News on Taxes
by Gary North: Baloney
To cheer your
day maybe your year click
through to this chart on tax revenues.
The U.S. Government
has hit a tax revenue ceiling. It is in the range of 16% of GDP.
is spending about 24% of GDP, which is down slightly from 2009,
which was the all-time high since 1945.
There is gridlock
in the negotiations over the increase in the debt ceiling. The House
Republican majority seems unwilling to vote for any increase in
the ceiling that includes tax hikes. The Democrats vow that they
will not accept spending cuts without getting tax hikes on the rich.
Bernanke warn of a disaster if the government has to stop making
interest payments to the non-Trust Fund holders of Treasury debt.
and Medicare are both running deficits, and these deficits will
get worse if the government ceases to make interest payments on
the debt held in their Trust Funds. So, temporary default is no
escape hatch here. The payment of interest is merely an accounting
device. The payments from the general fund must continue, whether
they are called interest or not, if the two programs are not to
be modified to send out less money or else have their respective
taxes raised, effective immediately.
The Obama Administration
can ignore the debt ceiling and keep borrowing on its own authority,
forcing House Republicans to do something about it. But there would
be political consequences for such a decision. If the President
does this, Republicans will cry "foul," and take their case to the
voters in 2012. The government will not shut down any departments,
so the Republicans will not get blamed for the political pain caused
by such a shutdown. Meanwhile, they can target Obama as a man who
violated what is perceived to be the law.
could invoke the 14th Amendment of the Constitution, which forbids
any questioning of the debt of the U.S. government. The amendment
reads: "4. The validity of the public debt of the United States,
authorized by law, including debts incurred for payment of pensions
and bounties for services in suppressing insurrection or rebellion,
shall not be questioned." Which are the key words: "validity of
the public debt" or "authorized by law"? Then there is section 5:
"The Congress shall have power to enforce, by appropriate legislation,
the provisions of this article." But Congress is in gridlock; it
cannot pass such enabling legislation. It therefore cannot authorize
the President's action to keep making payments. Some
Democrats are threatening this action.
So, we may
be heading into a Constitutional crisis to match the fiscal crisis.
That will surely make the election of 2012 even more interesting.
If the Republicans
buckle on the issue of not raising taxes in order to get a settlement
with Obama, then they will be seen by the swing voters Tea
Party members as betrayers. The anger of the Tea Party is
obvious to Republicans in Congress. These voters will not compromise
on taxes. Some of them, especially older ones who are more likely
to vote in 2012, are willing to see Republicans raise the debt ceiling
in order to keep Medicare and Social Security sending out checks.
So, I see the Republicans as more willing to buckle on the debt
ceiling than buckle on their resistance to higher taxes. The negative
sanctions would be less severe for any capitulation on the debt
ceiling in what will be perceived to be an emergency.
want to tax the rich. This has been true ever since 1933. This will
not change. But they are unlikely to get the House to accept this.
So, they will be willing to put on hold their demands for higher
taxes on the rich. They want to be able to go to their constituents
with this message: "We held the line against the Republicans, who
were ready to stop checks going out to old people." The House Republicans
are deathly afraid of being uncaring for the needs of old people.
The fear of
negative political sanctions is the greatest fear of politicians.
Members of the House want to avoid the systematic, well-organized
wrath of any voting bloc in their districts that may have the swing
votes in the next election. This is surely the oldsters.
The Tea Party
is an "unknown quantity." It seems to be growing. To the extent
that run-of-the-mill voters are tired of taxes, a hue and cry over
tax increases offers a threat to the re-election of incumbents.
This is why I think that Republicans will take a stronger stand
against raising taxes than raising the debt ceiling.
This is very
good news for taxpayers.
in the debt ceiling will send a message to Tea Party voters: this
government is out of control on spending. Most voters are becoming
vaguely aware that something very big and very bad is on the horizon,
but they are not sure exactly what.
