my family needs and someone else does not have enough.
If that is not what you mean, kindly explain how your scenario differs.

That is wholly irrelevant to the discussion at hand. Furthermore, in the scenario you describe, the amount of money the government spends ($0) is equal to the amount of money the government collects in taxes ($0) and thus you have described a system where taxes and spending are entirely coupled, which is the exact opposite of what I’m talking about here.

I’m saying that the government does and should spend money to get things done. All governments do this. The form of the spending can take many forms. Sometimes the government directly hires and pays people to do something, as with the military and post office. Sometimes it contracts out to a private company, such as with military equipment. Sometimes it subsidizes private industry, as with farming. Sometimes it passes laws requiring certain behavior, and pays regulators and the judiciary to enforce them.

The point is, the government gets stuff done by paying money. That’s how it works now, and that’s how I envision it continuing to work. If you have a different idea, about getting the government to do stuff without its having to pay money, by all means start a different thread to talk about that.

What I’m saying is, when the things being done are necessary, and they would not get done without the government paying for it, the government should pay for those necessary things to get done. I really don’t see how this can possibly be a controversial statement. People may disagree on which things are “necessary”, but the concept as a whole seems eminently indisputable to me.

Furthermore, the government can provide some services, namely improving overall societal wellbeing through decreasing negative externalities, not by paying but in fact by collecting money through well-placed taxes. Those two tools, government spending and intelligent taxation, should be used in the manner that maximizes the benefit they bring, relative to what would happen without them. So far, the only interdependence between them of which I am aware, is the effect on inflation caused by a changing money supply.

It may turn out that, in some situations, taxes and spending ought to be adjusted away from their individually-optimal levels, in order that the total benefit including interaction effects be maximized. However, before that happen, I think other methods of increasing and decreasing the money supply, or otherwise controlling inflation, that are not coupled to taxes nor spending ought be explored.
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Re: Taxes and Spending, decoupled

Postby firechicago » Fri Dec 23, 2011 3:46 pm UTC

marky66 wrote:Just to be clear: you support the government taking food from my pantry because they decide that I have more than my family needs and someone else does not have enough.
If that is not what you mean, kindly explain how your scenario differs.


I fail to see the philosophical difference between this and the government taking a little bit of money out of each of your paychecks and using it to provide food stamps to those in poverty.

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Re: Taxes and Spending, decoupled

Postby Zamfir » Fri Dec 23, 2011 4:27 pm UTC

Qaanol wrote:Furthermore, the government can provide some services, namely improving overall societal wellbeing through decreasing negative externalities, not by paying but in fact by collecting money through well-placed taxes. Those two tools, government spending and intelligent taxation, should be used in the manner that maximizes the benefit they bring, relative to what would happen without them. So far, the only interdependence between them of which I am aware, is the effect on inflation caused by a changing money supply.

You're letting "only" do a lot of work there. The amount of real resources that a government can collect by printing money is limited, especially in the long run. Your statement is somewhat equivalent to "the only interdependence between a car and its wheels is the suspension". It's true, and it means that a car sometimes moves up or down while its wheels are not. But when you drive uphill, you can't save fuel by uncoupling the wheels and leaving them at ground level.

If the government acquires real resources by printing money, then by first approximation someone else must be getting less resources as result. Within limits printing money can grow the economy, but that's not a general, unlimited case.

If the government unexpectedly starts printing more money to compensate a budget gap, it is relatively simple who loses out. People who have contracts that specify they will recieve a nominal money will lose, people who have contracts that specify a nominal payment will win. The government itself is a net payer (in particular in the shape of bond interest and repayment), so it is on the winning side.

But from then on people will start to second-guess the government, and the picture changes. If everybody would accurately predict future inflation and there are no more old contracts, the government cannot acquire resources by printing money. The government will have more nominal money to spend, but people are at the same time charging the government (and each other) higher prices that exactly compensate for this. The government can only acquire resources from printing money if there are people out there who underestimate the amount of future inflation, and therefore accept contracts that will make them poorer than they thought they would be.

