Re: Tax or Borrow?
- From: "Phil Scott" <philscott@xxxxxxxxxxxxx>
- Date: Sat, 15 Oct 2005 13:11:03 -0700
..
another bogus argument from Hummel, who is assuming that tax
money or money printed by govt goes to create durable goods ..
thus value...and is not for the most part wasted with the only
result more crap and toilet paper down the government office
building toilets...creating most cases no value what so
ever...just waste. AND counter productivity due to the
stress on the working culture it takes to earn and caugh up
the taxes.
Hummel ignores the fact of the US shipping its treasure off to
china in order to pay for imported trinkets...and going into
debt to do so, requiring interest payments to these other
nations.
All of that is a pure recipe for disaster and is commonly
repeated in history. The US at this point is already steeply
down that slippery slope. Rhetoric wont change that...
cutting the size of government by 70% or more would however.
Not to worry though...US govt will be reduced by 70% or more
by the time this mess is over...no taxes due to a collapsed
economy...no way to fund goverment no matter how many train
loads of bogus money it prints.
Phil Scott
Phil Scott
"William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message
news:l262l15b9levp2onghr7nmhe9likf60bo1@xxxxxxxxxx
> Tax or Borrow?
>
> Suppose the government planned a one-year program to repair
> the
> crumbling highway system at a cost of $100 billion. If the
> Treasury
> borrowed the funds directly from the Fed, that would be
> equivalent to
> printing money, with inflationary implications. The only
> truly viable
> options are taxing or borrowing from the public at market
> rates. .
>
> Implementing the Options
>
> The simplest taxing option would be a one-time surcharge on
> everyone's
> tax bill. Based on current tax revenues which total about
> $2000
> billion, that would amount to a 5% surcharge for one year.
>
> The borrowing option would involve the sale of $100 billion
> in
> Treasury bonds to the public at an interest rate determined
> in the
> market, which we will assume averages 5%. With an otherwise
> balanced
> budget, and assuming no increase in tax revenues, additional
> borrowing
> would be required to cover the interest payments. In that
> unlikely
> case the amount borrowed and interest paid would increase at
> an annual
> rate of 5%.
>
> The Common Elements
>
> In both options, the government creates a circulation of
> financial
> assets with the public which enables work that would not
> normally be
> initiated by private enterprise. The government receives
> $100 billion
> from the public. In return the public receives the benefits
> of the
> highway repair, and those doing the work receive income of
> $100
> billion paid by the government. The taxes due on that
> income will
> cover a portion of the interest payments due to the bond
> holders in
> the borrowing option.
>
> Other things equal, the entire $100 billion is paid out as
> fast as it
> is collected, because the Treasury does not maintain
> balances in
> excess of what it needs to cover its near-term obligations.
> Regardless of how it is funded, the program will result in
> some
> redistribution of financial assets. However it is important
> to note
> that all government spending redistributes financial assets
> within the
> private sector.
>
> The Differences
>
> In the taxing option, the government extracts the funds in
> proportion
> to one's normal tax liabilities. That means most of the
> cost will be
> covered by those in the higher taxable income group.
>
> In the borrowing option the government obtains the funds on
> a
> voluntary basis, according to the investment preferences of
> the
> public. Again most of the funds come from those with higher
> taxable
> incomes because they normally have more loanable funds.
>
> The evidence of a tax payment is a cancelled check. The
> evidence of a
> loan is a cancelled check plus an interest-bearing Treasury
> security.
> The latter can be sold, traded, or pledged as collateral for
> a loan,
> and thus has value that the cancelled check does not.
>
> Financial Equivalence of Both Options
>
> Measured in terms of present value, both options are
> equivalent in
> cost to the public as a whole. In the taxing option, the
> present
> value of the money paid up front is obviously $100 billion.
> In the
> borrowing option, the present value of the future tax
> required to
> retire the debt is also $100 billion. To understand why
> that is so,
> consider the following scenario:.
>
> With no tax to pay up front, the public could invest the
> $100 billion
> in a sinking fund returning 5% per year, the assumed yield
> on the
> Treasury bonds. At some future date, if the government
> chose to pay
> off that debt, it could levy a one-time tax surcharge, which
> the
> sinking fund would fully cover. Thus the $100 billion paid
> for the
> sinking fund is equivalent to having paid that amount in
> taxes up
> front. Note: the present value does not depend on whether
> or not the
> $100 billion was actually invested.
>
> Effects on Wealth Distribution
>
> The taxing option involves no net loss of financial wealth
> to the
> private sector. In effect the government merely transfers
> $100
> billion from those who pay the additional taxes to those who
> receive
> the income for doing the work. While the two groups are not
> mutually
> exclusive, the transfer is mainly from higher income to
> lower income
> earners simply because the former pay the bulk of the taxes
> and the
> latter do most of the work.
>
> The borrowing option increases the financial wealth of the
> private
> sector. The funds used to purchase the $100 billion in
> bonds are
> returned as payments for the work, and the bonds represent
> new
> savings. The interest payment of $5 billion on the bonds is
> drawn
> mainly from the higher taxable income group who are also
> more likely
> to own the bonds.
>
> In reality, only a small fraction of the bonds are bought by
> individuals. Most are bought by institutions such as state
> and local
> governments, banks, insurance companies, and pension funds,
> which are
> in turn owned by individuals. It is therefore impossible to
> determine
> quantitatively the redistribution at the household level of
> financial
> wealth in the borrowing option.
>
> A More Likely Scenario
>
> The two options considered above are opposite extremes for
> financing
> the $100 billion program. Some combination of the two is a
> more
> likely scenario in a growing economy. The $5 billion
> interest cost in
> the borrowing option would require an increase of only 0.25%
> in total
> tax revenues. That is well below the growth rate in total
> tax
> revenues which normally averages about 5% per year. Thus
> the funds
> needed to pay the interest in the borrowing option would
> likely be
> available without additional borrowing.
>
> There is one clear argument in favor of borrowing for the
> highway
> repair program. The real benefits can be expected to last
> several
> decades. To the extent that there are any financial
> inequities, it
> would be fair to leave some of the costs to later
> generations who will
> also enjoy the real benefits.
>
> William F Hummel
.
- References:
- Tax or Borrow?
- From: William F Hummel
- Tax or Borrow?
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