Thursday, May 17, 2012


I recently heard a conservative make a statement which seems to point out one of the right's biggest fallacies concerning the U.S. economy. After lamenting that it takes until some time in May for an American worker to earn enough to pay his taxes, this fellow says, "(that's) a whole lot of money for the government to be taking out of the economy." The problem with that point of view is that it is 180 degrees from the truth.

Government doesn't take money out of the economy. It redistributes money taken in taxes back into the economy. In fact, since we are borrowing $0.40 of every $1.00 of government spending, the government is putting way more money into the economy than it is taking out in taxes. Now, one can be against redistribution, call it socialism, and demand an end to it, but that's not the same as assuming that money taken in taxes just disappears into some black hole of the Treasury Department.

I think this actually gets to the heart of the American conservative idea of how the economy works and why I find the prospect of turning the keys to the whole thing over to them frightening. In their view, since being made to pay taxes takes money from them, that money is then gone and not available to be used by the "job creators." Since the free market no longer has use of those moneys they see this as a net loss that can only be resolved by cutting taxes. No credit is given to the government's use of the money. Government jobs don't count. Government workers have no worth to the economy and besides, we all know that government can't create jobs. Don't we?

As I said, conservative have it backwards. It's not government which takes money out of the economy, it's private sector investment in foreign companies, out sourcing and just sitting on over $2 trillion in cash which takes money out of circulation. Government, on the other hand spends the money taken in taxes by direct hiring, contracting, or in the form of grants to the states. The states, of course, then do the same. And here’s the real dirty little secret of government spending; they get some of the money back in more taxes.

Never forget, boys and girls, that the government taxes transactions. If you work for the government you pay taxes on your income. If a corporation enters into a government contract that corporation (hopefully) pays taxes on its profits. And that’s just the original transactions. That corporation pays wages which are also taxable. Buys products (taxable), services (again taxable), and perhaps invests some of the money (the profit from which is taxable as capital gains).

So, the next time you hear someone on the conservative side complain that taxes take money out of the economy, ask them if they’re kidding, or just confused. Then tell them why.

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