Most Tea Party
voters are not direct owners of Treasury debt. They do not perceive
the degree to which they are indirect owners: pension funds, money
market funds, local bank holdings. They will not resist an increase
in the debt ceiling with the same ferocity that they will resist
an increase in Federal taxes.
FULL FAITH IN FULL FAITH & CREDIT
in the debt ceiling is good short-term news for holders of Treasury
debt. There will be no default on the debt. But, in the long run,
it is bad news for holders of Treasury debt. If the government can
dodge the bullet this year on the debt ceiling, this will lead to
a decade of huge annual deficits and an ever-greater Federal debt.
in the debt ceiling will send the same negative message to holders
of Treasury debt. But these people are overwhelmingly optimistic
about the short-term future of U.S. government solvency. They do
not care about the long term, because they believe that they can
always sell their T-debt positions to willing buyers. They have
faith that their personal optimism regarding Federal solvency will
be widely held when they decide it's time to sell and buy some other
asset. They think that they can become pessimistic ahead of the
masses of holders of T-debt. They think they will be smarter and
swifter than the market for T-debt. They think they are very smart
they think they will be as agile as PIMCO, which has sold Treasury
bonds. They assume that liquidity at today's low interest rates
will prevail. They do not fear the consequences of rising long-term
bond rates on the market value of the bonds they hold. They believe
that there will always be a ready market for their holdings at today's
market prices or close to them. They define Treasury debt as AAA.
This has been true for so long that they cannot imagine that there
will ever be a default.
faith in Treasury debt, despite the frightening balance sheet of
the U.S. government and the equally frightening balance sheet of
the Federal Reserve System, is remarkable. It is widespread. It
is the basis of the retirement plans of millions of Americans. It
is the basis of the solvency of banks and money market funds.
with this optimism is that it undermines any resistance by voters
to a meaningful solution to the deficit, which must begin with massive
spending cuts. The voters think that there will always be a market
for Treasury debt, irrespective of deficits.
In this sense
they are like Democrats and their ideological allies, who say that
the debt ceiling may be ignored by the President because of the
14th Amendment. Democrats think that an 1868 amendment is the meaningful
reality. They think the free market may safely be ignored. After
all, investors have always bought Treasury debt. This will not change,
they believe, just so long as the President decides to ignore the
debt ceiling. They believe in their hearts that, because it is Constitutionally
illegal to undermine the solvency of the Federal government, free
market forces will not create interest rate conditions that will
undermine the full faith and credit of the United States government.
The same is
true of investors in euro-denominated assets. Until 2010, it was
true of the highly sophisticated investors who bought Greek government
debt. They believed the cooked books of the Greek government. Today,
the books are far less cooked, but there is still a market for Greek
debt, although at high rates.
experts were dead wrong in 2009. They did not see the Greek debt
crisis coming, any more than they saw the financial crisis of 2008
coming. They see themselves as ever so clever, and then they lose
hundreds of billions of dollars. Then they call on governments to
bail them out, which (so far) governments have done.
may not like this, but the voters have proven unable to stop their
representatives from running up the national bills in the name of
the voters. There is no real understanding of the nature of the
exponential increase in government debt since 2007. They think someone
is minding the store. Someone is: the biggest banks and their dutiful
representatives, the politicians.
RELIEF, NOT DEBT RELIEF
not going to experience any increase in their tax burden this year
or next year. The Democrats would have to gain a clean sweep of
Congress and the White House in 2012 for taxes to be raised. If
the Bush rates are allowed to lapse, we have until 2013 to escape
case for government deficits has never changed: the ability of politicians
to increase spending without facing outraged voters at the next
election. Taxes are understood. The pain they impose is understood.
The goal of politicians is to conceal this pain, preferably by deferring
it. They have done so by the following techniques.
