revenue nuetral taxes and the diminishing dollar

[cfish]

There is a long standing theory of economy that a country can tax it way out of crisis. It is proven false but that does not stop it from being promoted and it is being pushed on us hard at this moment. I want to attempt here to illustrate in simple terms why this can not work.

Long ago few kingdoms/empires/nations had coinage and it appears none had currency. Although the specific history of tender is fascinating we will skip it. Commerce was through inter-tribal (international) trade and local commerce. Payments were made through the trade of goods based on supply and demand as well as the trade of what we will call hard commodities. Hard commodities are gemstones, medals, and oils. Since they were not issued by a government their values fluctuated but still provided solid revenue for lords when taxing. They did not issue the tender therefore hard commodities brought wealth to their lands. Taxes were collected in a variety of ways but usually as a percentage of apparent wealth on hand (mob boss style).

Issued tender as a means of exchange originates with the government (eiliminates mob boss style taxes but destroys exchange values by creating debt based systems). It has no value of its own it is intrinsic and must be replaced as it is taxed into oblivion. A simple example of the diminishing dollar: The Treasury prints a bill and the reserve issues it to me as in exchange for my paycheck via my local private(ish) bank. I pay 20% in income tax and buy stuff at 8% I loose .28c off the cuff. The merchant I gave it to makes a profit and has employees. Because of his expenses he pays 1% in taxes on my dollar then gives it to an employee as pay. That employee pays 20% in taxes and 8% on a purchase. The second merchant only the 4th person to receive this brand new bill now has a dollar worth 43cents. If the cycle repeats two more times, and it will, or the dollar finds its self in Nassau County, NY it will need to be replaced by the end of the month because the government has taxed the entire dollar back into their coffers.

But fish that's okay now they will reissue it... NO they owe 14trillion dollars to the world and spend about 68 - 78cents of every dollar they receive on bureaucracy, the rest is sent back to our debtors as we roll most of our debt over because we can not pay it. In addition what they do reissue has a 0 value and is given to EIC and welfare recipiants where they use it to do what we all do and drive that original dollar into a negative value. The results are high inflation and devalued currency (each new dollar we get must bear the weight of the negative and 0 dollars in circulation). The problem is compounded when most of what we buy is imported and our nation has a major trade defecit (meaning we either do not manufacture anything demanded internationally or we trade it for free with countries that have nothing we demand).

To call a tax revenue nuetral is to say that each person regardless of what they pay receives an equal share as dividend of the 12 - 23cents not lost to the cost of bureaucracy (sound nuetral?) or it would cause a reduction in other forms of direct tax. The country spends far more than it can take in now so any dollar not raised through taxes must be borrowed from someone else at a cost. This results in a weaker dollar to buy the imported products we use.

What's imported fish?
30% of cars and motorcyles (my GMC Suburban was built in Mexico)
corn
wheat
cotton
cotton goods

Victoria Secret an English company likes Israel for manufacturing
Levi Strauss a US company likes Egypt

Electronics

Most TV's still come from Japan
many computers and phones are made in Europe

OIL and a sizable percentage of refined oil products

(Last major inland refinery in US 1976 population of US in 1976 218million today 307.9million)

Reducing taxes leaves a dollar in circulation longer and in bad economic times both stimulates the economy and increases governement revenue. It seems though that a tender based method of trade v. hard commodities trade will ultimately lead to bancruptcy regardless of how well it is run. Our country and others still suffer from an apparent inability to reduce govt. spending at these times and falling credit ratings. For example in March England failed to make a sale of gilts it intended, falling a 100m pounds short of selling. This was an intended 1.75bn pound sale - so 100m is not bad but it demonstrates that Englands international credit worthiness has fallen. They are in dire crisis and speeding toward bancrupty.

If China and India stop buying our debt because of our weak dollar what is in hand for us as we buy immense goods and services from each of them?

I know this is ending in what seems to be an incomplete thought but the demonstration of the dimishing dollar was the point not a thesis.

[norman]

Originally Posted by cfish

If China and India stop buying our debt because of our weak dollar what is in hand for us as we buy immense goods and services from each of them?

