Since government doesn’t produce wealth, it has to take wealth from the economy in order for it to operate. Even at its best, government operates at a net expense to a nation. However, it is a necessary expense, as long as the government protects economic and social freedoms which provide a platform for a stable and productive economy.

There is an optimal level of government, too little and the nation descends into anarchy, where no freedoms are guaranteed and a prosperous economy is not possible. However, too much government results in unnecessarily high taxes to fund it, along with stifling controls and regulation. Since the government takes money from the economy, it is removing capital that could be used to invest in more wealth creation and jobs in the private sector, the result is the loss of productivity (wealth creation), which is the basis of job creation in an economy.

Taxes, in and of themselves are not necessarily destructive and to the contrary are very much necessary to operate the basic functions of government to guarantee those necessary freedoms. However, they can also be a tool of tyrants that can cripple and even destroy an economy when they are too burdensome or when they take capital from the economy and destroy it on unproductive uses.

Politicians seem to think they have found a way around the burden of taxes through the justification provided by Keynesian economic theory.

A Keynesian economist would say that deficit spending stimulates the economy by creating jobs. Their theory suggests that if the government borrows, instead of taxing, and in return spends money, the economy will be stimulated regardless of actual productivity.

John Maynard Keynes, the father of Keynesian economics, explained his theory with this example: You can pay someone to dig a hole and pay someone else to fill it; the fact that nothing productive is taking place doesn’t matter. The spending alone will stimulate the economy.

John Keynes was only partially correct. In his theory, the economy can be temporarily stimulated via the credit of the US government. However, what Keynesians will not address is the long-term effects of this theory.

Logically, this cannot continue indefinitely. In fact, when asking a Keynes about the long run, he was famous for responding , “In the long run we are all dead”. This statement acknowledges the fact that eventually that form of economic stimulus will run out and have adverse consequences, but they brush it off by effectively saying, we won’t have to worry about it because we won’t be around. The problem is that in the long run ‘they’ may be dead, but someone else will still be alive and will be left to clean up the mess.

Keynesian economics debuted in 1936 through the book “The General Theory of Employment, Interest and Money”. The US government has been operating under this theory ever since. It has been a god-send to politicians, because they have been able to pay for ill conceived social programs without having to raise taxes, which is effectively buying votes with the wealth of future generations.

The problem is, we are now seeing the long-term effects, with staggering deficits, a huge National debt and an inflated currency. The government is having trouble continuing that economic policy. Borrowing has become more difficult, even from the Federal Reserve, because they have already printed so much money in response to the current crisis. America’s good credit is wearing thin.

The Austrian school of economics is the primary counter argument to Keynesian economics. It addresses the economy in a much more broad view, including the long run. An Austrian holds that the only way to have an efficient and sustainable economy, is through wealth creation and that environment is best created under a limited government, but one that is strong enough to protect the economic and social freedoms of a free society.

The course of Keynesian theory has not offered a way out of operating a government and an economy without having to face real trade offs. The cost of this theory is coming to light now that the latest keynesian bubble has burst and the American people are being forced to realize the destruction of trying to evade the reality of common sense economics. If America is going to be a sustainably prosperous and wealthy nation, it cannot continue to rely on borrowing wealth from posterity, which only shifts the current cost of government onto future generations. Instead, it will have to return to the principles of smaller government and true wealth creation by private industry.

Does Harry Reid have a point?

“All taxes ultimately—the consumer pays the taxes. Nobody else pays the taxes. Corporations don’t pay taxes. They collect them, but they don’t pay them.”
— Dr. Milton Friedman, Nobel Prize-winning economist

“Whatever you tax, you get less of.”
—Alan Greenspan

“…in this world nothing can be said to be certain, except death and taxes.”
—Benjamin Franklin

The video below gives a brief description of our current system as well as a strategy to achieve real tax reform.

Taxes must be paid. They are a necessity if we are going to enjoy the structure and protection that a government provides. However, there are many different methods and levels of taxation. Originally, the US government primarily collected taxes in the form of tariffs and excise taxes. However, in 1913 the US Constitution was amended to allow the government to tax income, specifically through a “progressive” income tax system. Until that point, all taxes were levied at the point of consumption or importation. The income tax however, imposes taxes at the point where the money is earned. This system effectively penalizes production. Further, the progressive component penalizes higher degrees of productivity by increasing the rate of taxation for a higher wage earned. So, a person who makes $30,000 per year is taxed at a rate of approximately 15%. However, a person making $200,000 per year falls in the 33% tax bracket. It is understandable that a person who makes more would pay more in taxes in absolute terms. But, to require them to pay more as a percentage of their income is an ‘unequitable’ system. It is no mystery why a “progressive or graduated income tax” is the second plank in the communist manifesto.

The current system is also too cumbersome. The current tax code sits at approximately 55,000 pages. That is 55,000 pages of rules, regulations and loopholes. The system is too complex for the average American and even for the average politician who writes the tax code to understand. The complexity in the tax code forces companies and individuals to spend millions of dollars each year to ‘try’ to figure out how to comply. This money is essentially wasted on a non-productive task. If the tax code was simplified, this money could be put back into the economy for more productive uses. As said before, the complexity also allows for loopholes in the tax system, which are mainly created by special interest groups through lobbyist in order for a select few to receive special treatment and tax breaks under the current system.

A more “fair” and “equitable” method of taxation is either through a “flat tax” or “The Fair Tax”. A flat tax would impose a flat percentage rate for all wages earned. In this case the higher wage earners still pay more in absolute terms, but they are not subject to an additional tax penalty for a higher production rate. It also simplifies the tax code to what could possibly fit into a single line, because it would just be a flat rate, which would be applied to all income levels and it would close all loopholes if appropriately enacted.

The fair tax would abolish all income tax and payroll taxes and replace it with a consumption tax that works much like a state sales tax. This method is further explained in the book- FairTax: The Truth . You can also find more information at FairTax.org. Both the flat tax and fair tax fix many of the problems with the current tax system. However, the fair tax goes much further to alleviate these problems as well as providing better solutions.

It is important however, that the ultimate end goal should be to restrict the amount of money that is sent directly to DC. Therefore, we should push to get rid of the idea of a vast Federal tax system. That is the only way to realize a Constitutionally limited Federal government.