Gov't Spending is the Real Tax? (Need Help)

Economics Economics Questions
1

Ok, I have been having an argument on other sites - and I cannot seem to get any adequate answers. People on the left say I am nuts. People on the right just tell me I’m wrong - but no one has offered a convincing counter argument to me. So I came here for help.

I am of the belief that gov’t spending is the real tax on the private sector. Regardless of whether that spending is taxed or borrowed. Key phrase - “private sector.” I’m talking the private sector as a whole.

(Prove me wrong if you can - because I really want to know for certain.)

I’ll use 2011 budget as an example:

Spending = 3.7 T

Revenues (taxes) - 2.2T

Borrowing = 1.5T

My belief is that the total tax on the private sector is really, in fact, 3.7T. Not 2.2 T.

(I am assuming no printing involved just for argument’s sake.)

Let me explain:

The 1.5T in borrowing is money that came out of the private sector. Same as taxes in a sense. It is money that cannot be spent by the private sector. Same as taxes. (Yes, individuals feel wealthier - but we will get to that.) And here is the key: It is money the private sector will NEVER get returned to it. Same as taxes.

Reason being: The gov’t never pays down debt. It either keeps borrowing more and more - or defaults one day. Either way - the money is never returned to the private sector.

The 1.5T it borrows this year will only be paid back from future borrowings (or taxes) from others the private sector. But that is no net return to the private sector. So that means the 1.5T is still out of the private sector forever. And the yearly deficits just keeps adding up over time. The total 14T today is nothing more than a tax taken from the private sector over the years - and will never be returned to the private sector. Same as taxes.

There is one way it can be returned. An actual cut in government spending in the future to the point of running a surplus - while not increasing taxes. (Good luck with that.) (And even then - using my logic - it would be a tax refund in the year of the surplus.)

Now - back to individuals feeling wealthier. Yes, some do. But the private sector as whole is NOT. Key phrase again - “private sector as a whole.” For the individuals - it’s akin to a multi-generational game of musical chairs. Eventually - someone will lose - and all those cumulative borrowings are officially forfeited. Which really means they were taxes all along. And it might be that they only take a partial haircut the first time the music stops - but the rest of it will be left with the gov’t as rolled over borrowings - and then the music will just start again.

Oddly enough, you could actually call this a “voluntary tax” of sorts. Because the people are freely choosing to give the money to the gov’t - knowing that they one day could be the ones left standing when the music stops.

(Note: there are two exception that I can think of. 1) Foreign borrowings. That money is NOT an upfront tax on the private sector. It only becomes a tax if the foreign holder unwinds its holdings one day. If they are the ones left standing when the music stops - then it never was a tax. 2) Interest paid to U.S. debt holders is not a tax. It could be considered a tax refund of sorts. That amount (interest) should be taken off of the total gov’t spending when factoring the total tax on the private sector.)

So - that’s why I think government spending is the real tax. Regardless of whether the money is borrowed or taxed. And that means that the tax on the private sector is really 3.7T this year which equates to 27% of GDP. (Minus the noted two exceptions above.)

In other words, the deficit is a tax too (on the private sector.)

(Like I said, please tell me if I’m wrong - and explanation would help also. I’m a layman, economically speaking, so dumb it down as much as possible too.)

2

That 1.5tn might actually be seen in the form of inflation which has been said to be a tax or increases in actual taxes at a future date. So i would not disagree with you, I would only say that the wording will annoy many socialists and might confuse other people. Government spending is government spending and taxes are taxes, the government might have other mechanisms for generating income (although nothing as significant as taxes) but they should also be taken in to account. Calling all government spending taxes might mislead people, I could be wrong but it is only a tax when it causes inflation or causes tax to actually increase.

3

I would not think the deficit could be considered inflation. There is no increase in the money supply if the gov’t borrows the money from the private sector to finance the deficit. (Yes - it will invariably lead to default style inflation down the road - but it’s not inflationary at the time of borrowing.)

As far as being “misleading” - yes, that is the problem. But it’s not meant to be misleading or tricky. It’s just meant to state economic reality (if I’m correct) of the fact that gov’t spending is the real tax on the economy. You could actually argue it’s MORE misleading with the current general belief that the deficit is a not a tax (on the private sector.)

Anyways, the argument started when someone said that the private sector has never had more money available to it than today. (In relation to taxes to GDP percent.) They said there is no reason why the private sector cannot create jobs since the tax to GDP rates is only 16%. That’s where I said he was wrong - and that gov’t spending overall was the real tax on the private sector. So, really, the tax to GDP was 27%.(*) Not 16%.

