The same goes for government spending. What came first, taxes or spending? Spending is the "chicken" of government, which you can't have without the "egg" of money, which means you have to tax first.
Government debt spending should also be considered, since it is a neat little Keynesian trick that excuses politicians from ever having to balance a budget. However, that is similar to a tax in that it creates an inflation "tax" on the people. It also creates a safe investment that crowds out other venture capital investing.
Which brings me to an interesting article over at Bloomberg:
President-elect Donald Trump’s race to enact the biggest tax cuts since the 1980s went under a caution flag Monday as Senate Majority Leader Mitch McConnell warned he considers current levels of U.S. debt “dangerous” and said he wants any tax overhaul to avoid adding to the deficit.It is hard to tell how serious McConnell is, because he is usually fairly spineless. However, I applaud his efforts if they are sincere. To use the original metaphor, our government has far too many chickens AND eggs. With the national debt closing in on $20 trillion, and federal tax revenue around $3 trillion, our government is far too big in both taxing and spending.
“I think this level of national debt is dangerous and unacceptable,” McConnell said, adding he hopes Congress doesn’t lose sight of that when it acts next year. “My preference on tax reform is that it be revenue neutral,” he said.
During a news conference, McConnell also poured cold water on the idea of a massive stimulus package, effectively laying out markers on taxes and spending that...could cramp Trump’s ambitions.
How big should the government be?
Except in times of extreme economic distress, the government should have a balanced budget. With constant overspending, the federal government is sucking all the investment capital out of the economy. Wealthy investors and companies will happily gorge on government bonds instead of having to make riskier investments with their money. If you want to know why there are no jobs being created, $20 trillion of investment capital languishing is the answer.
Unfortunately, getting politicians to live within their means is a sysiphean task. They WILL overspend.
Contrary to any practical arguments, there is no "minimum necessary expenditure". The amount government spends can be any number you like. For example, military spending could be just buy every American a rifle and be done with it, or we can buy nukes, planes, tanks, ships, etc. This isn't to judge which is the correct answer, because there is no one correct answer. We spend $600 billion, which is plenty. Is it enough? I think so, but others might not agree. Some might even say it's too much.
However, my point is you can limit the amount they overspend by cutting their tax revenue. Let's say the government overspends by about 20%: You give them $1, they will spend $1.20, which is close to accurate, as they spend about $3.9 trillion on about $3.3 trillion in revenue.
But since you cannot stop politicians from overspending, you can force them to cut spending by strangling their tax revenue. For example, if they spent $3.9 trillion with only $1 trillion in tax revenue, the American people would scream bloody murder. More importantly, the bond markets would also scream bloody murder, and cut their bond ratings, which would lead to the U.S. government having to pay higher rates, which would in turn lead to more spending just on debt interest. No politician ever got elected paying interest.
Returning to the McConnell-Trump debate, McConnell is right. if you want to increase spending, you have to increase taxes. If you want more chickens, you have to make more eggs first. On the other hand, if they cut taxes first, any further spending ideas will be dead on arrival. There is something to be said for Trump's tax cut idea, even if it runs counter to his full agenda. Cut back on the eggs, and eventually you get fewer chickens.
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