So the national debt has never been higher and this year’s federal budget deficit may be a record-breaker too. Washington has just formally taken on a bunch of debt with the housing bailouts, and Congress is thinking of giving away money to everyone in the form of another stimulus package. The economy is in the receiving end of the outhouse, which means that tax receipts will be low this year (fewer capital gains in the income-tax paying classes, lower corporate profits, more people unemployed). Meanwhile, both frontrunner presidential candidates are promising to cut taxes and increase the size of the military and give everybody a pony.
All of which might make you wonder whether in fact there are any sorts of reality-based restraints on federal spending at all. If the government can just spend as much as it wants without bothering to come up with any reasonable claim to be raising the money it’s spending, why does it bother to go through the farce of raising money at all?
Jeffrey Tucker at the Mises Institute tries to get to the bottom of this in his article “Why Taxes Don’t Matter Much Anymore”. Excerpt:
Why is it that talk of tax policy doesn’t seem to have a relationship to policy generally? Whether it’s a bailout of subprime mortgage holders, large investment banks, or going to war, whether or not the resources exist to do these wonders rarely enters into the equation. Why is it that tax cuts don’t curb the government? And why do politicians not feel the need to tax us more when they spend more?
You might at first say that the answer is simple: they just go into debt by running an annual deficit. And the debt today stands at some figure that has no real meaning, because it is too high for us to even contemplate. What does it really mean that the debt is $5 trillion or $10 trillion? It might as well be an infinite amount for all we know. At least that’s how the political class acts.
Reference to the debt only begs the question. You and I have to pay our debts. We cannot run up an infinite amount of it without getting into trouble and losing our creditworthiness. In the private sector, debt instruments are valued according to the prospect that the debts will be paid. The likelihood that it will be covered is reflected in the default premium. But the debt of the U.S. government doesn’t work that way. The bonds of the U.S. Treasury are the most secure investment there is. It is valued as if it will be paid no matter what.
If not through taxes, and if not through infinite debt, how is it that the U.S. government gets the money it wants regardless of other constraints?
Tucker suggests that the government, via the Fed, is essentially just powering up the printing presses — or, at least, implicitly keeping this option in reserve. Should push come to shove, the government will pay its debt by devaluing it (and everyone else’s dollars) to a manageable level. Or something like that. I dunno. When I hear libertarian types go on about the gold standard and the Fed and sound money and so forth my eyes glaze over and I get the same sort of feeling I get when I hear Kennedy assassination conspiracy theorists — maybe they’re right, but they sound a little batty, and I’ve got other things to do than educate myself enough about the issue to evaluate the arguments intelligently.
But whatever is the mechanism that makes these shenanigans possible, the fact that government growth and activity doesn’t seem to be at all restrained by government income poses the same challenge to (some varieties of) tax resisters that it has to advocates of the “starve the beast” theory of small-government. If you’re a tax resister because you hope that if enough people resisted their taxes, the government might be unable to do some of the nefarious things it does, or that the government might reform in some way in the hopes of winning back some of the revenue its lost to disgruntled ex-taxpayers, you may be fooling yourself.
