The United States Should Do Away With The Income Tax
This is obviously going to be a very popular notion. However, there is sound reasoning for why the United States should do away with the personal income tax.
Many will agree with this based upon principle or ideology. It is something that I can understand. However, the alternative might not sit well with too many people. It is a radical idea yet seems to make a lot of sense.
Understanding the unique position the United States finds itself in is essential to grasping how this will work. It is all a part of the international banking system and somehow getting economic growth.
Right now, we see things are stagnating.
Therefore, the U.S. should just scrap the income tax and fund the budget through debt.
US Treasuries Are Pristine Collateral
AS we stated on a number of occasions, when it comes to pristine collateral in the international banking system, nothing comes close to US Treasuries. They are the only game in town. To go one step further, if the best of the best is required, it is T-bills.
One of the major challenges right now is the world is suffering from a collateral shortage. This is slowing economic growth as lending is reduced. If the United States sold more securities, then the world would see this situation abated a bit.
Of course, some will instantly point to the debt. This is going to surprise many but it doesn't matter. The amount of debt the US Government has means nothing. Why is that? Simply because they are not going to pay it back.
There is no chance that $3 trillion will be paid back, let alone $30 trillion. Thus, if you are not going to pay the debt back, the amount means nothing. It could be $300 trillion.
What does matter is the cost of servicing the debt. Here is where we have to really focus the attention.
Interest Rates Going Up
The media is awash with headlines how interest rates are going up. This is the story for the moment but do not get accustomed to it.
When interest rates are high, it is a sign the economy is flush with money. That is not the case. In fact, it is the exact opposite. The reason why we have low interest rates, declining over the last 30 years, is because there is a shortage of money. The system is simply being starved.
It is also one of the reasons why global growth numbers stalled over the last few decades. Without enough money floating through the economy, stagnation is the only outcome.
The shortage of collateral has a direct impact upon money created. Think about it for a second. Money is generated by the international banking system. If there is a shortage of collateral, loans are not going to be made. This ultimately filters through the entire global economy.
Hence the growth rate is slowed to the point it has difficulty offsetting all the debt.
Moving the growth rate up will offset the increase in servicing cost. Here is where the proverbial rubber meets the road. With interest rates likely to come back down as the economy realizes it cannot digest them, servicing costs will be, once again, dirt cheap.
Money Multiplier
So why is it a good idea to eliminate the income tax and replace it with debt?
The Money Multiplier is the reason for this.
A popular term in economics, the m multiplier effect defines the process of proportional increase or decrease in final income that results from an injection, or withdrawal, of capital.
In other words, for each $1, how much increase, or decrease, is experienced. This is what is really comes down to.
The reason why the income tax should be eliminated and the government funded through the sale of securities is cause the Money Multiplier for the US Government is negative. That means, according to Lacey Hunt for each dollar that goes in, about 80 cents comes out. The private sector, while volatile, has a positive M Multiplier.
To phase this another way, if the income tax money was left in people's hands, they would positively impact the economy. Most believed that money with the government simply did not get a decent return and they are correct.
For this reason, with interest rates making money very inexpensive, the net effect would be some growth in the economy. As private individuals spent the money commonly taken as tax, we would see the multiplier vibrate throughout the economy. This would raise the Velocity of Money, creating a greater economic impact.
The Only Works For The United States
This is a scenario that can only work for the United States. As mentioned, since it is selling pristine collateral, something absent from the private sector, there is always a market for it. In fact, the thirst is akin to someone being in the desert.
Of course, it would be better for the United States economy if deficits were not run. However, since politicians are not going to stop that, we need to mitigate the damage as much as possible.
That said, for the global economy, it is much better for the U.S. to run major deficits and finance it through bond sales. Here we see Triffin's Dilemma. Is the focus upon one's own economy or that of the world?
On the present course, we can be sure the economic growth rates will continue to slow. This will only cause more hardship as long-term economic conditions deteriorate. It is a path we were on since the early 90s with no sign of letting up.
Without growth, it is hard to maintain the productivity necessary to sustain both a growing as well as an aging population.
And simple math means that people are going to have to do with less.
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