In the previous post of the series, Federal Deficits, National Debt, and Taxes, we found out this important fact:
The federal government has an unlimited amount of money at its disposal.
To further illustrate this concept think about the very first days of government. Has the government collected any revenue for it to pay its members, rent buildings, pay for food, etc.? No. Yet it still can run its business by issuing IOUs. And it can issue as many IOUs as it wants.
Thus, the next question is if the federal government has as much money as they want then why do they tax people?
Warren Mosler of the Center of the Universe blog points out in his paper, The Natural Rate of Interest is Zero, some of the reasons that we pay taxes which include:
- A tax liability payable in its own currency creates a demand for the state monopoly of currency.
- As the private sector is taxed, the private sector spending power is reduced causing prices to fall, which makes it cheaper for the federal government to purchase things.
In order for the government to demand people pay taxes, it first has to spend money into existence otherwise the people don’t have any state owned money to pay taxes with. As Mosler points out spending logically precedes tax collection.
As is predicted and taught to us by Milton Friedman inflation is purely a monetary phenomenon. An increase in the supply of money and credit will cause eventual price inflation. Mosler explains another reason for taxes this way, “They tax us to take away some of our spending power, so their spending, combined with our spending, doesn’t cause inflation.”
So far we’ve found out:
- The federal government has an unlimited amount of money at its disposal.
- Taxes are collected to keep inflation in check and to ensure the state monopoly on currency.
When you understand at least these two basic points, you then begin to understand why the Federal Reserve and the income tax were both created in the same year, 1913. The two must work side by side to balance the economy.
In the next part we’ll discuss more about what all this means politically in our society. Hopefully we’ll fully appreciate if our politicians really understand fiscal and monetary policy.
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The federal government has an unlimited amount of money at its disposal.
To further illustrate this concept think about the very first days of government. Has the government collected any revenue for it to pay its members, rent buildings, pay for food, etc.? No. Yet it still can run its business by issuing IOUs. And it can issue as many IOUs as it wants.
Thus, the next question is if the federal government has as much money as they want then why do they tax people?
Warren Mosler of the Center of the Universe blog points out in his paper, The Natural Rate of Interest is Zero, some of the reasons that we pay taxes which include:
- A tax liability payable in its own currency creates a demand for the state monopoly of currency.
- As the private sector is taxed, the private sector spending power is reduced causing prices to fall, which makes it cheaper for the federal government to purchase things.
In order for the government to demand people pay taxes, it first has to spend money into existence otherwise the people don’t have any state owned money to pay taxes with. As Mosler points out spending logically precedes tax collection.
As is predicted and taught to us by Milton Friedman inflation is purely a monetary phenomenon. An increase in the supply of money and credit will cause eventual price inflation. Mosler explains another reason for taxes this way, “They tax us to take away some of our spending power, so their spending, combined with our spending, doesn’t cause inflation.”
So far we’ve found out:
- Taxes are collected to keep inflation in check and to ensure the state monopoly on currency.
When you understand at least these two basic points, you then begin to understand why the Federal Reserve and the income tax were both created in the same year, 1913. The two must work side by side to balance the economy.
In the next part we’ll discuss more about what all this means politically in our society. Hopefully we’ll fully appreciate if our politicians really understand fiscal and monetary policy.
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When you get this all done, why don't you think about posting it on the "Think Tank" so that people can refer back to it from time to time?
Posted by: Laura Ebke | 09/07/2009 at 09:02 PM
Will do.
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Posted by: Triple Hash | 09/07/2009 at 10:31 PM
"- Taxes are collected to keep inflation in check and to ensure the state monopoly on currency. When you understand at least these two basic points, you then begin to understand why the Federal Reserve and the income tax were both created in the same year, 1913. The two must work side by side to balance the economy"
It seems that this patawan was correct when he wrote:
["The federal government has an unlimited amount of money at its disposal." Technically, yes. Practically, no. Unless it has an infinite number of vehicles in which to absorb it so that it never causes hyperinflation.]
Unlimited, or infinite, amounts of money lent into existence would require unlimited, or infinite, vehicles designed to absorb it back in or there would be a very finite end to the economical system we now enjoy as we spiraled into hyperinflationary chaos.
The student has become the master.
Posted by: Brutus | 09/08/2009 at 08:16 AM
Great series of posts. Perfect for the think tank. I look forward to the next installment.
Posted by: Brutus | 09/08/2009 at 08:18 AM
Hmmm...Master you are. The code you have deciphered. To convince others is what you seek in how to impress freedom....Hmmm.
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Posted by: Triple Hash | 09/08/2009 at 06:43 PM