Why did you list India? India holds $38.5-billion worth of US Treasuries which puts it #15 on the list of foreign holders. The top three foreign holders of US Treasuries are China, Japan and the United Kingdom.

Country Aug 2009

China 797.1
Japan 731.0
UK 225.8

Total Foreign Held 3,448.8

source: Major Foreign Holders of US Treasuries

Of the $12-trillion of US debt, $4.4-trillion is intragovernmental and $7.6-trillion is held by the public (TreasuryDirect). Total foreign ownership of US Treasuries is less than half of what is held by the public.

The US dollar has been weak since 2002 (FRED, TWEXMMTH). Despite this, the last and the current administration vocalize(d) support for a strong currency.

[CubsFanJohn]

We can't afford the debt anymore we have to tighten up our Dollar supply and start paying off debts.

[norman]

Interest expense on US debt in FY '09 was $383-billion which was down from $451-billion in FY '08 (TreasuryDirect).

No corporation well-managed financially is desirous of zero debt. It is indicative of being under-financed. More important than the debt-equity ratio is the interest expense as a percentage of revenue ratio. Applying this to the US government, FY '08 federal receipts were $2.1-trillion (FRED, FYFR) making an interest-revenue ratio of 21.4% (451 / 2104).

Regardless of populist political sentiment, the money supply backed by US Treasuries and US debt is ever-increasing over time. The only risk-free investments will continue to be US Treasuries and the yield on those bonds and bills will continue to be the risk-free rate.

[cfish]

Originally Posted by norman

Why did you list India? India holds $38.5-billion worth of US Treasuries which puts it #15 on the list of foreign holders. The top three foreign holders of US Treasuries are China, Japan and the United Kingdom.

I listed India because it emerging markets are amongst the fastest growing. There purchase of our debt is amongst the fastest growing.
Of the top 15 foreign entities who own a piece of our debt based on the list China, Oil Exporters, Brazil, and India are the only ones with steady growth and a percievable long term ability to purchase our debt.

Intragovernmental debt is not healthy. The Treasury specifically prints currency to sell to other portions of government. This is usually a process of the Treasury printing money for the Reserve and then borrowing back from the reserve for interest. This is what was done for a guarantee of the recent stimulus. This is a high risk method of borrowing and speaking of corporations (you meant publically traded corporations which rely on sale of stock for capital improvement not sale of goods and services - this too is a debt driven system), those who shift money in a fashion to immitate that intragovernmental borrowing look alot like Enron and end up the same way.

[indepenence]

If I write a report and sell it to you for $1 and I pay taxes on that $1 to a bureaucrat who takes it as pay for writing a report, then we have two reports. This process can continue indefinitely and the economy can grow and prosper on the production and sales of reports.

When I get hungry, I can eat a report.
If it's cold, I can keep warm under a blanket of reports.
If I am rich enough, I can afford to burn reports every day instead of conserving them to use as a blanket.
I could press them into siding and build a house.
In fact, I bet I could thrive on nothing but reports!

But maybe economics is about more than reports and money. Maybe their are other goods and services that are involved! This may be a radical economic concept to some, but the economy does not actually involve money alone.

[GT7]

Money is the one item that all other items and services can be equally measured by.

I'll let you draw your own economics conclusions from this fact.

[indepenence]

Originally Posted by GT7

Money is the one item that all other items and services can be equally measured by.

It depends on what you mean by "measured."

Production cost is one measure of value, whereas market price is another.

That means that two things that cost the same to produce can have very different market prices, or that two things with the same market price can have very different values.

So, for example, when gas cost $4/gallon it was measurable as equally valuable to 2 loaves of bread for $2 each. At $2/gallon it is equal to one loaf at $2. The production cost of neither changed, but the market price changed, altering profit levels and redistributing the distribution of income.

Now, with gas prices down somewhat, income is redistributed to consumers and industries in the form of gas-savings, yet their income and revenue also decreases as the surplus oil profits are not spent.

So relative prices do not so much measure the actual value of goods as the determine the relative distribution of revenues and income.