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The measure of an economy is money. A large economy needs a larger supply of money than does a small economy. Therefore, a growing economy needs a growing supply of money. All money is a form of debt. Therefore, a growing economy requires a growing supply of debt. U. S. Federal Debt is the safest, most controllable form of debt. The federal government, alone among borrowers, never will default. Thus, there is no federal debt or deficit problem, and a balanced federal budget leads to a recession or a depression.
US National Debt
Why do you pay federal taxes? The reason is not what you may believe.
Taxes are not a solution to US National Debt

US national debt should remain a priority, because it cuts debt service and leaves the nation in better shape to deal with future unexpected economic challenges. . . The last thing President Bush should do is jerk the nation back into the dreary era of federal budgets scripted in red." Chicago Tribune Editorial, 2000

            You are about to learn something few people know or understand. You will find it counterintuitive. You even may resist it. You are about to learn the most important effect of taxation.
            Why does the federal government levy taxes? What would happen if the government did not levy taxes?
             If you ask most people why the government levies taxes, they will tell you, "To pay for goods, services, entitlements and as a solution to US national debt." If you ask most people what would happen if the federal government did not levy taxes, they would answer, "The federal budget deficit would grow and the government would go bankrupt." Are those your answers?
            Please see FREE MONEY for the correct answers.
Please click the cover to see excerpts from FREE MONEY. Questions? Ask the author, Rodger Malcolm Mitchell at:

Why Your Taxes Do Not Help The Federal Government Budget

            The belief that federal taxes pay for goods, services, entitlements and government solvency, is behind the powerful "eliminate-the-national-debt" attitude, both in Congress and in the populace. This belief, though widespread, is false. Any belief that is both widespread and false, represents a grave danger.
            Federal taxation does not pay for goods, services or entitlements. Federal taxation does not solve a Federal Government Budget "problem" (although as you will see in FREE MONEY, taxes can solve state and local governments' budget problems.)
            Federal taxation has no benefits for our economy, for our government or for us -- no beneficial purpose at all. This pervasive, intrusive, much-hated, easily-abolished activity is worthless. Worse than worthless, it is harmful.
            In year 2001, the government will spend $8.72 billion funding the IRS. This does not include the many billions that business and individuals spend on preparing and filing tax records. The wasted government spending benefits the economy, but the wasted business hours are a loss.
            The federal government creates money when it sells Treasury bonds, notes and bills, and prints currency. Corporations create money when they sell bonds to creditors. You create money when you take out a mortgage and when you deposit money into bank and money market accounts.  How is money destroyed? Who does it?

The US National Debt is Federal Money.  Taxation Destroys Money

           Assume you are the only person in America. You, the American economy, have $10 thousand in your bank checking account. You decide to use it all to buy T-bonds. What happens?
           You send a $10 thousand check to the government, and the government credits you with a T-bond. Have you lost money? No, you still have $10 thousand, only now it is in the form of a T-bond rather than in the form of a check book balance. Your bank no longer owes you the money in your checking account. Now the government owes you the money in your T-bond. You have traded one debt for another.
           When the government receives your money, it immediately sends your $10 thousand back into the economy, to pay for goods and services. The economy that formerly had $10 thousand, now has $20 thousand. By selling treasury securities (a.k.a "borrowing"), the government has increased the amount of money in the economy, which stimulates the economy.
            What happens when you pay taxes? This time, assume your tax bill is $10 thousand. You send $10 thousand to the government. You become $10 thousand poorer, since you received nothing in return.
            The government uses your money to pay the interest and principal on $10 thousand worth of US national debt, destroying the debt. When you pay $10 thousand in taxes, the amount of money in our economy is reduced by $10 thousand.
            The sole effect of federal taxes is to destroy federal debt (money), and/or to prevent the creation of federal debt (money). In either case, the economic growth is inhibited.
            (Taxing also can have a social purpose. Taxes on liquor and cigarettes are attempts to limit their use. The social purpose is irrelevant to this discussion, though the taxes themselves do hurt our economy.)
            When taxes pay for goods and services, the taxes substitute for the creation of the money that otherwise would have been needed to pay for those same goods and services.

