President Obama yesterday unveiled his proposal to extend the Bush-era tax cuts that were set to expire this year. Also the estate tax will be set at 35% and the social security tax will be temporarily lowered from 6.2% to 4.2%.
While it is always a good idea to reduce the amount of our own money coercively stolen from us by the government, it begs the obvious question of how this revenue shortfall will be made up. How is it that a country that spent $1.3 trillion dollars more than it received this year could possibly lower taxes billions of dollars without reducing its spending by a similar amount? There is almost no mention of this tiny detail in the media.
Unfortunately the unproductive segment of our society, i.e. government, will not be shrinking to pay for these tax cuts. The money will be borrowed, same as it always is. Additional bonds will be issued and sold. The Fed will make sure all those bonds are purchased. It will expand its quantitative easing program to buy them with newly created money if necessary.
Current bonds holders may tire of the immense debts the government is piling on top of old debts and sell their bonds. The Fed may have to monetize larger and larger amounts. The dollars created out of thin air to purchase the bonds will dilute the currency’s value causing prices to rise. This could snowball into a bond and dollar crash as everyone runs for the exits at once.
The answer is to instead cut government spending and cut it drastically.
The key to understanding how an economy creates jobs is to understand the difference between the private sector and the public sector. The private sector generates capital and consumer goods. Through competition and the system of free market profits and losses, it weeds out the inefficient and rewards the proficient. (This would be a non bail out free market, unlike the current system) Jobs are created and standard of livings are increased. The free market does this by letting people use their own money as they see fit on the goods and services of their choice.
The public sector by contrast stands outside the marketplace. All of its funds are taken from the private sector. The government is like a massive wealth transfer machine taking from one group to give to another group. It takes from the most productive of its citizens and gives to the least productive. Everything the government gets it steals from tax payers and worse of all the additional money borrowed must be paid back with interest by future generations of taxpayers.
By lowering taxes without also reducing spending, the government is simply passing the tax burden off to another year. The tax burden is still there. It is just disguised as debt. The way to actually reduce the tax burden is to reduce the level of government expenditures. The government must shrink in size and scope.