The Income Tax Is So 20th Century. It’s Time For The Left To End It.

With the possible exception of abortion, there probably hasn’t been an issue more divisive in American politics than the income tax. Since its beginning it has stirred the ire of Libertarians and the business minded right and has been viewed from the political left as the ultimate equalizer, funding safety nets and the expansion of central government’s ability to provide oversight of capitalism’s excesses. How’s that working for you?

What was actually achieved from the concept of taxing one’s productivity is almost the exact opposite of anyone’s original intentions. Far from subjecting business and the wealthy investment class to scrutiny and control, the income tax has empowered both by providing them financial incentive to hijack the legislative process. It has also been the driving force of the most devastating myths and misconceptions in politics that now threaten the survival of our nation as a first world country. We can not continue the circling of the drain that has been the result of managing the largest economy in the world from a perspective that is one hundred and eighty degrees divergent from reality.

While taxes never actually funded the spending of the federal government, they did, at one time, allow the currency supply to be balanced with the gold reserves that backed our economy. When our nation was a net exporter and an innovator in adopting technologies this was a fairly easy task that didn’t present enough conflict with the actual process of money creation to cause any significant damage. However, after the rest of the world began recovering its production capabilities post WWII and America shifted into trade deficits and faced the impossibility of maintaining gold reserves, the folly of a commodity based currency and fixed exchange rates became apparent.

In ’71 President Nixon made the wise move of removing the restraints placed on our economy by a feudalistic and mostly useless monetary system that required digging a shiny metal from the ground before making investments in the nation’s infrastructure and human resources needed to compete in global trade. The reconstruction of our economy after the depression and a world war required massive deficit spending that set the example of possibilities for a modern economy for decades, using the tax code primarily to direct private sector investment into production and away from financial instruments that benefited only the investors. Forcing them to accept shareholder equity from higher risk investment instead of cash returns from low risk financial instruments required extreme application of the carrot/stick of the tax code.

The actual payment of taxes, even with ninety plus percent top marginal rates, was a burden mostly imposed upon the growing middle class whose income was quickly spent on the proliferation of goods and services a vibrant, albeit unsustainable, post-war economy provided. Because of the high velocity of currency in the economy the average worker accepted this yoke with only minor grumbling over their beer in after work gatherings in pubs. Taxation was mostly accepted as the cost of living in a modern industrial society. This positioning of taxation as the funding source of government was mostly illusion, even before Nixon’s monumental achievement of ending the gold standard accounting of our currency’s value.

One simply can not provide a mathematical formula that supports funding a growing economy with currency removed from that same economy without a juxtaposition of the reality involved, especially when sectoral balances become negatively skewed by the demand for cheap imported goods and the drain of trade deficits. With the high velocity of currency and the average worker’s concept of economics based in their paycheck it wasn’t difficult to falsely position business as the source of the currency in mainstream thinking. It was an easy assumption to make for the middle class that saw no end in sight for the good times marketed by a new political reality that folded politics into the emerging science of advertising and perception manipulation that Madison Avenue firms perfected.

Selling ideology is actually easier than selling soap because the customer becomes emotionally vested and will defend his/her choice without the attending requirement of results s/he might impose on soap products. The selling of business as the benefactor to the middle class was made easier by a population that was well steeped in rugged individualism, had an existing mistrust of its government, and that had recently taken most of the credit for winning a world war against a very well provisioned enemy. The fact that the enemy was mostly financed and provisioned by the same businesses selling them a false concept of capital and monetary reality was lost on Americans that largely represented the first generation off the farm. In fact, the only factor that could have made this deception easier would have been a population predisposed to magical thinking and the rejection of empirical evidence by their religious belief system.

While this recap of the history of our economy appears harsh toward Americans, it isn’t purposed in that context. I simply felt it important to lay out how America’s management of its economy and monetary system became so widely separated from the simple reality that determines outcomes. Once you decide to view the private sector as the “source” of the currency it is only a logical step to view government as a “cost/overhead” item that we must “pay for” with our taxes. It then only becomes an extension of that logic to assume that cutting the spending of the government reduces that overhead and leaves more currency in the private sector. This is the big lie/misunderstanding of politics and economics that is currently causing half of the population of the wealthiest nation ever to reside on this earth to live in borderline poverty, continually leveraging more of its private debt just to stay even, and failing in that.

A good place to begin setting the record straight about how our economy is funded is examining the relationship between the currency and government spending. The federal government, not business or the Federal Reserve banks, is the sole authorized issuer of the dollar. Business can shuffle money around between winners and losers (there is always a balance) and the banks can create “deposit accounts”, but only Congress can actually create a dollar, and it does that when it spends to provision itself and to fund programs to benefit the private sector. While this funding has never been reliant upon tax revenue, moving to a fiat currency removed an accounting function that had no practical use in a modern economy.

That function used to account for the currency in circulation in relationship to the value of the nation’s gold reserves so the currency supply could be managed without incurring inflation or deflation. If the value of the gold reserves were in excess of the currency that represented them the government could spend more to fuel the private sector with currency and create infrastructure that would better enable the production of goods and services. If the currency in circulation was greater than that value it was necessary to “tax” the private sector (or conduct more positive foreign trade) to bring the economy in line with the available gold backing the currency. Even under this system, the “taxing” function was not meant to fund additional spending, but to simply “cancel” sufficient currency to better align with the value of gold held.

When Nixon moved us to a fiat currency the part of that accounting representing gold reserves was eliminated and the resulting number that we still label “debt” (purposefully misleading) now only reflects the amount of currency that Congress has spent into the private sector since our nation’s founding that has not yet been canceled by taxation. It is our “savings” and our paychecks. It also represents the net equity of the private sector that is leveraged against private sector debt accounts in banking. Should we ever become so deluded as to attempt to “pay off” the debt as most politicians advocate (the two parties only diverge in “how” they would do this) we would have to remove all currency from the economy, default on all bank loans, and sell sufficient public resources in some denomination other than the dollar to satisfy any shortfall from trade deficits and Treasury instruments.

There are complex mechanisms between Treasury, Congress, and the Federal Reserve banks that many bankers don’t fully understand, but the short story is that “every” dollar in federal spending to retire Treasury debt is a “new” dollar and there is no mechanism that credits taxes collected against spending. Taxes are canceled currency, end of story. Once you fully understand the economics of a sovereign fiat currency you realize that it is not limited by anything except the will of Congress to appropriate its creation. It is not a “thing” that we can run out of, any more than a sport stadium can run out of “points” to award to teams playing there. The stadium also has no need to reduce the points awarded to the teams by any percentage to “pay for” its overhead. Likewise, the monopoly issuer of the currency doesn’t need, or use, our currency to spend currency.

I am not stating that the federal government doesn’t need some method of removing currency from the economy, should situations demand it, but only that a structured reduction of income is not the best way to manage fiscal control and it only fuels the falsehood of our taxes “paying for” anything. It would be better if we simply acknowledged the reality of the economy our politicians are working so hard to destroy and let them know we aren’t swallowing their myths any longer. The only thing dumber than failing to compensate for trade deficits and wealth accumulation with deficit spending is to double down on the stupid and also claw back what currency has already been created by brighter minds previously. We should be using the power of government to levy fees to direct investments and punish behavior we all agree are detrimental to society instead.

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