The Nature of Deficits: It’s the Spending, Stupid!

Earth to Democrats/Statists/Leftists: tax breaks do not cause deficits!

If there is one economic fallacy that completely drives me crazy, it’s this one! So, in order to dispel this notion that truly defies all logic, I figured the best way to prove this point is through graphical analysis. But first, let’s define some terms relating to the three possible scenarios pertaining to government taxation and spending.

Surplus: A situation in which assets exceed liabilities, income exceeds expenditures, exports exceed imports, or profits exceed losses.¹

Deficit: A situation in which liabilities exceed assets, expenditures exceed income, imports exceed exports, or losses exceed profits. ²

Balanced Budget: a budget is balanced when current expenditures are equal to receipts. ³

With those terms in mind, let’s imagine a hypothetical society. We’ll call this society Atlantis. Atlantis' government was just founded and has immediately incurred expenses for its functioning. In total, these expenditures will cost $75.00 (Hey, we’re talking Atlantean dollars here! After all, their economy is just starting off.). 

No matter how much Atlantis spends greater than $0, absent tax revenue, it will never be in the positive (i.e. deficit). Spending is an expense and an expense is a negative (-). You either have spending (-) or no spending (0).

Now, let’s take a look purely on the revenue side. Let's say the government of Atlantis has imposed an income tax on all productive members of society as a source of revenue and brought in a total of $100.00.

No matter how much tax revenue Atlantis takes in greater than $0, absent any spending, it will never be in the negative. Taxes are a source of revenue and revenue is a positive (+). You either have revenue (+) or no revenue (0). 

Now, let’s see what happens when the two are stacked up side by side.

Atlantis’ revenue is greater than its expenditures by $25.00. As mentioned above, this is known as a surplus. 

Calvin Coolidge, America’s 30th President, once said “Collecting more taxes than is absolutely necessary is legalized robbery.” Atlantis agrees, and so it has decided to cut its income tax by 50% (For now, we'll assume everything else remains constant. And later we'll see examples of what actually happens to state coffers when taxes are raised). 

Ah, we’ve arrived at the dreaded deficit and the source of all this confusion. In the beginning I asserted that the belief that tax breaks cause deficits defies logic. But it seems logical that this is exactly what happened. Spending didn’t change, taxes were cut, and now a deficit has arisen. But this is one-dimensional thinking that does not get at the fundamentals. It’s important if we are to solve a problem that we get to the fundamental nature of its cause. What the left ignores is the side of the graph the deficit resides on. It’s not coming from the revenue side but the spending side. They ignore the nature of the deficit: spending.

To further concretize my point, let’s examine just the revenue side. If it is true that tax breaks cause deficits, then we will arrive at one in this example and put this debate to rest, either way.

Let’s once again start with $100.00 of tax revenue. 

From the outset, we have a surplus of $100.00. Now let’s offer a tax break and give back 50% of what we took in back to the people. Now remember, the mindset is that tax breaks cause deficits, so we should surely arrive at a deficit after enacting this tax break...

Hmmm… no deficit. We just hacked the revenue a whopping 50% and not only did we not arrive at a deficit, on the contrary, we still have a surplus. No matter how much we lower taxes, we will still have a surplus until the point where we take in no revenue, where we will ultimately reach $0.00. There is no possible way to get into negative territory. The fundamental truth to be gained here is that there can be no deficit without spending. 

Keep in mind in order to make that point, assumptions were made above that everything else remained constant. In actuality, tax revenue is known to increase when tax rates are lowered. There is a plethora of evidence that shows government revenue actually decreases when taxes are raised, especially on the rich, and increases when taxes are lowered. It has a lot to do with the fact that lowering taxes allows more money into the private sector leading to greater and more efficient use of capital visa vi investments in start-up companies and expansion of already established businesses. Also, people are less inclined to seek out loopholes in the tax code when they perceive their rate of taxation to not be oppressive. 

A great example of this phenomenon is what happened in Oregon in 2010. Reported by The Wall Street Journal, "Oregon raised its income tax on the richest 2% of its residents last year to fix its budget hole, but now the state treasury admits it collected nearly one-third less revenue than the bean counters projected... One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did."⁴ Can somebody say "Who is John Galt?"

But this scenario is not exclusive to Oregon. Another similar case played out in New York a few years back. Then Governor Paterson is quoted as saying "We increased the income tax for millionaires last year. We projected that we would get $4 billion and we actually got well short of it. Tax the rich, tax the rich. We've done that. We've probably lost jobs and driven people out of the state."⁵

And how about the state of Maryland? "We reported in May that after passing a millionaire surtax nearly one-third of Maryland's millionaires had gone missing, thus contributing to a decline in state revenues... Well, the state comptroller's office now has final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million."⁶

So the left says tax breaks cause deficits but in reality tax increases actually bring in less revenue. I guess another truth to be gained from this is that wishful thinking clouds all reason.

Final Word:
I am unequivocally against all forms of coercive taxation. The reason is simple: a person who does not get to keep the products of his labor is a slave. At tho point one might ask "But who will fund the government?" This saying succinctly makes my point: 'I don't need to know who is going to pick the cotton to know that slavery is wrong.'

But for those who are still unsettled by that unanswered question, a great mind at The Objective Standard, Craig Biddle, has written on exactly this subject with an article entitled "How Would Government Be Funded in a Free Society?" (The link offers just a preview of the article but it's well worth the purchase price.)

Now, the unfortunate reality is we live in a country that has imposed an immoral right's violating income tax. With that knowledge, currently the best we can ask of our government is to act in the most moral way possible. When faced with a deficit, the more moral and more responsible thing to do is not to further violate one's rights by increasing taxes (we know from examples above that this also lacks practicality), but to reduce the spending, reduce the burden on the people, and bring the budget into balance. Not only is it a moral imperative for our government to do so, our future quality of life is depending on it!

