What Taxes Are Necessary?
By Staff News & Analysis - April 12, 2010

With the April 15 filing deadline in view, American taxpayers may be surprised to find that their tax burden is less than those in most industrialized countries. But can that last? … As millions of Americans file their tax returns this month, they can find some solace in comparing US tax rates with those in other nations. Or can they? The United States still has a lower overall tax burden than the typical advanced economy in Europe. But the gap isn't as big as you might think, and it may be poised to shrink as the pace of federal spending ticks upward. Here's a look at how Americans' tax burden ranks against that of citizens of other countries, and why it matters. The average American pays wage-based taxes that are similar to what Britons pay – and not much lower than in France. Japanese citizens enjoy the lowest rates among the Group of Seven large industrial economies, or G-7. This includes national and local income taxes, plus payroll levies such as the employee share of Social Security. But wage and payroll taxes are just part of the picture. Add in sales taxes, capital gains taxes, property taxes, and corporate taxes, and the US sends 28 cents of every dollar of output to the government. That still matches Japan for the lowest ratio of tax revenue to gross domestic product (GDP) among the G-7 nations. France and Italy score highest. – Christian Science Monitor

Dominant Social Theme: Americans need to give more?

Free-Market Analysis: We are not sure that comparing American tax rates to Europe's is a salutary way of figuring out an optimal tax rate. We think, in fact, that the governments in many countries in Europe are somewhat profligate. Can citizens of Western countries say with certainty that their tax dollars are well spent? How would they know?

The Monitor article above explains that American taxes are lower than the "typical advanced economy" in Europe. But what is a European advanced economy? Is it an Italian, Greek, Spanish or Portuguese economy? In all of these countries, governments can be said to have spent a good deal more money than they have taken in during the past decade. Has the money been put to good use? Some would say no, given that these countries are all having extreme difficulties funding their expenses with additional government debt. Greece is in the worst shape from a market standpoint, but give it time.

Like money itself, taxes are not what they once were. We've asked some questions about taxes above. But in this article, we want to dig even deeper. (We are not, by the way, suggesting that you cease paying your taxes, dear reader. Our questions are hypothetical ones.) Mainly we want to ask if the Internet – and modern monetary mechanisms and bailouts – will eventually give rise to fundamental questions about the current system from a fiscal standpoint.

To properly explain the antecedents of such a question, we need to digress a bit and re-examine modern-day banking. Today, with the gold link severed, the West's mercantilist central banks can give paper money directly to businesses and individuals. They can give away as much or as little as they want. It costs them almost nothing to print. There is no ratio with money metals to observe. As Richard Nixon famously said, "We're all Keynesians now."

This is, in fact, the secret that was revealed to many people during the economic crisis – at least we think it was. Western central bankers provided trillions to stabilize banks but then bemoaned the lack of lending. But they did nothing. They couldn't because to do so would reveal the lack of importance of a banking system in a purely fiat environment.

You see, once banks are bypassed, questions about paper-money printing would become more insistent. Bankers are the gatekeepers, the ones to evaluate whether money will be practically spent or not. But how can anyone utter such justifications in the 21st century with a straight face? Banks and bankers are no better at determining creditworthiness in a pure fiat economy than credit rating companies are competent to ascertain credit. And credit ratings agencies did a lousy job of it during the economic crisis.

Fed chairman Ben Bernanke recently has floated the idea that American money center banks ought not to keep any reserves in hand at all – that the ratio between reserves and "money" loaned be severed. Perhaps he is right. The "reserves" that banks currently keep on hand are no more than IOUs. What backs them, putatively, is the "faith and credit" of the United States.

Party Time for Anglo-American Elites?

In a sense, despite his theoretical acuity, Bernanke is treading on dangerous ground. Bernanke seems to assume that no one fundamentally questions the system. Like so many others, Bernanke, in our opinion, doesn't seem to have any idea how badly the Internet may have punctured the modern scheme.

Bernanke and others probably think that most people in America and the rest of the world are still convinced that the "financial industry" is "a necessity to the functioning of Western economies. Everybody did seem to think so in the pre-Internet 20th century. But we would bet that at least some people (more and more), having seen the bailouts, read about money on the Internet, and observed the result of two-years of Keynesian stimulation, are concluding otherwise.

We read the Internet quite a bit. People, especially young people, really do "get it." When you have quasi-government central banking entities (as opposed to fully private entities which would be far less powerful and abusive as they would not wield the authority of government) you have what cannot be described otherwise than as dubious mercantilist mechanism. That's what they "get." And the frustration rises.

Nonetheless, we have the spectacle of the modern central banking era, in which a handful of powerful people have constructed a system that swaps electrons for gold and pretends that paper has value. The same can be said for taxes as for the banking system – and sooner or later we think this fundamental (even simplistic) question will be raised: Why are taxes necessary, or at least so many of them? Can't Western governments print all the money they want or need?

After Thoughts

Such questions, elemental as they are, may become more insistent over time, especially if Bernanke continues to advance the theory of non-reserve banking. People (especially Bell readers) are very sophisticated about money and what has happened to it. Collecting taxes made sense when there was a link, however tenuous, with money metals. But that link has long been severed. So … won't people eventually start to wonder why Western governments so intent on collecting their own IOUs?

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