In a world of full of concessions, and a financial system rife with complexity, it is often too easy to lose sight of basic economic principles. This is especially true when it stops becoming a show that you watch and begins to be a reality you experience.
We’ve all been astounded at one point or another when confronted by the layer upon layer of law and complexity around income tax. Your taxes have nothing to do with the government's need for money.
The father of income tax, Beardsley Ruml, in a discussion about how the function of taxes changed after the nation exited the gold standard, wrote about the merits of corporate taxes. This must also read includes his statements regarding taxes without a gold standard:
Ruml is the former Chairman of the Federal Reserve Bank of New York and instigator of federal income tax withholding. He states that, in a fiat currency system, governments can create infinite money and, in doing so, they are limited only by potential debasement of the currency. He also states that taxes thereby have nothing to do with raising revenue, but rather, are instruments of social policy and control.
Ruml states, “…inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue… It follows that our Federal Government has final freedom from the money market in meeting its financial requirement.
All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.”
He goes on to explain how, with Federal spending not revenue constrained, the first function of taxation is to regulate the value of the dollar, which we know as regulating inflation. The notion of the Federal government ‘running out of money’ and ‘dependence on foreign borrowing’ as well as ‘sustainability’ are all categorically inapplicable.
The revenue story is the psychological anchor - the social backing -keeping us all in line with the destruction and consolidation of politics, power, and industry to the point where real organic growth is an almost accidental rarity. ‘Revenue’ is gone it ‘disappeared’ long ago.
It’s all debt service. As we struggle to pay the ‘vig’, confidence erodes. And we accelerate toward the event horizon. Like a massive cargo vessel, the dollar is slow to turn back toward home. An emergency it seems to take an eternity. So we forget. And the dollars return slowly, then all at once, as they are thrown desperately overboard in attempts to survive.
It is a certainty. Not a prediction. If history documented 10%, 20%, or even more of all fiat currencies have survived, would that be enough to maintain your confidence? If history said that eighty percent of the time, fiat currencies failed — is an equally predictable time frame? But in reality, zero have survived. Why would historians make that error? Certainly there is motive to find at least one example.
So much for the victors and their power of the written word.
Concessions around the deeper realities are useful. They serve to reach people where they are. Income taxation keeps us distracted from real inflation.
The formula for hyperinflation concedes that massive debts require massive servicing. We don’t collect enough to meet that at normal rates of interest. Budget deficit numbers and perception can be fudged for all eternity, but ultimately, it is the massive flow of coming payments that will require equally massive bond offering.
Once rates begin to rise on the long end of the curve, the portion where there is no direct control, the cycle begins to accelerate. Extraordinary measures, from capital controls, to bail INS, to declarations of the end of cash--all justified. And then war unravels it all.
Once we’ve gone past the point of no return, when the reserve currency collapses, the funding mechanisms die. The financial infrastructure fails and we are left sitting high, dry, and suddenly very local.
A cleansing no one likes to think about. Net worth becomes anchored to net survival. Worry over how much my silver and gold are worth are secondary issues when no one know the value of the measuring stick.