A Response To Reader Olivier Strauch

I’m indebted to reader Olivier Strauch, who wrote to us at RedState to express some reservations he has about the admittedly radical tax-holiday proposal that I made here.

Mr. Strauch’s pithy but resonant rhetorical style defies summarization, so I’ll quote him literally (with one minor redaction; I changed a crude sexual reference to a crude gastronomic one):

“Seriously.  Your answer to the devastation caused by the dogma of rightwing deregulation of everything  is.. to cut 100% of federal taxes?

So how do we pay for your favorite President Bush’s most brilliant achievement – the war in Iraq?  Shall our troops eat dust and drink happy thoughts, and shoot magic bullets filled with your pee and propelled by wingnut farts?   How about Afghanistan?  How about border guards, customs, INS, the FBI, the CIA, Guantanamo, federal prisons, airport security, and all the other things even disphits as braindead s you agree government needs to do?

Seriously – you are a [overeating] over the top, blue-ribbon winning, one in a million tool.

Please never, ever reproduce.”

Thus Olivier Strauch. His points are thoughtful and well taken, but I feel that they don’t go nearly far enough as regards the spending priorities of the Federal government. More critically, Mr. Strauch appears not to appreciate one of the finer points of Federal taxation, that actually is key to my argument.

In the first place, it’s hardly the case that defense and war are the bulk of what the Federal government spends money on, as Mr. Strauch appears to imply. In fact, by my reckoning, spending for the Iraq and Afghanistan adventures amounts to a mid-single-digit percentage of the Federal budget. (Although the new President has pledged to sharply escalate the Afghanistan war, so the financial commitment to Afghanistan will probably grow.)

But the really important point is this: a great many people fail to appreciate that the Federal Government does NOT need to collect tax revenues in order to spend money.

Think about that very carefully. Unlike state and local governments, the Federal government prints its own money. They can spend literally any amount of money that they wish, simply by causing the money to appear in the accounts which the Treasury maintains for this purpose at commercial banks around the country. They create money simply by changing numbers in computer files, a costless and friction-free process.

In a fiat money regime, there is one and only one reason for the Federal Government to collect tax revenue, and that is to control the size of the overall money supply. (More precisely, there is only one reason to collect taxes which is responsive to the exigencies of monetary policy. It’s also true that the government collects taxes to pursue non-economic objectives, for example, in order to punish success and reward indolence.) Ordinarily the effect of having the government spend more than 20% of GDP without collecting any tax revenue at all, would be to cause a hyperinflation, and severely distort resource-allocation flows in the private-sector economy.

But we’re now in a time of severe, incipient deflation. Inflation is very far from the key concern. It indeed would be a DIRECT and IMMEDIATE solution to the economic problem to generate a large pulse of monetary inflation, which would happen if the government were to temporarily but fully abate all tax collections.

And finally, I’m appreciative of Mr. Strauch’s personal suggestion as regards reproduction, which I will take under advisement.

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