Economic Series Part 2: Government Budget: Taxation and Spending

The most dreaded time of year is when everyone must file their taxes. Taxes are certain like death. Taxes are a necessary evil. To many people it seems that our taxes do very little for our own interests. Taxes are supposed to help the people who pay them but rather they seem to help special interests or people who don’t pay them. The responsible party of handing our taxes is the government. The IRS is the collector, Congress is the spender. I believe that this Economic Series Part 2 is probably one of the more important topics. This part will be a sort of contextual background for the last part of this series on GDP. (Gross Domestic Product) I think its very important to understand how the government balances or fails to balance the budget. The topic I choose is quite broad. However, I want to focus on why taxes are collected and how they are spent. I also want to point out how the national debt is growing and what we might do to stop it.

My own view on government taxation and spending is very much libertarian. I believe the government should spend as little as possible. This way our taxes are not the burden they have become. Government spending tends to go to ineffective programs and usually becomes wasteful. I think the best way to understand the federal government budget is by understanding some of the history behind. The creation of our federal budget and tax system was mostly implemented by one man. Alexander Hamilton is the responsible person for most our budget system.  If you remember from history class there was a lot of rebellion and distrust among the citizens of our new country. Many of Hamilton’s critics thought he wanted to become a pawn of the British or king of America through a tight relationship with England. Luckily for us, Hamilton’s set up turned out to be brilliant, and was kept in place until now.

One of the first ways that Hamilton helped set up the federal budget was by creating an import and customs service. It was necessary because when Hamilton became the secretary of treasury, the US had a war debt due to the revolution. In order to pay this war debt off, Hamilton created what is now the Coast Guard. He also set up customs and import agents along the ports. These agents were to collect the duties on the imports to America. The duties or tariffs were basically a tax on imported goods. This was the main source of income for the federal government after the Revolution. Another piece of the system that Hamilton created was the banking system. Hamilton realized that the US need a national bank. In part because of the debt and in part because of the wide range of currencies that existed among the former colonies. The Bank of America (similar to the one we have now) was created. Congress wrote a charter for it and it opened up by selling shares. These shares is how the bank made its money. The controversy came when it lead a lot money speculating among men who wanted to risk an investment in the bank.

The Bank of America also set up a line of credit for the federal government. This is was necessary because in order to pay back the war debt the US would need to take out a loan. Hence this created what we call credit. Hamilton’s system was much criticized by Republicans like Thomas Jefferson and Aaron Burr. One of Hamilton’s primary supporters was actually George Washington. With increasing responsibility due to the growing population and turmoil in France, the US needed to increase its revenue. Hamilton proposed and got a whiskey tax passed. This whiskey tax would put a small tax on whiskey and liquor. This lead to the Whiskey Rebellion in western Pennsylvania. Hamilton himself lead a rather big militia to help quell this protest.

Hamilton’s role in the banking, budget and tax collection in the US is monumental. It is often forgotten that he nearly created the whole system by himself. An impressive feat. It wasn’t until the 16th amendment that make income tax a thing in the US. This was passed in 1913 long after Hamilton’s death. Woodrow Wilson brought us into the modern era of taxes with the 16th amendment and the Federal Reserve Act. The Federal Reverse Act created the Fed as its usually called. The Federal Reserve Act basically moderates the US dollar according to the economic conditions. It also prints and controls the US dollar. Unfortunately, the Federal Reserve is mostly privatized. You may have heard the phrase “Audit the Fed” from politicians like Rand and Ron Paul. The problem is essentially, the Fed is undermining the US dollar and devaluing it. The Fed has its own agenda and nobody except the Fed knows what that agenda is. (Another post, another day)

Now in 2016, after over 200 years running our government, we find ourselves in 19 trillion-dollar debt. What could have gone wrong since Hamilton? The answer is hard to pinpoint. However, my working theory is that after War World 2, during the cold war, we started to spend more and more on defense. Defense spending became out of control and the Department of Defense was not held accountable. The DoD was allowed to “cook the books” on their budget numbers. Some estimates that I’ve seen put our spending during the Cold War at 16 trillion dollars. I would encourage you to check the national debt clock that shows our debt in real-time. It breaks down the debt into categories. The national debt being so high is due to overzealous spending and lack of accountability in the government.