(* minus two exceptions noted in OP)

That’s when I became “nuts” and “delusional” to the left. Even people from the Ron Paul right flatly said I was “wrong” because I said tax cuts won’t do chit to help the economy if you don’t cut spending also. I said that you could cut taxes all the way to ZERO - and there would be the same net negative burden on the private sector. Borrowing or taxing made no difference (on the whole.) Both were, in effect, taxes. That did not sit too well.

But I am still of the belief - that the deficit is an immediate tax on the private sector. Same burden as direct taxes. Yes, it’s not understood and hidden somewhat - like the inflation tax. But in economic reality - it is a tax. (Or at least no one has been able to convince me otherwise - that’s why I sought help posting here.)

4

This is where you’re simply incorrect. While it is true that the debt will always increase, it is actually the Federal Reserve and some foreign sovereign debt-buyers who finance this ever-ballooning debt. Private citizens purchase bonds to resell them at a later date. Until the government actually defaults, it’s not true that private citizens will never get their money back.

Bond purchases by government entitites (foreign and domestic) are inflationary. Unless the Federal Reserve sells some (real) assets from its balance sheet to purchase government bonds, its bond purchases are creating new cash. This is how the debt is acting as a tax. Deficit → increased debt → purchased with newly printed money → higher prices → tax on citizens.

Clayton -

5

Well, I had assumed “no printing for argument’s sake” about the point in general that “gov’t spending was the real tax.” But to include printing in the discussion, then that’s definitely a tax. The inflation tax. Whatever portion of the deficit is financed by inflation - then it’s still a tax on the economy. So the deficit would still be a tax.

As far as private citizens holding them til maturity. Yes, I agreed some individuals will recoup all. But the private sector (as a whole) will never recoup. Reason being: the individuals can ONLY recoup through the gov’t borrowing from other private citizens to pay back the maturing bond holder. No net change to the burden since no debt was actually paid down. Or via the printing press. Which would also count as a tax.

That’s why I still think deficit is an upfront tax on the economy - and should be considered such. (With the exception of foreign purchases and credit for interest paid.)

6

Yes, government spending is the real tax on the private sector but even gov. spending underestimates the true damage the government causes. An important aspect to consider is contingent liabilities. If the government implicitly states that it will bail out entities then it is a future liability that is placed on the government that is not accounted for in the spending numbers. Government spending can be mere redistribution which is at least better than wealth destruction such as the government spending that supported cash for clunkers. There are many regulations that harm the free market as well that are not taken into account in spending.

7

Well, it’s important not to double-count and I think you’re double-counting. A bond is repaid from future taxes, so the present bond purchase by a private citizen does not tax anyone else right now. The same goes for Fed purchases. It should be obvious that government bonds that are purchased by the Fed are not intended to be repaid, only rolled over. This is because the purpose of these bonds is to expand the money supply, not actually “give the government a loan.” The bond holdings of the private sector are purely voluntary. I agree with the overall characterization of the bond game as a ‘greater fool’ asset… if private demand for bonds goes down, either the Fed has to buy up the slack or bondholders experience losses. In the worst-case scenario, the government defaults and everyone holding a bond at that time will lose their entire principal.

Of course, the interest paid on bonds held by the Federal Reserve only adds insult to injury - first, we got taxed by the price increases that resulted from the new money created to buy those bonds and then we got taxed by the government to pay the interest on those bonds (most of which goes back to the Treasury anyway). It’s like getting taxed for paying taxes. There is no word to describe the viciousness of this arrangement.

Let S be government spending, R be revenue and D be deficit:

S = R + D

D can be further broken down into two segments, private bondholders (p) and Federal Reserve bond purchases (F):

D = F + p

So:

S = R + F + p

But F is inflationary, so it is effectively a tax. Gathering all taxes together:

T = R + F

… yields:

S = T + p

Private bondholder purchase are not inflation because private bondholders cannot print their own money. Unlike the Federal Reserve, they must forgo the use of their money in order to purchase the bond. So, government spending is funded by taxes (direct revenues + inflation) and new private bondholder purchases, as the final equation shows.

Clayton -

8

As Clayton points out, you’re on the right track but you’re a bit off. It is true that money the government borrows is money that the private sector cannot. This is usually what is being referred to with the term “crowding out”. But this does not mean money that is borrowed will never be returned.