So a government can never acquire a predictable amount of resources each year from printing money, and hope to have stable inflation. Either the amount of acquired resources decreases over time as people adapt to a more or less constant level of inflation (be it 2%, 15% or 50%), or the system spirals out into hyperinflation.

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Re: Taxes and Spending, decoupled

Postby Qaanol » Fri Dec 23, 2011 5:45 pm UTC

Zamfir wrote:You're letting "only" do a lot of work there. The amount of real resources that a government can collect by printing money is limited, especially in the long run.

…because of inflation. Unless there is a different mechanism besides inflation that limits the amount of resources the government can collect, then my use of “only” remains accurate.

Zamfir wrote:Your statement is somewhat equivalent to "the only interdependence between a car and its wheels is the suspension". It's true, and it means that a car sometimes moves up or down while its wheels are not. But when you drive uphill, you can't save fuel by uncoupling the wheels and leaving them at ground level.

Right, but when you drive over bumpy ground, you can keep the chassis at constant altitude while the wheels go up and down.

Zamfir wrote:If the government acquires real resources by printing money, then by first approximation someone else must be getting less resources as result. Within limits printing money can grow the economy, but that's not a general, unlimited case.

Right. I’m not proposing to grow the economy by printing money. I’m proposing that, when it is necessary for the government to do something, the government should pay for that thing to get done. And when it is desirable for something to be done less, the government should disincentivize it.

Zamfir wrote:If the government unexpectedly starts printing more money to compensate a budget gap, it is relatively simple who loses out. People who have contracts that specify they will recieve a nominal money will lose, people who have contracts that specify a nominal payment will win. The government itself is a net payer, so it is on the winning side.

Right. But if it is known that the government will continue to provide necessary services, regardless of year-to-year fluctuations in revenue, that tends to increase stability. Conversely, if the government says, “Well this year we didn’t bring in as much money as it will cost to provide necessary services, so we’re just going to hang the country out to dry” then it has abrogated its fundamental responsibility as a government.

Zamfir wrote:But from then on people will start to second-guess the government, the picture changes. If everybody would accurately predict future inflation, then the government cannot acquire resources by printing money. The government will have more nominal money to spend, but people are at the same time charging the government (and each other) higher prices that exactly compensate for this. The government can only acquire resources from printing money if there are people out there who underestimate the amount of future inflation, and therefore accept contracts that will make them poorer than they thought they would be.

This is not right. Suppose there is $1000 in the general economy, and I have $10. You, as the government, decide you want a sandwich, and offer to pay $1 for it. If I take the job, then I’ll have $11-C dollars out of a total of $1001, where C is the cost of my making a sandwich. If no one takes the job, I’ll still have $10 out of $1000. If someone else takes the job, I’ll have $10 out of $1001. Seeing these options, I am best off taking the job provided C < $1 (or, if I think no one else will take the job, then provided C < 99¢). So the government can definitely purchase things with “new” money.

And then, if the government collects $50 from taxing mercury pollution which I don’t cause, I’ll have $11-C out of $951.

Nowhere have I said that spending should be greater than taxes. That seems to be a common assumption of others in this thread, but it is not my assumption. For all I know, optimal taxes on detrimental items might dwarf the cost of providing necessary services. If that happens consistently, then provided we agree zero or low inflation is desirable, something would need to be done to cause inflation.

Zamfir wrote:So a government can never acquire a predictable amount of resources each year from printing money, and hope to have stable inflation. Either the amount of acquired resources decreases over time as people adapt to a more or less constant level of inflation (be it 2%, 15% or 50%), or the system spirals out into hyperinflation.