            The sole effect of federal taxes is to destroy federal debt (money), and/or to prevent the creation of federal debt (money).
            In general, does a large business need more money than a small business? The answer is obvious. McDonald's must have more money to operate than does the corner tavern.
            Does a large economy require more money than a small economy? Again the answer is clear. The economy of the United States of America must have much more money to operate than does the economy of California, which in turn, must have more money than the economy of Peoria.
            Large economies must have more money to operate than do small economies, which means a growing economy must have a growing supply of money.
            Large economies must have more money to operate than do small economies, which means a growing economy must have a growing supply of money.
            Some may argue that while a growing economy requires the real supply of money to grow, this doesn't prove that a growing real supply of money causes the economy to grow.
            Increasing  national debt won't always cause immediate growth. Depending on circumstances, a money infusion only may inhibit a decline or collapse. For that situation, a greater infusion of national debt is needed.
            By the latter part of 2007, the U.S. economy clearly was in trouble. GDP growth was minimal, bankruptcies and home foreclosures had increased alarmingly. The Fed's repeated interest rate decreases had accomplished nothing (as I repeatedly predicted they would).
            Inflation, fueled by the Fed's rate cuts, was beginning to grow (again as I predicted it would).
            The politicians and the media proposed many reasons were given for the slump. The Iraq war. High oil prices. Oil speculation. The housing "bubble," which lead to "walk-away" mortgages. Improper mortgage lending, which led to the housing "bubble." Falling car sales. Global warming.
            None of these caused the economic problems, because they were not causes; they were excuses for the Fed's and the Bush administration's inept handling of our economy. Unfortunately, the politicians and the media bought into this finger-pointing, rather than seeking the real cause. And without the real cause, there could be no solution.
            The real cause of the impending stagflation was money, or rather, the lack of it. A growing economy requires a growing supply of money, and our money supply was not growing fast enough on a per-capita basis to overcome inflation and a negative balance of payments. Our economy was starved for money.
Please click the cover to see excerpts from FREE MONEY. Questions? Ask the author, Rodger Malcolm Mitchell at:
            Growth in the money supply must at least compensate for inflationary loss of value. Inflation of 3% requires the money supply to grow at least 3% for the total value of domestic money to remain level. If the population grows 1%, the money supply must grow an additional 1% for the per-capita money supply to remain level. Further, a negative balance of trade, amounting to 1% of the money supply, requires an additional 1% growth in money supply.
            Historically, GDP long term growth has paralleled long term, money supply growth. So long-term GDP growth of 3% requires long-term money supply, per-capita growth of about 3%. In the above example, attaining a 3% GDP growth would require 1.03 (desired growth) x 1.03 (inflation) x 1.01 (population) x 1.01 (balance of trade) = 8% growth needed in the money supply.
            Early in 2008, apparantly realizing the economy was starved for money, Congress instructe the Treasury to send $150 billion to taxpayers, as a stimulus. I predicted this would help, but that it was too little and too late. Based on the size of our economy, inflation, population growth and a negative balance of payments, I suggested that between $500 billion and $1 trillion would be required.
            As this is written (July 2008), there are slight signs of recovery, and Congress is debating further stimuli. One can only hope Congress forgets its irrational fear of federal deficits, which never in our history have caused any negative economic repercussions, and immediately provides the money our economy so urgently needs.
            Congress can do this either by sending more checks as stimuli, or it can cut taxes. Either approach would have the same effect: adding money to the economy. Because federal tax reduces the amount of federal debt, federal tax is the worst money-destroy in our economy and is the primary cause of all recessions.
            Because federal tax reduces the amount of federal debt, federal tax is the worst money-destroyer in our economy and is the primary cause of all recessions and depressions.
            Federal tax can, and should, be reduced and eventually eliminated. FREE MONEY suggests beginning with the elimination of the FICA tax, as this immediately would stimulate consumers and businesses.
            Objections to tax elimination abound. "Servicing debt uses up money that other wise could be used for useful projects." "Our children and grandchildren will have to pay for the debt." "Taxes and interest rates will have to be raised." "The government would go bankrupt without taxes."
            These objections are stated as fact, though no facts exist to support any of them. In the past 30 years, our federal debt has risen an astounding 900%, surely enough to reveal any negative consequences. Yet servicing this debt has not used up any money; it has created money. Our children and grandchildren are not paying the debt; taxes actually have been reduced.
            Interest rates have not gone up; they have gone down, per the Fed's instructions. And the federal government is nowhere near bankruptcy.
            If a 900% debt increase, in only 30 years, has not caused the sky to fall, the thinking person must conclude fears of debt growth are groundless, fears based not on fact but on intuition.
The Interest Rate Fallacy | Social Security Solutions | Medicare Solutions | Economic Solutions | Recession | Federal Debt of the U.S. | Federal Budget Deficit | Stagflation | National Debt Letters | Federal Deficit Solution | Balanced Federal Budget | Federal Deficit Problem | Federal Government Budget | US National Debt | National Debt Solution | A Child In Arms | Glossary of Economic Terms Debt, Money, Deficit, Spend, Owe | US National Debt Clock | Inflation and Stagflation | Pseudoeconomics   | Money supply and the weather | Do low interest rates help? | The solution to Federal Taxes | The Relationship Between Gold and Money | Why Do You Pay Taxes? | Social Security Reform | Does Federal Debt Cause Inflation? | The 5 Myths That Damage Our Economy | 10 Reasons to Eliminate FICA | GETROYS | Rodger M. Mitchell -- Ideas |