If the U.S. Congress continues the current tax rates, won’t the deficit become bigger than if it raised the taxes for the rich people. Of course, it will. But the federal government budget deficit does not represent the gigantic problem that most people will tell you it is.
Deficits do not present a big problem for our national economy; government spending does.
I will address this topic of the deficit frequently, but for now I would like to clear up some of the myths that you hear about the deficit and debt problem.
First, you hear a lot of people say, “Oh, we should not leave this huge debt for our children to pay,” as if all the children in the U.S. will bear this burden equally. It simply does not work that way.
Remember, we have a progressive tax system. That means that everyone does not pay their fair share. In a system that has no “fair” shares, some pay more than others. A lot more. This means that our children will not have to pay this bill. Their children will. (That is, the children of the rich people.) It would take an unexpected change in the tax law for the entire burden to fall on all the children.
Okay, but shouldn’t the rich guys want to pay more taxes now so their own kids won’t have to pay in the future. Not really.
To understand this whole process keep in mind that the government has no money of its own. The money it pays out to one group of people, it takes from other people. Similarly when the government borrows money, the lender does not look to the government to repay the loan. The lender only cares that healthy victims exist from which government can steal to pay its obligations. This means that to understand whether government borrowing presents a problem we must look at how it affects the underlying debtor—in this case the rich guy tax payers.
First, let’s look at what a balanced budget would look like. The U.S. Government takes enough money from rich guys to cover the disbursements to recipients. Seems like a good way to run a business. But, this is not business; it’s the government.
Second, what does it look like if the government does not take enough to cover its disbursements?
In this case the government must borrow money—from the lazy rich guy and the Chinese Government (entrepreneur rich guy invests his money in productive assets) (see the green arrows). But, later the repayment problem arises (see the red arrows). The Government must repay the Chinese and the lazy rich guy. To do that it just raises the taxes on the rich guys—no problem for the rest of us.
But why should the rich guys not object?
At a given level of government “spending,” rich guys face two alternatives. Pay the government now, or pay the government later. (They get no third alternative.) The better choice always consists of pay later; even if the next generation must make that payment. To understand borrowing by the government presents we must examine and compare the alternatives.
When the government “borrows” money the rich guys retain more money than they would if government taxed them. Thus, government borrowing acts, in effect, as a loan to the rich guys—underwritten by the government. The government, in effect, borrows from the lazy rich guy and the Chinese to lend to the rich guys to pay their current tax liabilities. The rich guys pay back that loan sometime in the future by paying higher taxes.
Looking at a bit different picture might make this idea a little clearer.
The net flow of funds would remain exactly the same if the transactions were structured as follows:
- The rich guys pay enough taxes to cover 100% of the government disbursements—voila, a balanced budget. (Blue arrows)
- Entrepreneur rich guy borrows (green arrows) a chunk of the amount that he paid in taxes with the loan guaranteed by the government–which keeps interest down. (Lazy rich guy is a net lender)
- Entrepreneur rich guy later repays the loans, with interest.
Government borrowing has the same effect as lending the rich guys part of their tax payment at a low interest rate. What enterprising rich guy would pass that up? None.
This explains why “supply-side tax cuts” seem to work. They let productive investors keep some of their own money longer. You could say the government debt represents debt capital in U.S. businesses waiting for repayment.
So, does this mean that government borrowing represents no problems at all? No. It represents another way to finance the real problem: government “spending.” The misallocation for resources caused by government redistribution of resources will eventually break the rich guys (or cause them to move). Then the government will have no source for the loan payments they have guaranteed.