I’m not sure this is true. If the government consistently spends an amount equal to 2% of the total money supply each year, then ceteris paribus there will be consistent 2% inflation. In that scenario, the government will get a consistent amount of utility each year.
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Re: Taxes and Spending, decoupled

Postby Zamfir » Fri Dec 23, 2011 6:18 pm UTC

Qaanol, I don't understand where you are going. Within limits, a government can create or destroy money. Sure. That's hardly a revolutionary insight. High-powered money is essentially a zero-interest loan to the government, so when the money supply expands the government can spend more, when it contracts the government can spend less.

If a government relies too much on expansion, it can create a hyperinflationary spiral where the currency is no longer useful. There are enough obvious examples of this. The opposite is also possible: if the government draws in too much money, people start hoarding currency to pay their taxes and start using something else for everyday use. That's a version of Gresham's law that used to be more common in the past than in modern times.

So in practice, governments have to roughly balance their spending with borrowing and taxation. It doesn't have to be exact, but the two can't deviate too far if the government desires that their currency is also usesful for everyday transactions.

That's exactly how government already operate, calling it 'decoupled' or 'coupled' doesn't change anything.

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Re: Taxes and Spending, decoupled

Postby Bubbles McCoy » Sat Dec 24, 2011 1:32 am UTC

Qaanol wrote:
Zamfir wrote:So a government can never acquire a predictable amount of resources each year from printing money, and hope to have stable inflation. Either the amount of acquired resources decreases over time as people adapt to a more or less constant level of inflation (be it 2%, 15% or 50%), or the system spirals out into hyperinflation.

I’m not sure this is true. If the government consistently spends an amount equal to 2% of the total money supply each year, then ceteris paribus there will be consistent 2% inflation. In that scenario, the government will get a consistent amount of utility each year.

You need to justify this claim. Your entire argument relies on this, but it's not true. An expansion to the inflation rate can "create" real money for the government, but aiming for continually high inflation will not furnish any additional real value to the government.

Consider this dumbed down look at inflation and government spending:

Lets say the government spends $1 trillion a year, and does all of it's purchases once a year. Normally, it would tax some amount from the economy, and whatever amount it is short of $1T, it sells in bonds. Some portion of these bonds are bought up by the Federal Reserve, which causes the money supply to expand. Normally, the amount they buy is determined by desired inflation. Your proposed system would instead buy up all the bonds regardless, claiming that the resulting inflation is a form of a tax. Say that the budget is short an amount equal to 5% of the money supply - under your system then, the Federal Reserve would add enough bills to the MS to increase it by 5%, and there would be zero deficit.

However, let's say your one of the people the government has been buying from. Overnight, the money supply has expanded by five percent, which means inflation has also risen by five percent*. So, the money the government gave you is worth about five percent less than you thought it was. When the government makes their purchase from you next year then, you're going to demand five percent more than the normal cost, as you know their payments will be worth less then they tell you - by their printing of money, they're devaluing their payment to you. So, to perform the trick again, the Fed must add around 10% to the money supply, causing 10% inflation.

Now, the shit really hits the fan. Once again, their payment is 5% less in real terms than you thought it would be. When it comes time next year, what do you charge? No matter what you charge them, you know that the payment will be worth 5% less tomorrow then the day before. At this point, we see inflation spiral out of control, since it becomes an arms race between the sellers raising prices and the government enlarging the money supply, as we've seen in Zimbabwe and the Wiemar Republic.


What I believe this comes down to is you're mistaking a change in the rate of inflation for the rate of inflation. Keeping the rate of inflation constant, ceteris paribus, has no effect on government finances. Changing the rate of inflation can have an effect, but it's incredibly unstable to finance a government by committing to intentionally increasing the inflation rate forever into the future.


*I am being somewhat abusive in my terminology here. While I'm confident I could create a more careful justification if you really want me to, it would be pretty tedious.

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Re: Taxes and Spending, decoupled

Postby pizzazz » Sat Dec 24, 2011 2:53 am UTC

Silknor wrote:
pizzazz wrote:And since you're decreasing the value of every dollar by the same portion, this is a proportional tax. Not regressive, but not progressive either.


