As I've long since promised (and long-since neglected to write), this is my thread discussing how and why taxation are forms of theft, and why adding to the debt burden of the U.S. Taxpayer adverseley affects the purchasing power of the world's working poor. This will be a long post, and I'm betting that even the people who asked me to write this to explain myself will want to consume it piecemeal (or simply not at all). Because of this, I've decided to break it down into sections:
1: A Brief Discourse on Gresham's Law
2: What is Legal Tender?
3: The Folly of “Progressive” Tax
4: The Hidden Regressive Tax
5: Aren't Tax Cuts Good?
6: Towards an End to the Slave State
You can read this in segments (or not at all) if you wish. If you wish to read a particular section, simply “ctrl+F” the beginning of the title you want to jump to (including the numbers and colons) and hit enter twice, the exact text you see above will directly connote each of the six sections.
1: A Brief Discourse on Gresham's Law
I have always been fascinated by 'scientific' laws that constitute attempts to frame human behaviour in either a pessimistic or optimistic light. Gresham's Law is an example of the former. For those of you who don't know what it is, it's an observation made by 16th Century banker, Sir Thomas Gresham. The observation was in regard to bimetalic standards of the English economy during his lifetime. Bimetalism is an economic system whereby there are two precious-metal-backed currencies occupying the same jurisdiction, and a government (or some other entity) attempts to codify a standard of value between the two currencies. The theory was that it enabled market-based trade of the two currencies. What resulted was defacement of the good currency (i.e.,the currency whose commodity value is more commensurate with its face value than that of its counterpart), and the eventual monopolization by the bad currency (i.e., the currency whose face value is greater than its commodity value).
This is why Gresham's Law is usually stated as “Bad money drives out good”. Of course, we have governments whose primary purpose is to prevent the pessimists from winning the argument, don't we? I mean, if we lived in a Hobbsean “state of nature”, and some philosopher attempted to codify a “scientific law” that said “People will murder each other” based on the observation that people do in fact murder eachother, wouldn't we want a government to come along to pass an act of legislation that said “People can't murder each other”? How this bizarre analogy relates to finance is addressed in the following section. In some ways, establishments (and nationalizations) of Central Reserve Banks represent governments' and the banking industry's attempt to combat this law, but in one very crucial way, these attempts are universal failures.
2: What is “Legal Tender”?
Defacement was the phenomenon that drove out the use of “good” money. This isn't simply drawing ruby lipstick on Queen Elizabeth or Thomas Jefferson's face, this was the process whereby a few enterprising individuals found a way to double the benefit of their money. They would shave the metal on the face and edges of their coins, collected the shavings and sold their collected weight for the metal's commodity value, and then redeemed the 'defaced' money for goods and services in the coin's notional value. This process was weakly combated by criminalization of “defacement” and then eventually the defaced money was simply phased out.
To prevent this process from occurring again, and to mitigate the potential harm caused by bank runs (i.e., the phenomenon of depositors en masse claiming their savings while the savings are being lent out, causing the bank to collapse), private banks came together and formed central banks, and their existence was usually codified in law. This process also replaced commodity-backed money with what is known as “legal tender”. Look on your bills, and you will notice the political symbols of your jurisdiction, and the words “legal tender” somewhere on most of them. This is what we plaebians use as currency, but it is not money in a strict sense of the word, they are political documents. That is to say, they are instruments of coercion. These notes are promises to pay, not payments themselves. And the only payment promised is the coercive power of government to collect if you fail to pay your taxes. Legal tender is not redeemable for anything in particular (that is not to say they lack any purchasing power), they do not reflect a quantity of anything, and their purchasing power continues to decay as a result of inflation in the supply of these currencies. Essentially, trading in dollars, euros, and pounds is trading in promissory notes of taxation. This is why the greater the volume of commerce you make in your jurisdiction's currency means the greater amount you are taxed. This is the crux of the next segment of this post.
3: The Folly of “Progressive” Tax
Many statists (on both wings of the political divide) insist that progressive taxation is the best way of funding government services in a mixed economy (anyone who says any sort of tax is a good thing for a capitalist economy needs to check his premises). The conventional wisdom goes that because the poor are just as deserving of services like plumbing, roads, education, and healthcare as the wealthy are, but are unable to afford them in the current mixed economy, taking a greater amount from the rich and a lesser amount from the poor is justified. After all, does this not mirror transactions in the markets that do operate somewhat openly? Does the wealthy man not pay more for his Jaguar than a poor man pays for his Kia? Indeed this logic seems to bare out some sense, but it does not entirely square with what ends up happening in reality.