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Sources:

¹ http://www.investopedia.com/terms/s/surplus.asp##axzz1yjnP0AtM

² http://www.investopedia.com/terms/d/deficit.asp##axzz1yjnP0AtM

³ http://dictionary.reference.com/browse/balanced+budget

⁴ http://online.wsj.com/article/SB10001424052748704034804576026233823935442.html

⁵ http://www.freedomworks.org/blog/jborowski/tax-hikes-on-the-rich-wont-work

⁶ http://online.wsj.com/article/SB10001424052748703976804575114241782001262.html?mod=djemEditorialPage_h

Countering Statists' Accusations

I wanted to address a specific accusation I have heard one too many times from so-called progressives and other statists regarding people who advocate liberty that I feel needs to be rationally countered. I also wanted to share my perspective on a set of comments I’ve received personally throughout being involved in various online debates.

 

The accusation I continually hear against those who champion limited government and individual rights is that, somehow, they are uncompassionate, inhumane, and, I love this one, antisocial!

Now think about that for a second. These leftists are of the mindset that government's role is not merely to protect people's rights, but to take care of them. Of course, the most important way government is able to do this is through coercive income taxes and other wealth redistribution efforts imposed on productive people. What they either fail to realize or consciously ignore is that when government does this, it violates the individual rights of its citizens. But, they say, this is done out of compassion for the less fortunate and if you oppose this (i.e. you want to be left free from government force), then you are an uncompassionate, you hate the poor, and you're submitting to antisocial/sociopathic tendencies. Their logic simply astounds me.

A quick Google search for synonyms of the word "social" yielded the terms "friendly" and "companionable."

Is putting a gun to someone's head and demanding they do something for you or stealing their property being friendly or companionable? Of course not! Conversely, to respect the individual rights of all people is being of the highest social caliber man can possibly be. To identify one’s existence and to say “I accept and respect you as a living, breathing being possessing inalienable rights that would be immoral for me to violate,” that’s being social, and that’s what forms the basis of a peaceful and prosperous society. What is blatantly antisocial and sociopathic is to have a total disregard of anyone else's rights. Come to think of it, that's not only being antisocial, it's narcissistic! To feel that you stand above objective moral law, to feel that you have the right to violate the rights of others who've done no harm to you, or to believe that it's well within your rights to delegate that power to the government (because, let's be honest, you're too cowardly to violate my rights yourself), is just plain narcissistic. It's that simple.

 

Unfortunately, this mindset has permeated throughout my generation (I hold out hope that their minds can be changed, but only time will tell):

 

As I was engaged in a debate about the principle of individual rights, one woman wrote "Standing for principle is cool. But when principles are more important than people, that's when we lose our humanity." What she's saying here is that it's humane to violate the rights of others so long as someone is receiving benefit (in this case, we were discussing forced wealth redistribution to the poor via the government). That is totally and unequivocally wrong! The principle of individual rights is what gives rise to our humanity and separates us from the rest of the animal kingdom. When a lion hunts down a gazelle, the gazelle community does not subpoena the lion to a court of law to face justice. The objective morality of individual rights does not exist in non-human nature. Strip away our rights and we are fundamentally no different from any other animal. 

During a separate debate, someone wrote "When a principle or fundamental truth is shown to have little to no application in combating a real world scenario it should be modified." (Here's another example of that narcissism I was talking about before. How exactly does one “modify” a truth? And who made you God? A = A no matter how much you want it to be B!) Well, in history we've seen exactly what happens when people believe that. We don't have to look any further than Nazi Germany and Hitler's concentration camps or the Soviet Union and Stalin's gulags. Both Hitler and Stalin felt it necessary to "modify" the status of one's inalienable rights to achieve their goals. The result was mass-death and suffering for millions of innocent victims.

So much for being compassionate.

Happy Birthday, Jacques!

Jacques Benguigui (1931-1944)*

Today is my 23rd birthday, and although it’s one of my favorite days of the year–for it is a time when I get together with friends and family to celebrate my life–I always take a moment on this day to reflect on the life of an Algerian boy named Jacques Benguigui.

I was introduced to the life of Jacques in my 10th grade English class during a lesson about children of the Holocaust. I remember my teacher handing me his biography along with the picture above and instantly realizing we had something in common; we shared a birthday. I felt an instant connection to him and wanted to learn as much about him as I possibly could. Excited about this commonality, I continued to read his biography, hoping, perhaps, I could learn of an address where I would be able to write him to share my excitement and to learn more about what he endured during that horrific time in history. Unfortunately, after finishing his biography, I knew it would not be possible. Jacques Benguigui, just weeks after his 13th birthday, along with his younger brothers Richard and Jean-Claude, were killed in the Auschwitz gas chambers in May of 1944 (Read Jacques’ full story here).

Tragic. There’s no other word to describe it. Revisiting the life of Jacques caused me to take some time to reflect on what was going on in my own life on my 13th birthday. I was a 7th grader, and that day marked 7 months and 2 days after the horrific 9/11 attacks. I guess that means we share something else in common: we were roughly the same age when we witnessed the consequences of men accepting the premise that it is okay to initiate force against another human being, that it is okay to violate the rights of another. 

It is pivotal if we are to live as humans and not as animals, if we are to live a truly civilized existence and not one of savagery and barbarism, that we never violate these moral principles we call individual rights. 

So my birthday wish this year, in honor of Jaques, is that all men embrace reason fully, respect the rights of others absolutely, and that they find the courage to combat evil and rights-violators where ever they exist–lest these horrible events ever happen again.

Happy Birthday, Jacques! Gone, but not forgotten. 

*Photo Credit: The Museum of Tolerance