The logic flaw of tax cuts.

[Mexicano]

Did it ever cross your mind that spending less might also balance the budget? We dont have a revenue problem, we have a spending problem.

I think you are unaware of where does money come from.

Explain in a few words, according to your knowledge where does money come from? Who is in charge of creating and destroying money?

 

[task0778]

I think you are unaware of where does money come from.

Explain in a few words, according to your knowledge where does money come from? Who is in charge of creating and destroying money?

There are 2 basic kinds or types of money: 1) currency (cash) and 2) credit (fiat money). Cash is created or destroyed by the US Mint, under the control I believe of the US Treasury. Credit is created or destroyed by the Fed, either through Quantitative easing or tightening.

What does this have to do with revenue, spending, and the budget? Are you under the assumption that all the gov't has to do is print more money or have the Fed create more credit?

 

[Mexicano]

There are 2 basic kinds or types of money: 1) currency (cash) and 2) credit (fiat money). Cash is created or destroyed by the US Mint, under the control I believe of the US Treasury. Credit is created or destroyed by the Fed, either through Quantitative easing or tightening.

What does this have to do with revenue, spending, and the budget? Are you under the assumption that all the gov't has to do is print more money or have the Fed create more credit?

That's about 50% right
Money consists of currency and deposits.
Currency is created by the US mint.
Money is recorded as journal entries in the financial institucions ( central bank and banks)
Money is created when the government spends more than what it taxes and when banks issue more loans than what they receive as downpayments.
The amount of money in an economy is given by the following equation

Money = sum over time( Government spending - Taxes + interests on bonds + ( loans issued - loan payments) + net flows from abroad)

So the only way in which the government can spend less than what it collects in taxes without sinking the economy into a recession is by having a net inflow from abroad ( a trade surplus, payments on loans or remittances).
The huge trade surplus of Kuwat is what allows its government to collect no personal income tax and a collect a meager 15% tax on corporate earnings.

Edit:
It is a bit of a crude example , but assume you work in a company that spends more than what it sells and a big chunk of its revenues comes from the purchases made by the employees. The company has a large debt. Arguably the company would be better off with a lower debt. But the debt is a consequence of its performance. Trying to get rid of the debt without boosting it sells would lead to all kinds of problems.
Layout employees --> unemployment, decrease in production .
Cut wages--> sales reductions.
The only way to rid of the debt is to increase production and sales abroad.
It is a crude example because the Fed has the ability to create money out of thin air. It could simply swap the bonds of the bondholders with deposits ( if it was allowed by law).

 

[Toddsterpatriot]

The huge trade surplus of Kuwat is what allows its government to collect no personal income tax and a collect a meager 15% tax on corporate earnings.

If we had as much oil money per capita as Kuwait, we could do the same thing. We don't. We can't.

 

[task0778]

That's about 50% right
Money consists of currency and deposits.
Currency is created by the US mint.
Money is recorded as journal entries in the financial institucions ( central bank and banks)
Money is created when the government spends more than what it taxes and when banks issue more loans than what they receive as downpayments.
The amount of money in an economy is given by the following equation

Money = sum over time( Government spending - Taxes + interests on bonds + ( loans issued - loan payments) + net flows from abroad)

So the only way in which the government can spend less than what it collects in taxes without sinking the economy into a recession is by having a net inflow from abroad ( a trade surplus, payments on loans or remittances).
The huge trade surplus of Kuwat is what allows its government to collect no personal income tax and a collect a meager 15% tax on corporate earnings.

Edit:
It is a bit of a crude example , but assume you work in a company that spends more than what it sells and a big chunk of its revenues comes from the purchases made by the employees. The company has a large debt. Arguably the company would be better off with a lower debt. But the debt is a consequence of its performance. Trying to get rid of the debt without boosting it sells would lead to all kinds of problems.
Layout employees --> unemployment, decrease in production .
Cut wages--> sales reductions.
The only way to rid of the debt is to increase production and sales abroad.
It is a crude example because the Fed has the ability to create money out of thin air. It could simply swap the bonds of the bondholders with deposits ( if it was allowed by law).

Do I understand you to say that a gov't can spend their way out of debt by creating more and more debt? Just keep printing more and more money or having the Fed create more and more credit (otherwise known as debt on the Fed's ledgers)? Are you familiar with the concept of inflation? Do you realize that as inflation increases so does the interest rates, for the simple reason that your currency is worth less? And do you believe this scenario can last forever?