I agreed with the rest of your post, but I believe this is inaccurate. Remember that while inflation is a tax on holdings of currency and creditors, it also decreases the real value of debts*, so it helps net debtors (and has a smaller impact on those with large amounts of debt relative to their income and overall wealth). I don't have any statistics to back up this, but I believe that on average, this makes it at least somewhat progressive.

*Across the board inflation tends to increase wages along with prices, so it becomes easier to repay debts.

In the short term, yes. In the long run, fewer loans will be made to those who don't make much money, so I believe we should end up basically where we started. Perhaps worse, since the supply curve has shifted down, and these loans tend to be more beneficial for the borrowers than the lenders (I think; perhaps that's wrong, as I can't remember for the life of me I first heard it).

Qaanol wrote:Nowhere have I said that spending should be greater than taxes.


Qaanol wrote:
Silknor wrote:in the long-run, taxation must equal spending.

This is exactly the misconception I’m trying to correct here.
[/quote]

It might help you to hold a consistent position.

Zamfir wrote:
pizzazz wrote:No, because the government had to take that money from somewhere in the economy. It might have taxed it, or borrowed it (which is just taxing the future), or printed it (which is effectively a tax because it decreases the value of everyone else's money).

Because something is like taxation doesn't make it taxation. Taxation is just one among many ways how the government can direct productive facilities in a country towards its goals. Using its position as currency supplier is simply another way to do that. It can also directly conscript labour or facilities, or write laws and regulations that tell non-governmental actors to take certain desired measures, or shape markets to make such measures profitable. Or claim ownership of land and mineral resources.

Different governments rely on a different mix of such methods. Each method has it own peculiarities, and saying that they are all effectively taxation obscures those peculiarities. Taxation it's not the single magic tool in the toolbox. Taxation is useful, because it allows a relatively close and detailed bookkeeping of who is paying. But the complexity of tax incidence means that this bookkeeping can be misleading.


Yes, but my point was simply that printing money (like taxation) it effectively removes wealth from the possession of private individuals and businesses (by reducing the value of their property), and puts it under control of the government (unlike, as a simple hypothetical example, a government that made all of its necessary money by running a business that competed on equal footing with other businesses).

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Re: Taxes and Spending, decoupled

Postby Thaciv Yovero » Sat Dec 24, 2011 2:42 pm UTC

Bubbles McCoy wrote:
Qaanol wrote:
Zamfir wrote:So a government can never acquire a predictable amount of resources each year from printing money, and hope to have stable inflation. Either the amount of acquired resources decreases over time as people adapt to a more or less constant level of inflation (be it 2%, 15% or 50%), or the system spirals out into hyperinflation.

I’m not sure this is true. If the government consistently spends an amount equal to 2% of the total money supply each year, then ceteris paribus there will be consistent 2% inflation. In that scenario, the government will get a consistent amount of utility each year.

You need to justify this claim. Your entire argument relies on this, but it's not true. An expansion to the inflation rate can "create" real money for the government, but aiming for continually high inflation will not furnish any additional real value to the government.

Consider this dumbed down look at inflation and government spending:

Lets say the government spends $1 trillion a year, and does all of it's purchases once a year. Normally, it would tax some amount from the economy, and whatever amount it is short of $1T, it sells in bonds. Some portion of these bonds are bought up by the Federal Reserve, which causes the money supply to expand. Normally, the amount they buy is determined by desired inflation. Your proposed system would instead buy up all the bonds regardless, claiming that the resulting inflation is a form of a tax. Say that the budget is short an amount equal to 5% of the money supply - under your system then, the Federal Reserve would add enough bills to the MS to increase it by 5%, and there would be zero deficit.

However, let's say your one of the people the government has been buying from. Overnight, the money supply has expanded by five percent, which means inflation has also risen by five percent*. So, the money the government gave you is worth about five percent less than you thought it was. When the government makes their purchase from you next year then, you're going to demand five percent more than the normal cost, as you know their payments will be worth less then they tell you - by their printing of money, they're devaluing their payment to you. So, to perform the trick again, the Fed must add around 10% to the money supply, causing 10% inflation.

