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The Great Western Revenue Crisis, Part II

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In Part I it was necessary to spend most of my time/energy dispelling the fiction from the mainstream media that the debt-crisis afflicting most major Western economies is due to government over-spending. As I demonstrated with a combination of unequivocal charts, clear logic, and simple arithmetic; the U.S. economy is clearly in the grip of the worst revenue crisis in its entire history.

In Part II, I will explain why we can safely conclude that other Western nations are also facing a revenue crisis rather than their insolvency being due to excessive spending; and then along with that I will describe how this collective revenue crisis has emerged across the West.

To begin with, readers must understand that economies are dynamic entities, constantly evolving in response to the policies bestowed/inflicted upon them. This means that only dynamic analysis (i.e. analysis which accounts for change) can ever yield useful conclusions and policies.

What do we get instead from the mainstream media and their “experts”? A diet composed of 100% static analysis. It is simplistic, one-size-fits-all dogma – which never, ever accounts for change in our economies. The classic example is the Keynesian idiocy that governments can permanently run deficits (i.e.  never fully pay their bills), and that somehow this can lead to long-term prosperity.

Those who actually understand the concept of dynamic analysis would require only two words in rebuttal: “compound interest”. The chart below illustrates the long-term harm that has occurred to the U.S. from allowing the static dogma of Keynesian economics to be wrapped around the dynamic U.S. economy like a straitjacket.

At the beginning, Keynes’ static, run-up-the-credit-card mentality for economic management works great! In fact it keeps “working great” right up until it becomes time to start to pay the bills. Indeed, the Keynesian mentality is no different than that of the binge-drinking alcoholic: it’s not the “drinking” that is the problem, it’s the hangover.

In the minds of the Keynesians it’s not the “borrowing” that is the problem, it’s paying the compound interest on that debt. And so these frauds simply constructed a static economic model – where none of that compound interest is ever paid.

Any idiot knows that running-up one’s credit card could never, possibly be a recipe for long-term prosperity. “It’s different with national governments,” countered Keynes, and all the vacuous minions who have followed in his footsteps. Yes, it is different. Nations can run up much bigger bills, for much longer periods of time than any ordinary individual could ever get away with – but not forever. The binge-drinker must finally sober up. Ultimately “any idiot” would know that eventually those bills have to be paid.

Note that the chart proves that even if a nation’s creditors ignore the obvious insolvency of these national deadbeats that Keynes’ dogma is still a certain recipe for economic suicide. Once an economy has borrowed too much, for too long; the burden of the cumulative interest payments becomes so huge, and the benefit from each new dollar of debt so small, that further borrowing only causes the economy to shrink – as is happening with the U.S. today.

Once any economy has (dynamically) passed the point of no return in this perpetual-deficit trend, then as a tautology of arithmetic there are only two possibilities: run budget surpluses to reduce total debt (obviously now impossible) or default. Applying static thinking to dynamic issues is no different than driving one’s car into a brick wall.

The exact same analysis which applies to our deficit problem also applies to our debt problem. Static thinking tells us that if we have too much debt then the appropriate solution is always to cut spending. True, increasing revenues (i.e. taxes) is another alternative, but static thinking tells us that “raising taxes is always bad”. And so we have had in the U.S. (and most Western economies) decade after decade of cutting spending (in real dollars) and cutting taxes.

The consequence of decade after decade of doing the same thing here is obvious – a revenue crisis:

Just as it is not possible (as a matter of arithmetic) for any nation to keep borrowing more and more forever, it is also not possible for nations to keep cutting decade after decade – before we again crash our economies into a brick wall. At some finite level, continuing to cut spending and cut taxes only causes harm rather than benefits to any economy. What we are suffering from today is nothing less than “economic anorexia”, as one by one revenue-starved Western economies collapse.

This is no longer a theoretical discussion. Greece has already defaulted. Behind Greece, the longest and most aggressive “austerity” program in Europe has been in the UK. It recently reported that its monthly deficit just doubled – to the highest level in history. How is this “progress”?

The colloquial definition of insanity is to do the same thing over and over – but to expect a different result. Thus the management of our economies goes well beyond insanity. Using static models to manage every single facet of our economies, we not only insist on doing the same thing again and again but we exclusively practice nothing but insane policies.

