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Taxes – can’t live with ’em, can’t live without ’em

Geoff Coventry

The question of taxation boils down to how much and from whom should the government take back out of the economy after it spends. It is a critical question of public purpose, morality, and economic stability. The problem is that we’re asking the wrong questions because we don’t understand our own national currency.

There’s a lot of emotion and bravado when the topic of taxes comes up. You hear a lot of “me” and “mine”, and accusations of the big bad government “stealing” or “taking” what was “hard earned” and “deserved”. In some pockets of our country, it seems there’s nothing folk love more than to hate their federal government and its overbearing taxes (even from those who draw their salary or rely on support from it)!

Now unlike state and local governments, (which do need to collect taxes to pay their bills and make payments on their bonds), the federal government makes its own money — the Dollar. Every time it spends or makes a payment (usually via its central bank), it adds Dollars into bank accounts. Brand new money just shows up in the form of bigger balances in our accounts.

Now sure, some of us work and collect wages from private companies that don’t have government contracts, so it doesn’t appear that our money came from the federal government. But we’re all part of a bigger economy which would be that much smaller without these Dollars contributing to private sector sales and incomes. More than likely, there’s a fairly short chain of transactions from some recipient of Dollars from the Government and a purchase at the company you work for, and therefore some percentage of your pay check may well be said to be comprised of our country’s currency.

In any case, here’s the point. Taxation by the federal government takes back some of the Dollars it first created when it spent. Federal taxes redeem what the federal government first issued.

Federal taxes don’t fund anything. Zip. Zilch. Zero. They are there to ensure we use & accept Dollars and to remove their added purchasing power from the economy when needed. We’re so used to talking in terms of how to “pay for” what our government does, we’ve forgotten that we issue our own sovereign currency, and that since we left the gold standard, we have no threat of insolvency since no one can demand convertibility.

This is profoundly different than how the average person thinks about our sovereign government. And it completely changes how we should think about taxes and tax policy.

To repeat the opening statement: the question of taxation boils down to how much of its currency, and from whom, the government should take back out of the economy after it spends.

When you look at it in this light, ideas like the flat tax suddenly sounds quite irrational and even unethical. Taxes are not about asking everyone to chip in to fund the federal government.

Rather, we should be asking questions like:

  1. Who is disproportionately benefiting from government spending?
  2. Where are the Dollars accumulating?
  3. What parts of the economy need to be “cooled down”?
  4. Are there entities that are using wealth to destabilize our democratic institutions?
  5. Are there entities or individuals that have too many claims on the nation’s limited natural resources and are restricting access in ways that undermine the general welfare or the pursuit of happiness for all?
  6. Are there sectors of the economy that are using their access to money to harm the health of people, living ecosystems, water/air/soil quality, and could a different tax structure result in different outcomes that would bring positive changes?
  7. What kind of incomes do we want to encourage and to leave those receiving them with more purchasing power (e.g. should we lower payroll taxes on lower- and middle-income wage earners) and which kinds of earnings should be discouraged, reduced, or eliminated (such as carried interest)?
  8. How can we better calibrate the tax rates on many of our major tax structures such that they function in a more optimal manner to provide counter- cyclical, stabilizing currency flows to keep the economy healthy?

A tax system overhaul is certainly in order, but until we ask the right quest- ions and are solving the right problem, we won’t be able to make the right choices. The first place to start is to understand our monetary system.


Geoff Coventry works at Tradewind Energy Inc., attended Baker University, and currently lives in Kansas, USA

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