Taxing a minority of voters
2. Imposing hidden taxes, including inflation
3. Making payment less painful (e.g., withholding)
It is obvious
that #4 is the prevailing strategy for politicians all over the
West. The central bank of China has made this the path of least
resistance. The politicians of China, mercantilists economically
and Communists politically, have chosen to tell the People's Bank
of China to inflate the yuan, buy Western currencies, and then buy
government debt. This keeps the price of the yuan low, which subsidizes
exports from China. The residents of China buy fewer China-produced
goods. The central bank buys IOUs from governments that can never
repay, in order to subsidize the owners of export industries. The
losers are Chinese citizens, who subsidize Western buyers.
is this: addiction. The Communist politicians are addicted to a
domestic boom funded by monetary inflation. The Chinese exporters
are addicted to Western consumers. Western consumers are addicted
to low-cost goods from China. Western politicians are addicted to
Chinese central bank purchases of Western government IOUs.
This is all
proclaimed by Keynesian economists as sustainable economic growth.
Keynes was the great apostle of government debt as a way to increase
government spending to stimulate economic growth. The modern economy
is a testimony to Keynes' commitment to government debt. For as
long as there is no mass price inflation, no depression, and no
government defaults, most voters are content. Economists can continue
to draw their salaries in tax-funded and government-accredited universities.
They can continue to receive grants from the Federal Reserve, which
is the nation's licensed counterfeiter. All seems safe and sound.
But this illusion
of safety is being challenged by the threat of default by governments.
This is an immediate threat in Europe. It would be an immediate
threat in the United States if the debate over the debt ceiling
reflected unyielding intransigence by House Republicans.
is more likely than debt relief. The game of "defer the pain" will
go on. The politicians will continue to do what they have done for
centuries. They will evade the fiscal requirement of raising taxes
and then actually collecting them.
They have run
out of two alternatives. They cannot make taxes easier to pay (#3).
But they can impose the hidden tax of monetary inflation, which
redistributes wealth toward those citizens who get early access
to newly created central bank money (#2). In the United States,
they are not able to collect taxes from the rich (#1). The rich
will find ways to evade paying new taxes. This leaves #4: borrowing.
So, #2 and #4 are the paths of least resistance.
This is why
I think there will be tax relief, in the sense of no increases of
tax pain. This will be paid for, as it has for centuries, by an
increase in government debt.
This will defer
the crisis. That is the #1 function of government debt. It always
has been. This is why debt crises hit all nations.
is, they do not hit very often. The voters are not alert to the
negative implications of the policies of massive government debt.
The most effective
way to eliminate government debt is to lose a major war. The central
bank inflates during the war, so all pre-war debts are wiped out.
Rising prices are blamed on the war, meaning the bad guys in the
other side's trenches. The loser of the war then defaults. (The
only exception, most of the time: Japan.) The citizens on the winning
side are now saddled with massive debt. The losers escape.
don't mention this in the textbooks that are written for citizens
in the winning nations. Historians in the losing side also don't
mention it. They know there will be economic recovery. This will
create lots of new opportunities to fund new wars that will be funded
by massive debt.
of war are strengthened by central banking. This is why textbooks
praise the Bank of England. It let the British fight longer wars
and more destructive wars. The message: get a central bank for your
nation, so that your politicians can declare war more readily and
stay in that war far longer.
voters have believed this since about 1900. The result: the worst
years in history and the worst inflations.
be no tax increases in the USA before 2014. There will be great
increases in Federal debt.
We see that
the governments of the West are incapable of reducing massive deficits.
There is no significant political resistance to the vast expansion
of debt. We are in the final stage of the politicians' addiction
to debt. On behalf of future generations, they are buying votes
by buying time.
generations will elect new politicians who will stiff the trusting,
naive holders of government debt. There will be a Great Default.
There is no escape. There is no way to grow our way out of this.
be winners and losers. In the transition phase, there will be more
losers than winners. But, once the deck has been cleared of unsustainable
promises issued by generations of lying politicians, there will
be a recovery.
if you accept it, is to be a winner and then participate in that
recovery (if you are young), or at least survive the transition
period if you are older.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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