Poor people buy products and services from those with the financial wherewithal to hire other poor people to provide them. As taxes on the wealthy increase, so to do the pressures increase on both their capacity to demand and their capacity to supply. For instance a tax on capital gains is a tax on loanable or funds. If that wealth was not taken from the earner of the capital gain, it could be used to invest in a new employee, a new business venture, or a new charitible project. This wealth could be used to create new wealth, and to drive up the productive capacity (and therefore drive down costs) for the economy as a whole. The other side of it is the price that is then charged to the consumer in exchange for goods and services. The cost of a good or service tends to reflect the cost associated with the endeavours that went into producing the good or service. Machinery and knowledge to make the item, workers to assemble and package it, and shippers to distribute it. When you buy something, the money you put down is paying for all of these things. But there is another cost that producers must contend with: the cost associated with being taxed.
In order to recoup those losses, prices on goods are driven up in the wider economy. When prices increase, the wealthy and the moderately wealthy have a portion of that wealth base in savings to insulate them from a higher cost of living. Whereas the working poor generally save a smaller portion of their income than the wealthy, and subsequently a larger portion of their earnings goes to day-to-day sustenance than that of wealthy people. This makes them more acutely sensitive to increases in the cost of living, which is a similar problem, but not identical to the problem of inflation, a subject to be discussed presently.
4: The Hidden Regressive Tax
Many people (understandably) tend to mistakenly equate increases in prices and cost of living with inflation. While these tend to have similar deleterious effects on the purchasing power of the working poor, they are not always of the same source, and do not always reflect the same types of government interventions in the economy. The reason why these things get mistakenly equated is because there are basically two different ways inflation is measured. The first reflects this common mistake, the second is something slightly different. Governments of various jurisdictions, and the United Nations as well keep extensive statistics on economic activity. Inflation is one of the phenomenae government statistics bureaus tend to focus a great deal on, but the way they measure it is a reflection of selection bias.
Governments tend to track inflation by various methods, but the most common is known as the “Consumer Price Index” or CPI. This data is based on measuring the cost of a weighted “basket” of consumer goods that the average household will tend to consume in a given period of time. But at various times, various items are not reflected in inflation. For instance, the cost of food and energy no longer are reflected in U.S. Federal measurements of CPI, and federal reserve interest rates, and other monopolistic price policies (e.g., minimum wage) are reflective of the CPI, not the other way around. This means crucial areas of the economy are blind spots when statisticians are trying to quantify something as nebulous and furtive as purchasing power. If stock prices, energy, labour, and food are not included in CPI measurements, then one's attempts to use CPI as an index of purchasing power fluctuation will fall somewhat short because, energy, industry, food, and investment are the means by which our lives are sustained, and planned for in the future.
So again, this is not what I refer to when I call “inflation” a form of theft, what I am referring to is inflation of the supply of money relative to the amount of productive capacity in a given economy. By any objective measure, this rate has increased rapidly in the last couple of decades, and precipitously in the last year.
As you can see, the rate of increase in the supply of U.S. Dollars is approaching the rate of singularity (which is in and of itself completely fucking insane). Unfortunately, the Real GDP graph (i.e., the bottom graph) doesn't go back all the way to the founding of the federal reserve, but as you can see there is nowhere near a 1:1 correlation between GDP growth and money supply growth, they are not at all related. One fluctuates wildly, while the other is in a continuous upward trend. This upward trend reflects the continuous theft of purchasing power from the private economy by the U.S. Government, its Federal Reserve bank, and the Private banks who borrow money from the Fed.
When government budget requirements fall short of its revenue, the government's recourse is to print the shortfall. This process obviously does not take the 20 dollar bill sitting in your wallet out of your wallet, but what it does do is diminish that 20 dollar bill's purchasing power. How does it do that?
Well, as you can see, the amount of legal tender in an economy has no real relation to the amount of productive capacity of an economy, so when a government commandeers currently-existing productive capacity in order to achieve an objective (such as building a road, buying your grandma her prescription drugs, et cetera), it takes the access to that portion of capacity away from the marketplace. This is how inflation is a form of theft, it is not a theft of dollars directly (like taxes are), it is a theft of purchasing power from the dollars that previously existed.
This is why the working poor are most adversely affected by inflation of money supply. Wealthier people, companies, and and those with superior credit ratings, when they have a funding shortfall, are able to borrow money (either from investors, depositors, or from their own currently-existing savings) to cross that gap, whereas the working poor are have no such recourse, and can only bargain collectively for an increase in purchasing power, or simply work more hours. However, the solution to this problem is not necessarily precipitous tax or funding cuts by governments, and I will explain why in the following section.