As for a breakdown in spending and what we spend our tax money on. I found a nice infographic that shows how we spend our federal budget. It focuses on how the debt is effected by certain factors like raising and lowering taxes. You should definitely check it out right now. It’s from the Congressional Budget Office, a government agency. I think that paying taxes is obviously important however, I believe that some of our tax dollars are wasted. One of things that needs to happen is for the federal government to cut spending. Unfortunately, we don’t hold our government accountable for the money that it spends. A good analogy is like when you take your parents credit card and go on shopping spree. Your parents may give you the credit card with a reasonable expectation of what you will be spending it on.  Instead though, you spend it without any kind regard for how much or on what. Imagine if your parents never held you accountable for spending all their money. They would probably go bankrupt in most cases because without restrictions, then what’s the point of spending less?

This is how the federal government and taxpayer relationship basically works. The federal government is you as teenager with a parent’s credit card. The taxpayers are the parents. As taxpayers we are pretty irresponsible parents. We don’t hold our government accountable for their actions in spending money. The tragedy is that the US is in big trouble because of reckless government spending. The 19 trillion-dollar deficit is almost an insurmountable sum of money. Rather than discussing who is to blame for the problem, I think its more productive to discuss how to remedy it. The blame can be distributed to many people and government agencies. The blame can be put on US foreign policy too. However, there is a relatively easy and pain-free way to help cut the deficit and still keep our standard of living intact without raising taxes sky-high.

There are two primary solutions that I feel would work to greatly reduce our debt. One of those is a simple cut in unecesary government programs and spending. One of our biggest expenses is the military budget as you can see below:2016-budget-chart-total-spending2

So just imagine if we pulled back most of military troops from abroad and cut most of the unecessary research and development budet. I would only cut about half of the military budget. At nearly 634 billion dollars, let’s cut it down to 300 billion. The 300 billion left for the military would go towards the salaries of personnel mostly and all the war material necessary. In the case of an attack on us or our allies, then obviously the money could be restored. So where would that 334 billion that I cut off go to?

Take a look at the pie chart again. 60 precent of our budget is spend on healthcare and social security. Social Security, by the way is going bankrupt. So let’s put 334 billion into both of those. Approximately 150 billion to each service. In addtion, lets cut off the foreign aid to other countries and add another 30 billion to the pot. So imagine over eight years during just one president for two terms, with approximately 165 billion dollars going to sinking welfare programs. So in 8 years, the US would put nearly 2.6 trillion dollars into those welfare programs. You could even take a step further, take about 2 billion or 3 billion out of the 364 billion and put that into higher education. You could pay off the loans of all students each year. Just think about all this, this is just cutting the military budget by half. Which by the way, is nearly 10 times as big as the next country’s military budget.

My other option, which I have written about before and have over time, really have come to like is Basic Income. You should definitely read my post on Basic Income. I will explain in short, that Basic Income is basically a replacement for welfare. You cut all social programs including medicare and medicaid. Cut minimum wage. Cut everything related to social security.  Instead you give everyone over the age of 18 a check from the government for a certain amount each month. Now just imagine if we did as I describe in my basic income post and we cut the military budget. I truly believe that the effect of both of these actions could lower taxes and help eliminate the deficit.

The taxation and government budget problems are ones of responsibility and accountability. This in part comes from the lack of education how the taxes and spending work within the government. I hope that my brief explanation can help clear up some of the confusion and misunderstanding about how taxes and government budgets work. I mentioned that this series post prefaces my next topic of Gross Domestic Product. Its important to note that GDP is calculated without the input and outputs of the government. The government spending money on military war material and other research does not count towards GDP. This is a very significant fact in that it strongly affects the GDP numbers. As you will find out in my next post that GDP only measures the input of labor and the output of production by the private sector.

I would encourage you to research more outside of my post. Its a very interesting topic. Thank you for reading! Have a great day!

 

Advertisements

One thought on “Economic Series Part 2: Government Budget: Taxation and Spending

  1. Pingback: Economic Series Part 3: What is Gross Domestic Product? – Garrett's Life Experience's Blog

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s