But along these lines, if you really want to get down to it, yes, you can break down government financing into smaller and smaller categories. On the surface there are three ways government finances its operations: Taxing, borrowing, and printing (money). You can fuse printing into taxing, because as Milton Friedman and virtually every other economist worth his salt has pointed out, money printing (inflation) is simply an invisible tax…invisible because it is not a tax on nominal dollars, but on purchasing power…which is really what matters. So then you’re left with taxing and borrowing. But even then you can fuse borrowing, as interest payments must be made, and (in theory), the principle must be repayed…and of course, where does government money come from: either taxes or borrowing. So you either end up with a Ponzi scheme (which will eventually collapse), or more taxes. Most of the time, both.

So ultimately, yes, all government spending is financed by a tax on the private sector, which means that yes, in a sense, all government spending is a tax.

9

See, that’s the sticking point and where I disagree with you.

I think a bond purchase from a private citizen is a tax right now. Because the money is taken out of the private sector right now.

Let’s use 1M loan as an example today. The gov’t borrow 1M from a private individual for new deficit debt. That is 1M subtracted from the private sector in 2011. We’ll say 5 year note.

So in 2016 - the bondholder gets 1M back from the gov’t. But the gov’t has to borrow that 1M from another individual always. (Since there are never surpluses.) So there is a net sum zero change to the private sector in 2016.

That means the burden (on the private sector) was actually levied in 2011. Not 2016. That was the only year money was taken from the private sector.

So that’s why a present bond purchase is an immediate tax on the economy. Not a future tax.

10

But my point is that it will never be returned.

Not to the private sector as a whole. Yes, to some individuals. But not the private sector as whole. Because the only way individuals can be repaid is from borrowing (or printing) from other individuals in the future. But that is no net gain to the private sector with that transaction. Only the net negative from the original transaction.

This is true because (as far as I know) there has never been a gov’t that has ever paid down debt. As in never. It only borrows more and more in nominal terms. There is never a net return of capital to the private sector. (Except for the interest which can be subtracted from overall gov’t spending to get the real gov’t burden.) Only subtractions.

That’s why (I still think) borrowings should be consided no different than taxes. And inflation, taxes, and borrowings can all be lumped together simply as taxes.

11

You can’t have it both ways. Either it’s a net zero sum change or it’s a burden, but not both. It’s no more burden to the private sector for Joe to buy $1M of government bonds than it is for Joe to buy $1M of corporate bonds. Either way, that $1M will go from Joe’s control to someone else’s control. You can argue that the government buys a different mix of things than the private sector does, thus artificially forcing up prices of those things which acts as a tax, but this is double-counting again since we’ve already taken that into account by noting that all of S has the crowding-out effect JJ mentioned above.

Clayton -

12

But I am not double counting. I am saying the burden occurs once - in 2011. Not in the future. Single count. You are saying it occurs in the future. Not in 2011. Single count. I just think (for reasons stated previously) that the burden can only be considered as occurring in 2011. That’s why I keep coming back to the realization that the deficits are taxes on the private sector in the year the deficit occurred.

And if Joe buys 1M in corporate bonds - then that money stays in the private sector. It never leaves. So that’s good right there.

Plus, the corporation will pay Joe back - because corporations make profits. (Yes, I understand corporate debt can default.) But a corporation usually can pay debt down in time. Actually down. A gov’t never pays debt down since they never run a surplus (profit) in reality. Key difference.

13

Then you don’t know very far. The first one that comes to my mind is the government of a country called the “United States.”

14

Ok, I was wrong. There have been some periods where debt was paid down. But has it ever been paid down completely without default or monetization?

I was thinking more of the current indebted Western countries. There has been no actual paying down of debt in three or four decades - and I cannot envision it happening again with the current deficit situation. Not to mention all the unfunded liabilities out there to boot.

Oh - and if you re-read my OP - you will see I noted the exception that if there ever was a surplus - then the debt could be paid down. Also, it is my contention, that if debt is paid down in the future - then it serves as, in effect, a tax refund to the private sector in the year of the pay down. But still a tax in the year it was borrowed.

For example: Gov’t runs a 1M dollar deficit in 2011. Borrows 1M from private sector in 2011. (Five year note) That is a -1M burden to the private sector in 2011. Money taken out of the private sector - same as taxes.

Then in 2016 - let’s say there is a surplus of 1M (based on no additional tax increases.) So the gov’t can pay back the private sector without new borrowings. Therefore, there is a +1M benefit to the private sector in 2016. A refund, of sorts.