 

[Blues Man]

Since they are public goods ( e.g the roads or the railroad network) that wealth is created for all the citizens.
In the case of Kuwait those revenues also create wealth for the citizens, because they are entitled to extremely low tax rates
0% personal income tax rate
15% corporate tax rate.

Kuwait Corporate Tax Rate

The Corporate Tax Rate in Kuwait stands at 15 percent. This page provides - Kuwait Corporate Tax Rate - actual values, historical data, forecast, chart, statistics, economic calendar and news.

tradingeconomics.com

Kuwait Personal Income Tax Rate

The Personal Income Tax Rate in Kuwait stands at 0 percent. This page provides - Kuwait Personal Income Tax Rate - actual values, historical data, forecast, chart, statistics, economic calendar and news.

tradingeconomics.com

A passenger train will not "create" wealth for anyone.

Unless that train is used for businesses and freight at a reduced cost it will not "create" wealth for anyone because everyone 'will be paying for it with their taxes.

 

[Mexicano]

Do I understand you to say that a gov't can spend their way out of debt by creating more and more debt? Just keep printing more and more money or having the Fed create more and more credit (otherwise known as debt on the Fed's ledgers)? Are you familiar with the concept of inflation? Do you realize that as inflation increases so does the interest rates, for the simple reason that your currency is worth less? And do you believe this scenario can last forever?

What I am saying is it can't cut spending, especially when the private debt is higher than public debt.
It needs to change its policies so that it has a positive monetary flow from the foreign sector.

The central bank can (in theory) write off the debt but has to do that in small steps. Most countries have policies against that , so the only solution is : become a net exporter or a net receiver of remittances or net receiver of interest payments ( any or all of them).

 

[Mexicano]

A passenger train will not "create" wealth for anyone.

Unless that train is used for businesses and freight at a reduced cost it will not "create" wealth for anyone because everyone 'will be paying for it with their taxes.

But you are wrong, it will create value for all the passengers, although it depends on the price of the ticket.
It is usually cheaper to take a train than to use a car pay toll fees and parking. Especially if you are commuting to work on a daily basis and your home is 50 miles away from your work. The train will make the trip in 20 minutes.
It creates wealth by reducing costs and leaving capital for other expenses.
Anyway, those railways transport 4.3 billion tons of cargo, so they definitively contribute to wealth creation.

Rail transport in China - Wikipedia

en.wikipedia.org

 

[Blues Man]

But you are wrong, it will create value for all the passengers, although it depends on the price of the ticket.
It is usually cheaper to take a train than to use a car pay toll fees and parking. Especially if you are commuting to work on a daily basis and your home is 50 miles away from your work. The train will make the trip in 20 minutes.
It creates wealth by reducing costs and leaving capital for other expenses.
Anyway, those railways transport 4.3 billion tons of cargo, so they definitively contribute to wealth creation.

Rail transport in China - Wikipedia

en.wikipedia.org

Value is not wealth.

It costs the people their tax dollars and then it costs them every time they ride on it. It is a net financial drain on the people who pay for it and what about the people who had to pay for it but don't live anywhere near the train and can't use it?

 

[task0778]

It needs to change its policies so that it has a positive monetary flow from the foreign sector.

The balance of trade has nothing whatsoever to do with public (gov't) debt. Even so, there are only 2 ways to achieve a positive monetary flow from foreign sources: either you apply tariffs and other protectionist policies to make their products more expensive than domestic products, or you subsidize our domestic products. Either choice will reduce our standard of living significantly because the US dollar will not go as far as it used to. And I know what you're going to say next, you would raise wages to compensate. Which of course is inflationary, and domestic prices would rise and then you would increase the trade protections and up you go. That does not work.

The central bank can (in theory) write off the debt but has to do that in small steps.

Oh yeah? Whose debt would that be, debts to foreign businesses or to domestic investors that are holding US Gov't securities? Somebody somewhere owns that debt, who do you think should get screwed? And do you think such actions will have no consequences?

so the only solution is : become a net exporter or a net receiver of remittances or net receiver of interest payments ( any or all of them).

I do not believe you have an adequate understanding of how the balance of trade works. There's a reason why we do not enjoy a positive flow of exports vs imports, the rest of the world can make just about anything cheaper than we can and that's after they ship their stuff here. Ergo, the US is NEVER going to be a net exporter or receiver of remittances or interest payments. The 2022 deficit for the gov't was $1.4 trillion, do you really believe you can get that much from higher customs duties and excise taxes?

 

[Mexicano]

Value is not wealth.

