Tuesday, May 01, 2012

It's Not the Current Tax Rate That Concerns Us...

it's the future tax rate.

People often ask,

"Captain, why do you look at spending as a percent of GDP instead of revenues as a percent of GDP when looking at overall tax burden?"

Simple, curious Cappy Cappite.

Because no matter what we tell ourselves today, the TRUE tax rate we face is driven by how much we spend, not what we collect at any given point in time in terms of tax revenue.  Oh sure, we can postpone the inevitable taxation way into the future (long after current politicians have died and suckered their constituents into voting for them with the money of future chidlren), but do not be fooled, all those precious little social programs, health care programs and other socialist programs, they HAVE to be paid back by tax dollars.

Maybe the taxpayers of today won't pay it (which  many politicians are banking on), but SOME taxpayer at SOME POINT IN TIME will.

That is of course unless the US inflates itself out of it or just refuses to pay the Chinese back, but we wouldn't do that now would we?


FSK said...

You're making a common fallacy. The cost of deficit spending is not deferred to the future. The cost is paid immediately via inflation.

If the Federal government has a $1T deficit, that causes $1T of immediate inflation. The "interest payments on the national debt" are a State subsidy of the financial industry. They borrow at the Fed Funds Rate (0%-0.25%) and buy higher-yielding Treasury debt.

Cutting taxes without cutting spending is stupid. That merely increases the inflation tax.

That's the "advantage" of paper money. There's always some wiggle room. The "inflation tax" can be raised without raising other taxes.

Captain Capitalism said...

Extra and well-deserved Cappy Points for you. Not a terribly common instance where I learn something.

You can trade your "Cappy Points" in for...um...nothing...unless young girls becomes incredibly aware of economics....so um..yeah..nothing.

But you should have warm fuzzies tonight that you impressed the Captain!

Anonymous said...

The inflation tax doesn't always exactly equal the budget deficit, though.

Imagine this situation: 10 people in economy, 8 employed in the private sector. The 2 unemployed are engaged in subsistence farming to survive.

Government decides to reduce employment, by getting 1 person to build a new road, and paying him via deficit spending. This person decides to buy stuff, causing prices in the private sector to rise. The price increases, cause it to become profitable to hire an additional worker to make more stuff.

End result: 1 public sector employee, 9 private sector employees, prices up and production up. Capitalist makes higher profits, since price and production increases caused revenue to increase more than his wage bill. Existing private sector employees have purchasing power reduced, since prices increased with no commensurate wage increase. Public sector employee and new private sector employee are better off, as they are no longer subsistence farmers. Everyone has a new road. So, the only losers are the existing private sector employees, and thats only if they value the new road less than they valued the old price levels. In this scenario, there is a net benefit to society, as more stuff is being produced (private sector G+S and the road).

Now, once we are in the latter situation, thats when additional deficit spending causes a 100%inflation tax. Since there is no spare capacity, the government bidding for goods/services causes an increase in the price level with no rise in output. At this point, additional government spending can only be inflation neutral if a tax hike reduces the spending power of existing purchasers of goods and services.

Cogitans Iuvenis said...

And what happens if say the cost of servicing this road is in excess of whatever additional utility it adds? That road would then be a net loss on gdp wiping out whatever benefit was accrued in the short term by paying that unemployed man. If one needs an example then you only need look at Japan, which built numerous white elephant projects, Google Japanese village and highspeed line to nowhere, in the hopes of sparking economic growth. China now is a great example of it. Just because someone is building a road, a building, or a rail line doesn't mean it will add economic value. I'd the demand doesn't exist for it the it; then it is a net loss on gdp. Why? Because of the debt accrued to build it will be in excess, due to interest, of whatever payout you give to the workers. Forgetting this fundemental rule helped lead the US to depression, and soon it will wreck China as well.

Aurini said...


I believe it would be a mixture of both.

Deficit spending creates the illusion of a higher production base, and is often financed 'invisibly' through loans from the Chinese, for instance.

So on the one hand, we have a bubble, artificially inflating wages and profits for the time being. People wind up spending beyond their means without realizing it.

Meanwhile, inflated dollars are sitting off shore shomewhere, like a cyst that's about to burst.

Both create a time delay between the money spent, and the inevitable inflation. Now granted, when you do this consistently over 50 years that time delay will average out (leading to the boom and bust 'business' cycle), but that's assuming the rate of deficit spending remains consistent.

When you have a massive increase, as we've seen in Canada and the US recently, then you're looking at a time bomb waiting to explode.

It won't take decades to kick in... but it won't happen immediately, either.