Now, the shit really hits the fan. Once again, their payment is 5% less in real terms than you thought it would be. When it comes time next year, what do you charge? No matter what you charge them, you know that the payment will be worth 5% less tomorrow then the day before. At this point, we see inflation spiral out of control, since it becomes an arms race between the sellers raising prices and the government enlarging the money supply, as we've seen in Zimbabwe and the Wiemar Republic.


What I believe this comes down to is you're mistaking a change in the rate of inflation for the rate of inflation. Keeping the rate of inflation constant, ceteris paribus, has no effect on government finances. Changing the rate of inflation can have an effect, but it's incredibly unstable to finance a government by committing to intentionally increasing the inflation rate forever into the future.


*I am being somewhat abusive in my terminology here. While I'm confident I could create a more careful justification if you really want me to, it would be pretty tedious.


The problem with your hypothetical is that it relies on the government making all it's purchases in one single day. The reason why hyperinflation can spiral out of control is because once inflation reaches a certain point, there is no stability (even in the very short term) for prices. This is not the case with an inflation rate of 5% at all. You've created an imaginary and impossible scenario where inflation is 5%, but that inflation occurs in one day so you can talk about hyperinflation. With a 5% inflation rate, if you're only planning on holding on to cash for a short while (in the matter of days) you're not really going to consider inflation because it's negligible.

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Re: Taxes and Spending, decoupled

Postby Bubbles McCoy » Sat Dec 24, 2011 9:22 pm UTC

Thaciv Yovero wrote:The problem with your hypothetical is that it relies on the government making all it's purchases in one single day. The reason why hyperinflation can spiral out of control is because once inflation reaches a certain point, there is no stability (even in the very short term) for prices. This is not the case with an inflation rate of 5% at all. You've created an imaginary and impossible scenario where inflation is 5%, but that inflation occurs in one day so you can talk about hyperinflation. With a 5% inflation rate, if you're only planning on holding on to cash for a short while (in the matter of days) you're not really going to consider inflation because it's negligible.

Well, this is where we start getting into my qualifier of how I could do a more careful justification, it would just be kinda tedious. Here it goes, I guess -

When I talk of the money supply, I'm not just referring to the number of dollars out there. Money supply is the total number of dollars (called the "monetary base") multiplied by the number of times it is spent in a year ("money velocity"). So, when I used the "once a year" model, I was simplifying by setting velocity to one.

The Federal Reserve generally doesn't directly effect velocity all that much, so I think it's fair to focus on it's power to increase the monetary base for this argument. So, lets say we're considering the case where the government makes it's purchases from people who only hold on to the money for a few days. It's true that inflation matters much less the shorter the period you hold on to it, but the problem is the effective purchasing power of a 5% expansion to the money supply becomes much less. To show this using a bit of arithmetic:

MS = MB * VM (money supply = monetary base * velocity of money)

The above is a basic identity for determining money supply. Keeping in mind that the purchasing power of an expansion to the MS is determined by the amount added to the monetary base, as this is the number of physical dollars the government will have to buy things after the expansion. Lets say your example has people only holding onto money for a week, while mine has them holding onto it for a year. Using the velocity/base identity, a 5% expansion to the money supply will only give the government 1/52 as much money as in the year example. So, if the government tries to create as many dollars as in the annualized example I made, it would require an inflation rate over fifty times as high.

In short, you are right that the inflation rate has a smaller effect if money changes hands quickly. However, the effective purchasing power that the government gains from inflation proportionally declines the faster money changes hands, meaning you still run into the same fundamental problem that a steady rate of inflation cannot create any real value for the government.