5: Aren't Tax Cuts Good?
The conventional wisdom on the part of conservatives is that since “all taxes are bad”, it would logically follow that “all reductions in tax are good”, and generally speaking, I tend to side with the notion that the less victims of theft there are in the world, the better off the world is, but the problem is that tax credits, cuts, and subsidies usually constitute net transfers of wealth, not reductions in state-imposed burden.
Consider, for example, the “Bush tax cuts”. These tax cuts were done in the wake of military spending increases, which increased the debt for FY 2003 by $60 000 000 000 and was estimated to add to the deficit $340 000 000 000 by the end of the Bush Administration. In other words, the wealthiest were required to pay billions of dollars less in taxes for a few years (which is a good thing, but only marginally) at the expense of everyone (and, as illustrated earlier, the least wealthy most acutely) for years to come (which is a very very bad thing). This means, on the balance, this tax cut actually increased the amount of theft the government would need to commit in order to fund its future operations, which illustrates that cutting taxes isn't always a way of mitigating the amount of theft a government commits. If simply cutting taxes is not the solution, what could be? Let's discuss this matter in the final section.
6: Towards an End to the Slave State
As I have asserted, cutting taxes are not the cure-all to the problem of the ever-diminishing value of labour. Government spending must be decreased, commensurate with these cuts in taxes, and eventually federal reserve systems of finance need to be phased out, but what can we replace it with that wouldn't lead to total anarchy and chaos?
As I have insisted in the past, liberty and anarchy are not one in the same. Quite simply you cannot have a free society without an institution whose role is retaliation as a means of deterring the initiation of force. And it has to be one institution (per given geographic area), you cannot have a competition in this field. Competitions in the use of force are wars. No sane person thinks war is preferable to slavery. A true moralist would realize that both are evil, and ought to be avoided. But how can we go about freeing ourselves from both? Well, no one believes there is a pure, perfect, or permanent solution to this problem. But adding to the financing responsibilities of governments, and increasing their power over the private economy are the causes, and so they should be avoided.
The best replacement for a system of taxation (after, not before dismantling monopolies in industries that do not involve the act of governance) I have come across is what is referred to by some as contract insurance. In essence, a government already has the responsibilities that secure its role as the primary deterrent against force: courts of law, criminal justice, military, and the police, and all of these convey genuine value to citizens (when they are employed justly and equitably). It is good that people get punished if they commit a crime, and it is good that a written contract can be backed up in a court of law, and these endeavours have value. However, you can't justly set up a system whereby citizens voluntarily pay to be protected from criminals, because this would simply devolve into a system where people pay to be protected from criminal prosecution. Such a system would not be free, since all the victims would be oppressed by all the wealthiest of criminals.
However, governments can and do receive funds commensurate with economic activity. Charging this payment on a voluntary basis, and making it more direct – i.e., insuring the obligations expressed in a contract for a deductible – can prevent a system of bribery from taking place. This is because the only contractual obligations that would be insured by the government are those contracts which both parties agree the government should insure it. Now you might say “corporations are cost-cutting entities. If they can avoid paying a cost, they will, then the government will end up with nothing, and society will end up without a government.” This is partially true. However, corporations do not shy away from all costs: they do not shy away from the cost of production, the cost of marketing, or any other cost that brings their profit margin an over-all benefit. The same would be true of contract insurance. Companies and individuals exchange billions of dollars every day in mercantile and stock markets. These transactions occur at a fast pace because the contractual obligations that underwrite these activities have the protection of Civil Law. That is to say, for example, if the millions of dollars company A paid for x amount of barrels of oil does not get them their oil, they can sue the company B for the damages incurred for having that contract breached. In other words, contracts that are actually backed by Civil Law (and not just word-of-mouth obligation) have value in the marketplace. So, a pre-defined portion of these billions of dollars could be taken voluntarily from both parties by the government, and used to fund its limited scope of programs.
Of course, you cannot replace income, capital gains, sales, property, and inflation taxes with a single system of payment over night. What needs to happen first is a cautious and prudent dismantling of government-controlled (and government-protected) monopolies and oligopolies, parallel with decreases in taxation, alongside a refusal to recognize the contract of any bank with a reserve ratio of less than 100%, and after all that, but not before, can we replace arbitrary theft of wealth with voluntary systems of payment across the entire economy.
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