No Taxation Without Representation!

Candidate Barack Obama promised to cut taxes for no less than 95% of Americans. In his State of the Union Speech on Tuesday February 24th he said, "if your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not one single dime." He almost immediately broke that promise when he raised the federal excise tax on cigarettes by 156 percent (or 61 cents per pack) on April 1st. Since one in four smokers live below the poverty line and 55 percent of smokers can be defined as "working poor," they are clearly making less than $250,000 per year. This is just one obvious example of a broken Obama promise.

But it gets worse than that... far, far worse. Every time the government spends money that it does not have (i.e., deficit spending), it is imposing a tax on the American people. It may be a delayed tax or a hidden tax, but it is a tax nonetheless. When the government spends money it does not have, it can do so in only one of two ways: 1) it can borrow the money, or 2) it can print the money. Government borrowing is a delayed tax. Printing money is a hidden tax.

Consider: the primary source of income for the government is tax. Whether in the form of a cigarette tax, an alcohol tax, a gasoline tax, an income tax, a "user fee", or fines and penalties, they are all basically some form of tax. When the government borrows money, it creates an obligation which it must pay back -- with interest. It is essentially a loan. In order to repay the loan and the interest, it must do so with income that comes from, you guessed it, taxes. Government borrowing in the form of 30-year Treasury Bills delays the need for increased tax revenue by 30 years. Likewise, shorter term borrowing delays the need for increased tax revenue correspondingly, for example by 5, 10 or 15 years. Nevertheless, the taxes must eventually be collected in order to pay the bill.

Some economists feel that government deficit spending is a good thing because, according to them, it stimulates the economy and thereby promotes greater tax revenues in the future. Theoretically, a growing economy produces more jobs in the private sector, which in turn results in more business and personal income taxes that are collected by the government. In this way, they say, the government can afford to pay tomorrow for the debt that is incurred today. [Remember Wimpie: "I will gladly pay you on Tuesday for a hamburger today".

Unfortunately, the effects of government deficit spending are not always the same. An economy which is simply stagnant may benefit from limited deficit spending. An economy which is in free fall will not benefit nearly as much, except perhaps to slow the rate of decline. In that case, the economy will likely take much longer to recover and any short-term debt that the government has incurred may need to be repaid before the economy has even fully recovered. The need to repay short-term debt only impedes the recovery process.

Response time therefore, is critical. Typically, government spending is slow and inefficient. The government must decide where it wants to spend the money, pass legislation to permit the spending, allocate and distribute the funds, get bids, and then award contracts. In an economy that is contracting rapidly, this process takes far too long to provide much immediate stimulus. And if the government spending is used for things like unemployment benefits, or to support other failing government entities, again there is little if any stimulative effect on the economy. In that case, the money is simply being used to maintain the status quo.

To stimulate the economy quickly, it is better to give the money directly to the people who need it. This is normally achieved by cutting taxes or direct subsidies. Cutting sales taxes or excise taxes reduces prices and spurs spending. Cutting corporate taxes allows businesses to increase their dividends, hire more people, or make needed investments in the business. Cutting income taxes leaves more money in the hands of people to spend, invest or save.

We know how spending helps the economy, but investing helps the economy too -- either directly by investing in one particular aspect of the economy, or indirectly through the purchase of mutual funds, etc. Saving helps the economy by providing banks with more liquidity for lending at lower interest rates. For those 50%+ of Americans who do not pay any income taxes, a reduction in tax rates accompanied by a corresponding reduction in withholding, or a direct subsidy (i.e., free cash), is a quicker way to stimulate the economy than government spending.

Unlike the average American who knows how best to spend his or her own money, the government will almost assuredly make bad decisions about how and where to spend money. When the government spends money, some will benefit while others (sometimes the most deserving) do not. Not surprisingly, favored classes, lobbyists, and political supporters are most often the ones to benefit. And the government is more likely to spend money on projects that are not wanted, needed, or economically justifiable.

First party purchases are always the best. That's when you buy something for yourself that you really need or want, using your own money. You have a high stake in the purchase (your own money) and a high interest in the product or outcome. Second party purchases are when you buy something for someone else, which they may not need or want, using your own money. You have a high stake in the purchase (your own money), but a low interest in the product or outcome. Third party purchases are the worst. That's when you buy something for someone else, which they may not need or want, using someone else's money. You have little or no stake in the purchase and a low interest in the product or outcome. By definition, all government purchases are third party purchases.

Along the way of course, the government takes its share as a management fee -- money which could be better used by the economy. Often times, new agencies and bureaucracies are established to direct and supervise this government mis-spending. Again, this does nothing to help the economy but actually creates additional tax burden needed to support the new bureaucracy. And such bureaucracies have a way of becoming permanent. As Ronald Reagan famously said, "a government bureau is the nearest thing to eternal life we'll ever see on this earth!"

Massive deficit spending can become counter-productive. By increasing the amount of government debt, the need for ever larger sources of tax revenue to pay back that debt puts a drag on the economy. During a severe recession, massive deficit spending can slow the recovery or alternately, permit a modest recovery followed by an even more severe downturn. There is also a certain "tipping point" where government spending as a percentage of GDP begins to affect the economy negatively rather than positively.

