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ANSWERS / Taxes & Gov't Services

Do you feel like your taxes are increasing but government services are deteriorating?

Basically governments pay for 3 broad categories of expenses: interest on accumulated debt, entitlements, and discretionary expenses. Services all fall under the discretionary label. For the last several decades governments all over the western world have let the good times roll – you know that politicians do want to get re-elected and we all want to get more for less – and have overspent and overpromised. The overpromising has been largely in the area of entitlements so let's not deal with that on this page but talk about overspending.

Here are several points on overspending:

1) When governments spend more than they take in through taxation, they run a deficit which is covered by issuing bonds which then add to the total debt. In the US the federal government has now done that to the tune of about $16.5 trillion. See the page on government debt.

2) When the good times roll and the tax revenue to the government is relatively high, we add new programs, which are virtually impossible to stop as that new program has now created a small but very vocal group of beneficiaries who will NOT allow their program to be killed. So, when tax revenue drops because of a slowdown in the economy, the politicians find it difficult to stop these programs and so we print bonds and sell them, thus increasing the debt. However, this website is about economics and not politics directly, so we will leave this issue.

3) As we continue down the road of what I just described in #2 above, deficits are run and so debt increases every year. This means that on the whole interest payments also steadily increase, and remember that is one of the 3 categories which the government has to pay out of its tax revenues. Well if one of the 3 expense categories increases, there are only 3 choices being: (a) increase tax revenues; (b) decrease expenses somewhere else, or; (c) a combination of (a) and (b). And (c) it is, as under (b) it is not possible to significantly decrease entitlements in the current political climate, and so we are experiencing increased taxes with decreasing services.

OK, so how would this be different in the Real Money Economy?

1) Interest payments would be zero, so one of the 3 expense categories would disappear;

2) Seigniorage would add another $350 billion or so per year (with 2013 numbers);

3) Therefore there would be substantial room to decrease taxes, or increase services, or some of both.



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