It costs the people their tax dollars and then it costs them every time they ride on it. It is a net financial drain on the people who pay for it and what about the people who had to pay for it but don't live anywhere near the train and can't use it?

That seems to ignore several facts
1) IF the railway system was private the service would not be provided at a break-even price. The price would be higher because private enterprises need to extract a profit. The profit will not be low because railways are a monopoly although they have indirect competition from road transport.
2) There is a reduction of costs because of mass production and economy of scale. The railway construction was mass produced so every new mile is cheaper than the previous. The fact that many people use it makes it cheaper than commuting by car.

 

[Mexicano]

The balance of trade has nothing whatsoever to do with public (gov't) debt. Even so, there are only 2 ways to achieve a positive monetary flow from foreign sources: either you apply tariffs and other protectionist policies to make their products more expensive than domestic products, or you subsidize our domestic products. Either choice will reduce our standard of living significantly because the US dollar will not go as far as it used to. And I know what you're going to say next, you would raise wages to compensate. Which of course is inflationary, and domestic prices would rise and then you would increase the trade protections and up you go. That does not work.



Oh yeah? Whose debt would that be, debts to foreign businesses or to domestic investors that are holding US Gov't securities? Somebody somewhere owns that debt, who do you think should get screwed? And do you think such actions will have no consequences?





I do not believe you have an adequate understanding of how the balance of trade works. There's a reason why we do not enjoy a positive flow of exports vs imports, the rest of the world can make just about anything cheaper than we can and that's after they ship their stuff here. Ergo, the US is NEVER going to be a net exporter or receiver of remittances or interest payments. The 2022 deficit for the gov't was $1.4 trillion, do you really believe you can get that much from higher customs duties and excise taxes?

Well then , the only solution is to have the Fed write off the debt. It can simply write big IOU to the government.
If you try to cut spending you will get a recession , for that reason none of the parties actually cut the budget or put a hard ceiling on debt, in spite of all the sable rattling.

 

[Toddsterpatriot]

What I am saying is it can't cut spending, especially when the private debt is higher than public debt.
It needs to change its policies so that it has a positive monetary flow from the foreign sector.

The central bank can (in theory) write off the debt but has to do that in small steps. Most countries have policies against that , so the only solution is : become a net exporter or a net receiver of remittances or net receiver of interest payments ( any or all of them).

What I am saying is it can't cut spending,

Liar.

especially when the private debt is higher than public debt.

Irrelevant.

The central bank can (in theory) write off the debt but has to do that in small steps.

What debt can the central bank write off?
For what benefit?

 

[task0778]

If you try to cut spending you will get a recession

Politicians in either party know that if they cut spending then their chances for re-election are not too good unless they come from a deep red state. I am not sure that spending cuts would result in a recession, which might happen anyway if they don't cut spending. Sooo, significant spending cuts will not pass in Congress until the situation gets so bad that there is no other reasonable alternative. If the US Gov't cannot at least control spending enough to be no more than revenue, then at some future point the national debt will be so great that the interest payments alone will be the single largest item in the budget and we will face some very bad choices: keep printing more and more money which results in ever-growing inflation, OR default on the debt and that would be far more catastrophic than a recession.

the only solution is to have the Fed write off the debt. It can simply write big IOU to the government.

No, they can't.

I am not sure you comprehend the fact that the national debt is not solely held by the Fed. In fact, the public holds over $24.53 trillion of the national debt, as of January 2023.

Foreign governments hold a large portion of the public debt (approx $7.5 trillion), while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, pensions funds, insurance companies, and holders of savings bonds.

The Treasury breaks down who holds how much of the public debt in a quarterly Treasury bulletin. Foreign and international investors held over $7.4 trillion, according to its December 2022 bulletin, which included data through June 2022. State and local governments held $1.55 trillion and mutual funds had $2.84 trillion.

Other holders of the public debt include insurance companies, U.S. savings bonds, private pension funds, and other holders, including individuals, government-sponsored enterprises, brokers and dealers, banks, bank personal trusts and estates, corporate and non-corporate businesses, and other investors.


You can't just wipeout that debt without serious consequences. All I know is, the US Gov't has to cut gov't spending and increase economic growth so that revenue goes up. Some say they should also raise taxes, but there is concern that doing so would stifle economic growth somewhat. We know that tax cuts do not pay for themselves, s does it not make sense that tax hikes would not pay for themselves either, in terms of revenue? That would be akin to getting a bigger piece of a smaller pie. Spending cuts and tax hikes would both have to be done very judiciously, which means choosing the most efficacious policies irrespective of politics. Yeah, like that'll happen.