Of course it is assumed that the principal holders of U.S. government debt should be Americans. When Americans invest in their country through the purchase of Treasury Bills, they are rewarded by receiving that money back with interest -- money that they (or their heirs) can then spend in our economy. If a significant percentage of U.S. government debt is held by foreign countries, then the taxes which the government must eventually impose on Americans to repay that debt will necessarily leave the country. Collecting taxes to pay off foreign countries is nothing more than a vast transfer of wealth that can do little to help the United States.

Now, some may argue that the government money borrowed from foreign countries will be used to "invest" in American infrastructure. But that money will still leave the country eventually, and the infrastructure that is left behind will still need to be maintained. Massive deficit spending supported by major foreign investments can only insure that our "investments" will be used not for ourselves, but to pay off foreigners. We will become serfs working for a foreign master. The more "investments" we make, the harder we will have to work to pay off those debts and, at the same time, try to maintain the new infrastructure.

What's even worse, is borrowing money from foreign countries to establish new entitlement programs. New entitlement programs are essentially unfunded liabilities, that is, net cash outflows. To borrow money from foreigners in order to create a new government cash outflow is absurd. It's like borrowing money to create debt! When we have to repay the money that we owe to foreigners (with taxes, mind you), where does the money come from to pay for all the new debt we have created with the entitlement programs?

The only alternative is for the government to print the money it needs. Of course, printing more money reduces the value of the existing dollars already in circulation, and that leads to inflation. Some economists think that printing money may be of some benefit during a severe economic contraction as a means of preventing deflation, or falling prices. Rapidly falling prices can lead to layoffs, wage cuts, companies going out of business, etc. The doomsday scenario is that a death spiral is created where prices and wages fall so low that bread costs only a few pennies, but nobody has even a few pennies to buy the bread. Printing money prevents deflation by creating artificial inflation.

But moderate price declines without a corresponding wage decline can be beneficial. Lower prices increase buying power. Lower prices make people wealthier by allowing them to spend less on goods and services than they otherwise would have. Lower prices spur spending and increase saving. Lower prices can also provide the motivation for productivity and efficiency improvements. Maintaining artificially high prices during a recession causes some people to stop buying or to postpone their purchases, thus delaying an economic recovery.

Massive deficit spending financed by printing money is dangerous. It can lead to uncontrolled inflation, otherwise known as hyperinflation. Inflation is a hidden tax because consumers are forced to spend more for goods and services than they ordinarily would have to spend. Inflation reduces buying power and reduces the amount people can save. Inflation makes people poorer than they would be if prices remained stable or actually decreased. If inflation grows at a faster rate than wages or income, then the population loses real wealth. If government deficit spending is financed by printing money and the result is higher prices, then the population is being taxed through their purchases to support the government's spending.

So then, either way the government funds its deficit spending, the result is a tax. It is either a delayed tax or a hidden tax. So let's just see how much Obama has "not" raised taxes. First, he released the second half of the TARP funds (Troubled Asset Relief Program) at $350 billion. Then there was the Stimulus Package at $787 billion. Then there was the Omnibus Spending Bill at $410 billion. Currently, the national debt stands at $11.5 trillion, and the deficit for the current fiscal year is projected to be close to $2 trillion. Out of that $2 trillion, Obama is responsible for over $1.5 trillion [$350 + $787 + $410 = $1,547].

Then there was the TALF (Term Asset-Backed Securities Loan Facility) and the PPIP (Public-Private Investment Program), currently being funded out of TARP funds, but which the Treasury and Fed have said in the next phase could increase to as much as $1 trillion in cost. Then there is the Budget for fiscal year 2010 at $3.6 trillion, which includes $150 billion for funding "green" energy sources, and $634 billion towards the introduction of universal health care, both of which are new and unfunded programs. That $3.6 trillion budget also includes a $770 billion proposed "tax cut" for working families. But since 50%+ of the American people already pay no income taxes, that means that for most, the "tax cut" will really be nothing more than a direct subsidy, which by the way, is also unfunded. And for those who actually do get a legitimate tax cut, the government will have to make up the difference by replacing the loss in revenue with deficit spending elsewhere.

Then there are the Bush tax cuts which are set to expire in 2010. They will not be renewed, so that will result in a "real" tax increase, and it will affect people who make less than $250,000 per year. Then there is the Energy-Climate Bill, which different studies have estimated will cost the average household between $170 and $1,400 per year. But those are only the direct costs in energy price increases. It does not include the hidden costs of higher prices for goods and services that everyone will have to pay when businesses pass on their increased costs to the consumer.

Despite what anyone says to the contrary, these are all TAXES. Obama has raised taxes by over $1.5 trillion for the current fiscal year, and intends to raise taxes next year by at least $784 billion, plus whatever is spent on TALF and PPIP, plus whatever costs we incur from the Energy-Climate Bill. They might not look like taxes, but they are taxes nonetheless -- delayed or hidden taxes.

Do the American people want higher taxes? I don't think so. Simply ask any American if they want to pay higher taxes. The vast majority will most assuredly say "NO". But that's what Congress is giving us -- higher taxes. And to add insult to injury, these bills have been flying through Congress without anyone reading them.

So I think it's only fair to ask if we, the American people, are actually being represented in Congress. Yes, there are people in Congress who have been elected to represent us, but are they really representing our interests? I don't think so. If the minority party is powerless to stop the majority party, and the majority party is passing bills without even reading them, then where is our representation? If the American people don't want higher taxes, but that's what Congress is giving us, then where is our representation?

I think it's time to revive that old refrain: "No Taxation Without Representation!"