Two flaws in tax cut debate: Deficit reduction & trickle-down economics

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It takes only two things to keep people in chains:
The ignorance of the oppressed
and the treachery of their leaders.

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Cutting federal taxes is a good idea. Contrary to popular belief, federal taxes do not fund federal spending. Even if all federal tax collections were $0, the federal government could continue spending, forever.

The reason is that the federal government, unlike state and local governments, is Monetarily Sovereign. It is sovereign over its currency, the dollar. The federal government never can run short of dollars, which it creates, ad hoc, every time it pays a bill.

The sole effect of federal taxes is to reduce the economy’s money supply, a rather dubious accomplishment, since a growing economy requires a growing money supply.

That is why cutting taxes grows an economy. This brings us to the first flaw in the tax cut debate:

Debate Flaw #1. The desire to reduce or even eliminate federal deficits.

This clearly is the strangest idea since homeopathy. There is zero credible evidence that federal deficits are “unsustainable” (the favorite word of deficit attackers), and there is massive evidence that deficits are necessary to grow the economy.

For example: U.S. depressions tend to come on the heels of federal surpluses.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

There also is zero evidence that federal deficits lead to hyperinflations, which actually are caused not by “money printing, as so often is claimed, but rather by shortages of goods and/or services.

The U.S. never has had a hyperinflation, despite gigantic past deficits.

There even is zero evidence that deficits are a prime cause of inflations. Since America has gone off its most recent gold standard (1971), the prime cause of inflation has been oil prices, i.e. oil shortages.

The GOP’s various tax-cut plans are truly awful, and are nothing more than a “We-have-to-pass-something, – anything” bit of political desperation. So, there is enough to hate about the plans without resorting to false objections based on “excessive deficits.”

Debate Flaw #2. The notion that “trickle-down” economics benefits America. 

The so-called “trickle-down” economics hypothesis boils down to this “wrong-on-its-face” notion: If you give the rich more money, they will hire more people and give these people higher salaries. 

In the entire history of human existence, that never has been true. It is a con-job by the rich. They want you to have the pitiful hope that the rich will be kind to you, if only you make them richer.

The fact is: If you give the rich more money, they will have even greater power over you, and will use that power to provide you with the fewest jobs, at the least pay they can get away with.

If, as the GOP tax planners want, you cut taxes on business, those dollars will not go primarily to increases in payroll, but rather to shareholders and to executive bonuses. The last 10 years have proven that increased business profitability does not translate into increased payrolls.

Why do you think the stock market had been zooming in anticipation of the GOP tax bill passing?  Certainly not because businesses will increase pay scales.

If anything, businesses will use the dollars to automate, thereby reducing the number of good-paying jobs.

So rather than the proven-to-be-wrong trickle-down economics, how about the mathematically-certain-to-be-correct trickle-up economics?

How about giving the middle- and lower-income groups more financial support, which would allow them to buy more goods and services, thus benefitting the rich owners of business?

Why try to help businesses directly, if consumers don’t have enough money to buy from those businesses?  Doesn’t it make more sense to help consumers buy more, and allow that additional buying to trickle up to business owners?

The Ten Steps to Prosperity (below) does exactly that. The Steps are designed to put more money into consumers’ pockets, so that they can spend, spend, spend.

The most common measure of the economy is Gross Domestic Product (GDP), the formula for which is:

GDP = Federal Spending + Non-federal Spending + Net Imports

Notice the word, “Spending“? Increasing Federal Spending to support the poor and middle-income groups will increase Non-federal Spending — two of the three factors that move GDP.

Money is the way modern economies is measured. By definition, a large economy has a larger money supply than does a small economy. Therefore, a growing economy requires a growing supply of money. QED

The graph below shows the essentially parallel paths of GDP vs. perhaps the most comprehensive measure of the money supply, Domestic Non-Financial Debt:

One could argue that money begets production or that production begets money, and both would be correct. The point is that money supply (i.e. debt) and GDP go hand in hand.

Similarly, reduced debt growth results in reduced economic growth.

In summary:

The GOP tax “reform” plans focus on exactly the wrong goals: Deficit reduction and trickle-down economics.

The correct goals are: Deficit spending increases and trickle-up economics.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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The most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:
1. ELIMINATE FICA (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
This article addresses the questions:
*Does the economy benefit when the rich can afford better health care than can the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE A MONTHLY ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA (similar to Social Security for All) (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB (Economic Bonus)) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:

Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012

Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONE Five reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
5. SALARY FOR ATTENDING SCHOOL
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
6. ELIMINATE FEDERAL TAXES ON BUSINESS
Businesses are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the federal government (the later having no use for those dollars). Any tax on businesses reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all business taxes reduce your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and business taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.

MONETARY SOVEREIGNTY