Divine Neutrality

Premise: Government functions. It does things. It must pay for its buildings, for roads, for its military, for its functionaries, for welfare projects…

1. Primitive government finance.

Government (its treasury) pays its bills with printed certificates (called currency) These certificates are promissory notes. The promise is to redeem them – to accept them in payment of any obligation to the government. For example, it promises to accept these same notes in payment of tax obligations.

A balanced budget is when the Government collects in taxes as much as it spends. Naturally the Government is loathe to collect taxes because tax collection makes the Government unpopular. So it tends simply to print whatever currency it needs to pay its bills. Doing this causes the currency to lose value. When the supply of circulating currency rises, each unit is worth less in goods or services. The steady loss of currency value is called inflation.

2. Modern government finance.

In modern times the printing of money is not something that the government does directly. Until a Central Bank was created in the U.S. most any bank at all issued currency. They had ‘bank notes’ printed. Each bank had its own notes. These were promissory notes; promises to pay on demand. To pay what? Answer: specie or gold, but more importantly, the promise was to redeem the note. To redeem the note means to accept it in payment of any debt to the bank. These bank notes functioned as money in the community. They were generally accepted in payment for goods or services since the holder could go to the bank for payment on demand. The notes of different banks were exchangable via exhange rates between them. Like exchange rates between different national currencies today.

Currently the U.S. Central Bank – the Federal Reserve – is the only bank in the U.S. allowed to issue bank notes. And these are used for currency.

The Government’s Treasury pays all the Government’s bills It pays the salaries of officials. It pays the debt service. It pays for the military etc. All with the bank notes issued by the Federal Reserve.

It acquires these bank notes in two ways. It collects taxes which are paid with these bank notes. And, when need arises, it solicits loans. It issues (sells) long term promissory notes called bonds. Bonds are promissory notes that need be repaid only many years after their sale. They are purchased by investors and the money paid for them – in bank notes – goes into the Treasury. The Treasury must pay the interest that is due each bondholder and it must eventually ‘redeem’ the bond. i.e. repay the loan that the bond represents. The bondholder buys the bond for its income (the interest payments) and because a U.S. Government Bond is considered to be an essentially risk free investment.

The Federal Reserve Bank buys these bonds on the open market with ‘bank notes’ i.e. with printed paper certificates called Federal Reserve notes. Idea: Every bank note issued is ‘backed’ by a valuable asset: a bond of the U.S. Government (assumed to be as good as gold!). Click on the go/reset button in the Money Creation motion graphic above to see the process visually. In that graphic each column pair represents a balance sheet. Liquid assets are green. Illiquid assets are brown. Liabilities are red. And net worth is blue. See  http://chesters.org/marvin/economations/ for further elucidation.

The modern method of ‘printing money’ to pay its bills is this: The Government Treasury issues (i.e. sells) bonds which the Central Bank (the Fed) then buys with ‘bank notes’ that it prints. The law says that the government may not exceed the debt allowed by Congress. So the debt ceiling must be raised periodically to permit the Treasury to sell bonds in order to have money printed by the Federal Reserve to pay its debts.

You buy a pair of shoes. In most states if the price is $50 you pay about $55 to buy them. The extra amount is sales tax. Sales taxes range from 7% to over 10% in most communities. To buy a car in Cook County, Illinois you pay $11,500 if its price is $10,000. The extra $1,500 is a sales tax collected by government. In Santa Cruz, CA for a MacDonald’s hamburger listed as 89¢ you pay 97¢. There is a 9% tax.

But if you buy 10 shares of Wal-Mart stock at $56 per share you pay $560. Nothing at all is taken by government! There is no sales tax on buying stocks or bonds. Too bad you can’t wear or eat stock.

Now here is the remarkable fact: If there were a 9% U.S. Government sales tax on the sale of securities (stocks or bonds) the amount of revenue collected would entirely wipe out the Federal Deficit and even leave some surplus!

The web site of the New York Stock Exchange (nyse.com) lists the value of securities traded each day. Extrapolating for a 250 day year of trading yields an amount of about $18 trillion in stock sales per year. The US Government Budget, Summary, Table S-1 (www.gpoaccess.gov/usbudget) says the deficit for the year 2010 was $1.6 trillion.