But still in the above example - there was a 1M tax on the private sector in 2011. Which doesn’t defeat my belief that the deficit is an immediate tax on the private sector.

(Somewhat similar to the inflation tax and the current QE programs. Those programs are immediately inflationary and a tax on the economy this year. But if the FED actual let the bonds mature and retired the money - or simply sold the bonds to the private sector. Then - at that time - that would negate the inflation tax. But it still would have been an inflation tax in 2011.)

15

Let me try explain my contention another way:

The 14T debt.

Except for foreign borrowings - I am saying that that debt ceased to be a burden to the private sector as a whole once it was lent. The burden on the private sector was felt the year it was lent. It was removed from the private sector at that time. The net loss was suffered in that year only. Same as taxes.

Now, if it never gets paid back - via default - then there is no net loss to the private sector at that time. Yes, certain individuals will feel poorer. But the private sector as a whole will have no real loss at that time. The loss will have occurred in actual terms when the money was lent - not defaulted.

Now, if it gets paid down one day - then that would be a refund to the private sector as a whole at that time. But it still would have been a drain to the private sector at the time it was lent.

Hypothetically - let’s say the gov’t pays down 200B in debt in 2015. (5 year note) In 2015, there will be a +200B benefit to the private sector from whatever the tax burden is that year. But when the money was lent in 2010 - there was a subtraction (a tax) from the private sector of 200B.

That’s why I keep coming back to the realization that any govt borrowings (the deficit) in, in reality, a tax on the private sector at the time. Meaning - today there is an additional tax of 1.5T that the private sector is paying this year. It’s not a future tax. (Minus any foreign borrowings.)

16

@NCredible:

2011 Joe buys $1M gov bond → Gov buys $1M of asphalt to pave a road

OR

2011 Joe buys $1M corp bond → Corp buys $1M of asphalt to pave parking lots

Either, way, the public feels no burden from Joe’s choice in 2011. You are flat wrong.

Clayton -

17

One more example of “gov’t spending being the real tax.”

What is the tax burden on the private sector for the following two examples?

(Hypotheticals - and the borrowing is from the private sector - not foreign sourced or printed.)

2011:

Gov’t spending = 2.5T

Revenues (taxes) = 2.0T

Deficit (borrowing) = 500B

2016:

Gov’t spending = 2.0T

Revenue (taxes) = 2.5T

Deficit = 0

Debt paid down = 500B.

In example one, it’s my contention that the tax on the private sector is 2.5T. Not 2T. Because there was 2.5T removed from the private sector.

In example two, it’s my contention that the tax on the private sector is 2.0T. Not 2.5T. Even though the private sector paid 2.5T in taxes = only a net 2.0T was removed from the private sector since the 500B was returned that year.

So, the tax on the private sector is whatever amount the government spends. Not necessarily what they collect in taxes. That’s why gov’t spending is the real tax.

18

2011 Joe is taxed $1M → Gov buys $1M of asphalt to pave a road.

No difference there between taxing and borrowing the money. The net result is the same to the private sector in that year. 1M was taken from it for gov’t spending. That’s why gov’t spending is the real tax. Regardless of whether it was borrowed or taxed.

19

Nonsense! A bond is an asset and Joe receives that asset in return for his $1M. You really need to slow down and think about what I’m saying rather than just trying to repeat yourself in so many different ways.

2011: Joe buys $1M gov bond

Before:

Joe’s assets Gov Assets Gov Liabilities

$1M X Y

After:

Joe’s assets Gov Assets Gov Liabilities

$1M bond X + $1M Y + $1M

2011: Joe is taxed $1M

Before:

Joe’s assets Gov Assets Gov Liabilities

$1M X Y

After:

Joe’s assets Gov Assets Gov Liabilities

0 X + $1M Y

Note that in the second case where Joe is taxed, the government’s liabilities do not increase. That is how you know that bonds entail future taxation, that is, because they increase the government’s debt.

Clayton -

20

You are right for the wrong reasons. This is an important point which is why I refuse to allow you to make a bad argument in support of it. Coming to the right conclusion for the wrong reasons is actually worse, in my opinion, than coming to the wrong conclusion. If you come to the wrong conclusion, it might be an accident or maybe you can be brought around to review your premises but if you come to the right conclusion for the wrong reasons, you are just engaging in special pleading and it’s only by sheer chance that you happened to come to the right conclusion on this particular issue.

Clayton -