 

[elektra]

While I can understand how tax cuts on the middle class and small to medium businesses can help the economy, I am reluctant regarding giving tax cuts to large corporations. The main reason is that history has proven they engage into speculative investment ( derivatives, stock exchange, money markets).
These activities hardly help the economy or consumption.
The only way around this problem is to either tax capital gains or a tax on wealth.

Now just a definition of large corporation : a corporation with sales exceeding one billion dollars.

So, you believe;

the corporation must first be taxed at a high federal rate?

All the employees than get taxed even though that money was already taxed?

And stockholders should get taxed even though a federal tax was already paid?

how many times should we be taxed?

 

[Mexicano]

Politicians in either party know that if they cut spending then their chances for re-election are not too good unless they come from a deep red state. I am not sure that spending cuts would result in a recession, which might happen anyway if they don't cut spending. Sooo, significant spending cuts will not pass in Congress until the situation gets so bad that there is no other reasonable alternative. If the US Gov't cannot at least control spending enough to be no more than revenue, then at some future point the national debt will be so great that the interest payments alone will be the single largest item in the budget and we will face some very bad choices: keep printing more and more money which results in ever-growing inflation, OR default on the debt and that would be far more catastrophic than a recession.




No, they can't.

I am not sure you comprehend the fact that the national debt is not solely held by the Fed. In fact, the public holds over $24.53 trillion of the national debt, as of January 2023.

Foreign governments hold a large portion of the public debt (approx $7.5 trillion), while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, pensions funds, insurance companies, and holders of savings bonds.

The Treasury breaks down who holds how much of the public debt in a quarterly Treasury bulletin. Foreign and international investors held over $7.4 trillion, according to its December 2022 bulletin, which included data through June 2022. State and local governments held $1.55 trillion and mutual funds had $2.84 trillion.

Other holders of the public debt include insurance companies, U.S. savings bonds, private pension funds, and other holders, including individuals, government-sponsored enterprises, brokers and dealers, banks, bank personal trusts and estates, corporate and non-corporate businesses, and other investors.


You can't just wipeout that debt without serious consequences. All I know is, the US Gov't has to cut gov't spending and increase economic growth so that revenue goes up. Some say they should also raise taxes, but there is concern that doing so would stifle economic growth somewhat. We know that tax cuts do not pay for themselves, s does it not make sense that tax hikes would not pay for themselves either, in terms of revenue? That would be akin to getting a bigger piece of a smaller pie. Spending cuts and tax hikes would both have to be done very judiciously, which means choosing the most efficacious policies irrespective of politics. Yeah, like that'll happen.

Since the economy is a set of interleaved balance sheets. There are only 3 ways to increase the money supply in local currency:
1) When banks extend loans
2) When the government spends more money than what it taxes.
3) When interests on bonds are paid by the government.

1) decreases when firms and households have too much debt or interest rates increase.
2) decreases when you cut spending
3) decreases when you lower rates on bonds.

Most of fiat money is debt; it is just a journal entry in financial institutions. It can be created as easily as the fed created the assets it swapped for bank assets during QE.

 

[Mexicano]

So, you believe;

the corporation must first be taxed at a high federal rate?

All the employees than get taxed even though that money was already taxed?

And stockholders should get taxed even though a federal tax was already paid?

how many times should we be taxed?

In the past, the marginal tax rate in the US reached 90%, so it is nothing new.
Just once, but applying a marginal tax rate.

Historical Income Tax Rates

Wolters Kluwer takes a historical look at the top marginal income tax rates in the United States.

www.wolterskluwer.com

 

[elektra]

In the past, the marginal tax rate in the US reached 90%, so it is nothing new.
Just once, but applying a marginal tax rate.

Historical Income Tax Rates

Wolters Kluwer takes a historical look at the top marginal income tax rates in the United States.

www.wolterskluwer.com

So?

 

[Mexicano]

So?

So you don't tax them multiple times. You just raise the marginal tax rate.

 

[Blues Man]

That seems to ignore several facts
1) IF the railway system was private the service would not be provided at a break-even price. The price would be higher because private enterprises need to extract a profit. The profit will not be low because railways are a monopoly although they have indirect competition from road transport.
2) There is a reduction of costs because of mass production and economy of scale. The railway construction was mass produced so every new mile is cheaper than the previous. The fact that many people use it makes it cheaper than commuting by car.

Except that the government cannot run anything more efficiently than a private business and if the train was private then only the people who use the train will pay for it and not people who will never use the train. And the people who will never use the train far outnumber the people who will.