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Re: Taxes and Spending, decoupled

Postby elasto » Sun Dec 25, 2011 2:42 am UTC

I think the bigger problem with Bubble's hypothetical is that it ignores taxation. The OP merely suggested decoupling not having no taxes at all. Somewhere in the example there needed to be, at the very least, the government taking x% out of the economy once a year - with, realistically, both taxation and spending happening billions (trillions?) of separate times a year.

Over the long term the OP'er agrees taxes should be roughly equal spending (I think??) - hence decoupled not non-existent. I guess he's thinking something along the lines of how insurance companies fund themselves: They have no idea how much they'll have to outlay in a particular year, hence they have cash reserves and hedge - both of which a government can do better simply by printing less or more money.

If it's clear the risk model has changed (or they aren't making enough profits!) an insurance company will raise rates in subsequent years (subject to market forces), and, likewise, a government can choose to raise taxes (subject to it being an opportune time for the economy).

As others have pointed out, in practice this 'loose decoupling' is how governments operate anyway... They just call it 'emergency spending' or whatever (eg see the Iraq War funding under Bush) and it appears 'outside of the books'. And no government has ever advocated coupling taxes to spending to the extent that this year's taxes must equal last year's outlay or whatever. It could never happen and will never happen. So, unless I'm misunderstanding the OP's intent, he already has as much as he could ask for - as much as is economically viable...

Edit: Oh, and finally, imagine if taxes were coupled to outlay - as a constitutional amendment, say. Imagine the political fights that would break out every single year! Every time there's a 100Bn shortfall or a 100Bn excess, there'd be months of intransigence and rows on 'do we lower tax X or increase subsidy Y or raise tax A and simultaneously lower tax B' etc. etc. Even if the amount were minuscule, the opposition could oppose simply in an attempt to horse-trade. Or, if the law were changed so tax changes could be forced through quickly and without political obstruction by the opposition, a R government might bring in a 9-9-9 tax law and the subsequent D government rip it up for a 70% top rate, or one government might impose isolationist import duties and no local VAT and the next one scrap import duties in favour of a 20% sales tax and high 'green taxes' on gas or whatever. It'd be a nightmare either way...

Basically, I'm saying that the current system is nothing like a coupled system (because, if it were, we'd have all the problems I list above) and, hence, I'm not sure what problem exactly the OP'er is attempting to solve...

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Re: Taxes and Spending, decoupled

Postby pizzazz » Sun Dec 25, 2011 4:59 am UTC

I don't think his example ignores taxes, for 2 reasons.

The first is that inflation (or deflation) is described in the OP as being the difference between taxes and spending, not all of spending. At least, this is my interpretation (since there is not really any difference between taking money, destroying it, printing money, and spending it, and just taxing it and spending it, other than the losses incurred by the middle two steps of the former). Thus, in every period, the net amount printed is spending minus taxes.

The second is that as described by the OP, taxes would just be a lump sum each collection period, with the amount collected not being directly based on the inflation rate. Yes, the amount collected would increase with inflation, but it in theory it would be strictly limited by how much disincentivising is efficient. The real amount collected might even go down, making the increase in number of dollars taken out of circulation less than the old inflation rate (I think my napkin math is right on that. Either way, this tax system does not ensure that increases in taxes match increases in spending).

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Re: Taxes and Spending, decoupled

Postby elasto » Mon Dec 26, 2011 9:40 am UTC

Ok then, while we're on this vague topic and we have knowledgeable people posting, I have a related question.

Japan is suffering from a high exchange rate and has done for a long time. Why isn't the solution for them extremely simple? Why can't the government just print money and lower the exchange rate that way? They can print money and invest it in long term capital infrastructure projects (eg replacing the broken nuclear power plant) resulting in long term economic growth, or perhaps print money and lower taxes giving an economic boost that way - and also lower the exchange rate.

Why wouldn't that get Japan out of its decade+ long economic difficulties? In fact, why isn't that always the easy solution to deflationary type situations?