So a 9% tax on security sales (otherwise known as stock trades) would completely eliminate the deficit!
(9% × $18 trillion > $1.6 trillion)

When a ‘sales’ tax is imposed by the federal government it goes by the name excise tax rather than sales tax.  The euphemism ‘security trade’ actually means ‘sale’. Somebody sells a stock or bond to somebody else who buys it. And, unless it’s a rare initial public offering (IPO), the sale has no effect whatever on the coffers of the company being ‘traded’. It’s just an exchange of ownership. The ten shares of Wal-Mart stock that the seller sells to you means that he relinquishes his ownership stake to you. Now you, instead of the seller, own one 400 millionth of the company – 10 shares worth. It’s like buying a used car from someone. He owned it before. You own it afterward. No money goes to the manufacturer. But you must pay a tax on the car ‘trade’! The stock trade is tax free.

There’s an important economic difference between taxing the sale of consumer goods and taxing the sale of securities. Taxing consumer goods hurts prosperity. Taxing stock sales doesn’t. Making, transporting and selling consumer goods employs people. Trade in goods and services adds to general prosperity. It keeps people working and gives them purchasing power. So a sales tax on consumer goods hurts prosperity. Every fiscal conservative knows this.

But a sales tax on stock market speculation – the buying and selling of stocks – doesn’t directly affect general prosperity. Stock trades are exchanges of ownership. Exchanges of ownership don’t create jobs. Consumer goods are not affected. So our tax system encourages speculation and discourages the prosperity of job seekers.

Things not taxed cost less. Low taxes encourage commerce. The tax system makes the commerce of stock market sales easier and the commerce in manufactured goods harder. But the manufacture of goods employs people. It contributes to prosperity. So prosperity is handicapped with taxes. While speculation is encouraged by being tax free.

Perhaps its time to discourage stock market speculation and to tax it.

For those who may want to bring this idea to their representatives in Congress and in the Senate take note that, using your zip code, you may look up your representative and senators at:
http://www.govtrack.us/congress/findyourreps.xpd

For sending email to Chairman Max Baucus of the US Senate Committee on Finance go to http://baucus.senate.gov/?p=contact

Email may be sent to Senator Barbara Boxer at:

http://boxer.senate.gov/en/contact/policycomments.cfm. Or on twitter @senatorboxer

Email may be sent to Senator Dianne Feinstein at:
http://feinstein.senate.gov/public/index.cfm?FuseAction=ContactUs.EmailMe

Email may be sent to Congressman Sam Farr at:
https://forms.house.gov/farr/webforms/issue_subscribe.html

The essential premise: Prosperity is desirable.

Austerity is undesirable. Everyone wants prosperity. Austerity brings violence and unrest.

What is prosperity?

Prosperity is the ability to buy what you need – or what you may not need.

It is everyones desire – this ability to buy what you need.

When there is much buying and selling we have prosperity. Those are times when people are employed. They sell their time and buy goods and services with their earnings. Thus causing other people to be employed and, themselves, to buy things. Prosperity is connected to economic activity; the vigorous exchange of goods and services.

To be able to buy things is the ultimate measure of prosperity. So to ask for prosperity is to ask for economic activity.

Of course, the benefits of economic activity may not fall equally on all, but those who prosper do so from economic activity. Governments try to create prosperity. Adversity drives Governments from office.

Fundamental equation:

spending minus revenue = deficit = must be borrowed

Any government – municipal, national – is an economic unit. During the year it spends an amount called ‘spending’. The taxes and the fees it collects are its ‘revenue’. The difference between these two is called the ‘deficit’. A negative deficit is called a surplus.

The deficit is the amount of money that must be borrowed in order for the government to pay its spending bills for that year.

Government borrowing takes the form of bonds. These are promissory notes sold on the open market. In the U.S. all such borrowing is done only with the consent of the electorate. It is we who permit government to borrow; either directly, by vote on a bond issue, or indirectly as when Congress raises the Debt Limit.

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