Obama’s budget and taxes

As pointed out here and in previous notes, there is absolutely no difference between government, corporate or household debt. At the end of the day, the money to service the debt comes out of the pockets of society; i.e. you and me. That’s because government has no money or wealth of its own. Government expenditure is only made possible by taking money from society. The more government spends, the more taxes, fees, licenses, duties or excise it has to extract from society. The difference between what the government spends and the taxes it collects, must be made up with debt. Debt must be serviced. So, when tax collection is not sufficient for government expenditure and government increases its borrowings, it must necessarily increase its tax collection in order to service the debt.The rationale of this dynamic is that increased government borrowing is supposed to bring about an increase in GDP sufficient to cover debt service. However, in a situation where credit markets are contracting, unemployment is rising and the velocity of money (after a steady 30 year decline) has fallen below 1, further increasing government debt is a questionable strategy.

Lest you should think that increasing taxes on the wealthy is the solution, I can guarantee that you have another thing coming. Also, willingly expanding the size of government to ostensibly pull out of a crisis is a contradiction in terms. That’s because the larger the government becomes, the more money it has to extract from the economy for its own internal working.

Now, at a time of credit contraction, increasing taxes means by necessity that consumption must diminish. In an economy that is 70% consumer based as the US economy is diminishing consumption spells doom. 2 + 2 still = 4 folks. The laws of arithmetic have not as yet been repealed.




“For the current year, the government would borrow 46 cents for every dollar it takes to run the government under the administration’s plan. In 2010, it would borrow 35 cents for every dollar spent.


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