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Re: Taxes and Spending, decoupled

Postby Zamfir » Mon Dec 26, 2011 2:33 pm UTC

Because they want to running a trade surplus. Japan exports more than they import, and the difference is used to invest in foreign assets. That's not a bug, it's a feature. It's the result of many Japanese people saving for their old day, and part of those savings are invested abroad.

If they lower their exchange rate, they will get less foreign currency for their exports, and pay more foreign currency for their imports. So they have to export more to build up the same foreign savings.

Your proposal is comparable to the Japanese government forcing more investment in Japan, instead of abroad. But given the demographics, it makes sense for Japanese to invest part of their savings abroad. There's a period coming with lots of old Japanese people as share of the population, and the Japanese economy is already very capital-intensive. They just won't have the people around to make use of even more capital back home.

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Re: Taxes and Spending, decoupled

Postby elasto » Tue Dec 27, 2011 9:11 am UTC

But isn't running a trade-surplus long-term bad in rather the same way that running a trade-deficit long-term is bad? China is looking to rebalance its economy by looking less towards exporting and more towards building up a bigger internal market after all.

And the medium-term solution to demographics is to allow more immigration, which also happens to require more investment in local infrastructure.

Wouldn't the ideal be for all countries to be neither net importers nor net exporters and to allow labour to flow in and out as easily as capital? Why isn't that a long-term goal for all countries?

[I realise this has drifted OT and for that I apologise!]

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Re: Taxes and Spending, decoupled

Postby Zamfir » Tue Dec 27, 2011 5:15 pm UTC

Emigration isn't pleasant, most people only consider it if they have to. It means leaving your family, friends and community behind. To abandon the culture you grew up and feel at home in for a different one where you will often stay a bit of a humbling stranger, and your children will be 'minorities'.

And the destination gets the other side of those problems: people who don't quite fit in, often in poor and sheltered ethnic communities with all their social problems, who put pressure on wages,rent and welfare schemes where their added presence hurts exactly the people who already have it hard.

Of course, that's an exaggerated picture, but there is some truth in it. Transplanting people is difficult, painful, slow. While containers travel at ease. As an ideal it's better to invest where the people are and then ship the products then to invest at the destination and ship the people in. Emigration happens when investments abroad turns out difficult (for whatever reason). It's hardly an ideal.

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Re: Taxes and Spending, decoupled

Postby elasto » Wed Dec 28, 2011 8:44 am UTC

Zamfir wrote:Emigration isn't pleasant, most people only consider it if they have to. It means leaving your family, friends and community behind. To abandon the culture you grew up and feel at home in for a different one where you will often stay a bit of a humbling stranger, and your children will be 'minorities'.

And the destination gets the other side of those problems: people who don't quite fit in, often in poor and sheltered ethnic communities with all their social problems, who put pressure on wages,rent and welfare schemes where their added presence hurts exactly the people who already have it hard.

Of course, that's an exaggerated picture, but there is some truth in it. Transplanting people is difficult, painful, slow. While containers travel at ease. As an ideal it's better to invest where the people are and then ship the products then to invest at the destination and ship the people in. Emigration happens when investments abroad turns out difficult (for whatever reason). It's hardly an ideal.

You're speaking to a person from the UK currently residing in mainland China - I know all about the issues! I still reiterate my assertion that it should be an ideal for countries to be much more welcoming towards immigrants both skilled and unskilled though - ie. the world would benefit from labour becoming ever more mobile just as it benefited when capital became much more mobile. eg. Japan and the Japanese people would benefit if more older rich and middle-classes moved abroad where their money would go further and younger skilled and unskilled workers came from abroad in their place.

With telecommuting, increasing AI/automation and real-time speech translation tools and such your citizenship and the country you are living in ought to become almost irrelevant to your job in this next century.

Besides, 'leaving family friends and community behind' can happen simply by moving jobs within the same country. Not many people get to work in the same city their whole lives after all. Yes it's a more extreme situation when changing countries and cultures but it's more a difference in degree than difference in kind.

Anyhow, this is way OT now so we ought to just leave it! :p


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