THE BUDGET AND THE FAIRTAX—HOW DEMOCRACY IS SUPPOSED TO WORK
Fiscal irresponsibility has created a disease that has infected all of us. We are all receiving benefits from the government. Most of these payments are coming not from federal tax revenues but by the Federal Reserve printing money and increasing the national debt. Even during the worst of the Covid-mandated shutdowns:
- No government workers missed a paycheck even though they stayed home.
- Social Security recipients continued to receive their payments.
- Medicare payments were made.
- Teachers continued to be paid.
- Aid recipients continued to be paid.
- The military continued to operate and be paid.
- People on unemployment or who went on unemployment received additional federal funds and extended benefit periods.
- Many businesses were loaned money to help them survive and the loan was forgiven.
- The businesses were allowed to deduct the payments, and this meant that the loan was “free money.”
- Now there are tax-free payments being made to parents with children.
- In fact, few areas of our society don’t receive benefits from our government.
However, as has been the case throughout history, the Ruling Class knows that once people get used to receiving “free” benefits, they’re not going to do anything that would threaten those benefits. That’s true even when people know that the money they’re getting is borrowed and that the debt will be a burden on later generations.
There’s an old saying, Give a man a fish, and you feed him for a day. Teach a man to fish and you feed him for a lifetime.
The Ruling Class and their minions in D.C., know the truth of that saying. However, the ugly truth is that they don’t want to teach people how to fish. They want as many people as possible coming to them for their free fish every day. They know that as long as they continue to deliver “free” benefits, the people will let them stay in power.
The problem is that this plan only works for as long as the Ruling Class can continue to borrow money. They know that tax revenue alone is not sufficient to fund all of their “free” giveaways, and that increasing taxes too much will just lead to more evasion and likely resistance that could result in their being overthrown.
The solution--use money created by the Federal Reserve. While this adds to the national debt, it keeps taxes at a tolerable level. As long as money is available to borrow, the Ruling Class sees it as basically “free money”.
INTEREST RATES AND THE FEDERAL DEBT
As we discussed in last week’s Chairman’s Report, most local and state governments have to operate in much the same way as individuals with regard to their budgets. How much they can spend is limited by how much they can take in. One fact that is often ignored is that even before the Federal Reserve was created in 1913, the United States had often carried high amounts of debt relative to GDP.
The chart below is from an article by usgovernmentspending.com:
It shows the U.S. debt as a percentage of U.S. GDP. You can see that in 2020, our national debt as a percentage of GDP was at the highest level since the founding of our country.
The chart below is from the same site:
It is interesting that the 16th Amendment was passed in 1913, the same year the Federal Reserve was created. From that point forward, gross debt for local and state governments has increased some, but the federal gross debt has soared. No coincidence.
Of course, a significant factor in the rise of all debt by both consumers and governments, is that interest rates have been very low for a long time. Today, the federal borrowing rate is around 2.2%. However, this is changing because the rate of inflation is increasing rapidly.
In simple terms, inflation means that prices are rising, thereby degrading your purchasing power by diminishing the value of your money. At a six percent inflation rate, prices will double in just twelve years, so a dollar then will buy only half as much as it does today. In effect, your dollar has lost half of its value.
Many of the “experts” tell us that the recent increase in prices is just “temporary”, but oil is now over $80 a barrel. In some California towns, people are paying nearly $5 a gallon for gas. Grocery prices are steadily increasing all over the country.
Through it all, the experts are asking, “Are you going to believe us or your lying eyes?”
Interest rates must increase as inflation rises. If inflation continues at 6%, lenders cannot loan money at six percent because they will receive no net return on the loan.
For example, assume a lender makes a 12 year $100,000 loan at six percent interest. In 12 years, when the loan and accumulated interest is repaid, the lender would receive $201,220. However, 6% inflation will have reduced the value of the $201,220 to just $100,610 in today’s dollars. The lender, in effect, receives nothing. No prudent lender will make this loan.
The federal government is not immune to the basic laws of economics. If inflation continues to rise, the federal government will have to start paying higher interest rates. According to this analysis in thebalance.com:
- Interest paid on the federal debt reduces the amount of money available for other government programs.
- The World Bank says a country reaches a tipping point when the debt-to-GDP ratio approaches or exceeds 77%. In the third quarter of 2020, the U.S. debt-to-GDP ratio was 127%.
If Congress passes only $3 trillion of the proposed $6 trillion of new spending on top of the already anticipated $1 trillion of budget deficit, the federal debt will be $33 trillion at the end of next year. If the interest rate increases from 2.2% to just 3%, interest due on that debt balloons from $627 billion to $990 billion. The projected 2022 budget assumes total revenue of $4.1 trillion. $990 billion is 24% of $4.1 trillion.
Projecting ahead five years, if the deficit only grows by the $1.2 trillion a year projected here, the federal debt will then be $39 trillion. At an interest rate of 5%, interest due on that debt will be a whopping $1.95 trillion. With projected revenue of $5.3 trillion in 2026, interest on the national debt would be 38% of the entire federal budget.
However, if interest reaches its 1988 level of 8% by 2026, interest due on that $39 trillion debt climbs to $3.12 trillion, or 59% of total projected revenue. Clearly, that is not sustainable.
In order for the Ruling Class to continue providing the “free” benefits people have come to expect, it will have to borrow even more each year. Eventually though, those who are loaning the federal government money will realize that they’re running a higher and higher risk of not being repaid. At some point, no one will be willing to loan the government any more money and spending will have to be reduced drastically.
Who will bear the brunt of those cuts? Will it be seniors? Will it be those on government aid? Will it be the military or government workers?
Almost all of us match our spending to our resources. When we have more, we spend more. The “free” benefits we’ve been receiving increase our resources. People have come to rely on these benefits to feed and clothe their families and to pay their other bills. If these benefits suddenly disappear and people can’t pay their bills, then businesses will collapse and there will be widespread panic. This is the type of panic that will spur the government to print more and more money until no one will accept it.
Unfortunately, all we have to do is look at recent events in Venezuela. No, the U.S. is not Venezuela—yet, but this is a current example of what excessive borrowing to fund increased spending can do.
CONCLUSION
It would be nice to say that passing the FAIRtax will magically prevent the inevitable economic collapse that comes with funding too much spending with too much borrowed money.
However, it won’t. The FAIRtax is a far more efficient way to generate revenue for the government, but it would still be up to the President and Congress to abide by sound economic policy.
However, the FAIRtax will:
- Show every person in America multiple times a day that there is a cost of the government benefits they are receiving;
- Reduce the amount of annual increase in the federal debt by at least $1 trillion because it drastically reduces evasion;
- Bring high-paying jobs back to America that are now being forced overseas by the income/payroll tax system;
- Eliminate tax returns and the IRS;
- Prevent Medicare from running out of money by 2026;
- Make Social Security solvent;
- Rapidly increase the growth of the U.S. economy and the prosperity of all Americans.
We can write letters and make calls to our elected representatives demanding that if the government really wants to eliminate the burden of filing income tax returns, they should enact the FAIRtax and do away with tax returns altogether.
The great 18th century Irish statesman Edmund Burke made a statement that applies in many ways,
“Nobody made a greater mistake than he who did nothing because he could do only a little.”
If you want to prevent the IRS from being further weaponized to punish those of us who may object to the D.C. opinions and dictates of what is good for us, then help us PASS THE FAIRTAX!
The IRS will be gone and we will pay our taxes when we make purchases. WE and not D.C. Elites will decide how much federal tax we pay!
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”
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