Over the past few weeks, there has been a lot of talk about states cutting spending. For example, in Wisconsin, there’s been a very public battle over labor union contracts while in New Jersey, the police force was cut in a city formerly referred to as the “murder capital of the U.S.” California has talked about cutting funding to schools while in Pennsylvania, health insurance is on the chopping block.
There’s no doubt that, in this economy, something has to give. You can’t cut spending and taxes – there is simply not enough room in the budget of most states. Which brings me to today’s Fix the Tax Code Friday question:
If I had to pick one, spending. But since well over half of government spending involves direct payments to individuals, spending cuts are going to be very difficult to implement.
Raise taxes.
I’m with Mike – I would cut spending. However, I do realize it’s easy to say that when you’re not the one who’s getting the government benefit that’s going to be cut. Still, if push comes to shove, I think cutting spending is more beneficial in the long term; because, for whatever reason, raising taxes really seems to only result in more programs and our spending still outruns our income, so it doesn’t really solve the problem. Cutting spending has the double benefit of lowing debt and deficits and also builds trust between taxpayers and the government (i.e. “we are capable of controlling our spending and, thus, trustworthy with your money”). Who knows – maybe if citizens perceived the government as less greedy, inefficient, and out of control–only collecting the money it needed to run legitimate programs for the public good–tax compliance rates would go up.
The solution at the federal level is to end income taxes, which would give state and local governments more flexibility to gather revenues.
“If we eliminate income tax, then where will the government get the money to fund its operations?”
First, throughout most of America’s history, we did not have income taxes. Second, general taxes have always been a blunt instrument for governments to get a return for what they provide their people. Third, most governments, especially ours, do not charge anything for providing their greatest benefit, economic stability.
Up until the 16th Amendment and Current Payment Tax Act of 1943, income tax was a small matter for Americans, most of whom didn’t pay up until then. Since WWII, income taxes have become pervasive and amazingly complex and unmanageable.
There is an alternative, based on the greatest value that America provides, economic stability. The world trades on our currency, and we receive practically nothing for it. The answer is to get a return for our money. How? By treating it like a loan.
Over the course of history, government provided economic stability by providing a trusted currency. First currencies were based on precious tokens, mostly metals such as silver and gold. That meant the government had to mine and mint trust. When that became impractical, they printed notes supported by gold or silver. Then they just promised to guaranty their paper’s value. Then they started borrowing. Much of our federal funding in the past 50 years has been through loans. The next step should seem obvious.
The government should begin issuing federal reserve notes that have a depreciation schedule, effectively a loan whose balance declines at a rate equal to the funding requirements of America. All issued currency becomes timestamped and is worth less with time. The Fresh Money is always worth a dollar, but it gradually becomes worthless, effectively returning to the Treasury.
This may seem like a huge step, but so was paper money. The huge benefit is that income taxes and all its complications are eliminated. More importantly, every time China pays Iran for oil in dollars, America gets paid. Every time Columbian drug lords hoard another million dollars, we gets paid. The world starts funding the Treasury. Now multinational corporations flock here to avoid the income tax effects on business decisions. The rich focus on investing money instead of avoiding taxes on it. The grey and black markets start contributing as much as any other business to the Treasury.
Fresh Money becomes easier to track, as it must be valued at each transaction. The Hidden Economy becomes visible. The trend from cash for debit/credit cards accelerates. Money may be harder to count but easier to earn and keep. It would be sea change for society, but it would be a small price to pay for eliminating the monster we now call income taxes. Business and individuals would grow to love it because it would be so predictable, completely unlike current tax law, which changes with every bit of case law.
Fair, predictable, perfectly proportioned, completely controllable, and far more efficient, Fresh Money solves a problem that is only getting worse. It may sound drastic, but most countries in as much debt wind-up devaluing their currencies involuntarily or have inflation destroy it. Better to command the change than be consumed by it. Just a thought.
Raise taxes.