When we see an anorexic individual in our society we have no problem recognizing both the symptoms and the consequences of that self-inflicted condition. Yet after having just watched a nation literally starve itself to death (Greece), what do we continue to hear the media drones, charlatan economists, and political stooges calling for? More “dieting”.

At this point it is necessary to back up, as undoubtedly many ordinary readers already began scratching their heads once I started talking about “cutting taxes”. As individuals, they have seen no sign of any “tax cuts” in their own lives. Once again it is essential to engage in definition of terms.

Note that when I am referring to the tax revenues of these governments that I am referring to the total amount of revenues – which is entirely distinct from the issue of tax rates. Raising a nominal tax rate does not “raise taxes” (in terms of increasing revenues) if there is nothing left to tax. You can’t get blood out of a stone.

When it comes to taxation dynamics in Western nations we have a schism – the most extreme and obvious schism in the history of our economies – between how the “have’s” are taxed and how the “have-not’s” are taxed.

On the one hand we have the Little People: the bottom-80% of our societies. Their effective tax rates continue to climb steadily higher ever year. However, with these people having already been squeezed-dry there is nothing left to tax. Just as we saw in the previous chart how continuing to increase U.S. debt now only causes that economy to shrink, increasing the tax rates on the bottom-80% has now become so harmful to the overall economy that any/every further tax increase only causes overall tax revenues to decline rather than increase.

Then there is the top-20%. Here it is important to be specific, since the propaganda machine itself spends an enormous amount of time attempting to convince everyone in this economic bracket that they are “part of the same team”. Nothing could be further from the truth.

Moving up the ladder, the majority of the people in this bracket are not “taxation deadbeats”, or as I wrote previously “don’t blame the millionaires” (the people whom billionaire Warren Buffet wants to tax). That is, these people are generally harmed by the taxes which afflict the Little People as much as they benefit from the “free ride” bestowed upon the ultra-wealthy (roughly speaking the top-5% of most economies). Thus in any (proper) tax reform, new taxation policy would be revenue-neutral to many of these people.

However, once you reach the economic stratosphere of the Privileged Few then it is all “gravy”. Here we have no better example than the U.S., since the U.S. has simply been much more obvious about its efforts to grant its own aristocracy a free-ride. Indeed, were it not for the massive “Bush tax cuts”, the revenue crisis afflicting the U.S. (as seen in the chart above) would not be nearly as stark/cataclysmic: Bush proclaimed his hand-outs for the ultra-wealthy and instantly U.S. tax revenues fell off a cliff (in real dollars).

Immediately the dynamics become clear. Any/all tax increases (in any form) to the Little People are directly and immediately harmful to all Western economies at this point. Similarly, any/all tax cuts for the Fat Cats are equally harmful. This raises an even more important issue, one that is never competently addressed by the media: the nature of taxation.

Roughly speaking we can classify all forms of taxation into three categories. Two of those categories are not only unequivocally harmful to the overall economy but extremely punitive to the bottom-80%. Conversely the third form of taxation is the only (relatively) benign form of taxation. In fact it is so egalitarian in nature that we could implement a “flat tax” – what the wealthy themselves tell us that we need so badly.

The two forms of taxation which harm economies and oppress the Little People are “income taxation” and “consumption taxation”. The benign form of taxation which treats everyone equally is wealth taxation. Again I can envision readers scratching their heads. “Wait a second,” they object, “All of the taxes in our society are income taxes or consumption taxes – and there is no wealth taxation.” Exactly.

Indeed, one hundred years of taxation oppression has hollowed-out all of our economies. The Middle Class are now “the working poor”. Meanwhile, a 100-year free ride for the ultra-wealthy has resulted in the accumulation of wealth-hoards which exceed the fortunes of even the Kings and Queens of the Middle Ages (just prior to the last great cycle of Revolution).

Critics will claim that there is “wealth taxation” in some Western economies, in the form of an inheritance tax. The rebuttal to that is obvious. Imagine what a wonderful world it would be for the Little People if they only had to pay their income taxes and their consumption taxes once in their entire lives – after they were dead – rather than every day of their lives, as they do with our current taxation oppression.

Having studied tax law for two years, I haven’t forgotten the Golden Rule drummed into the heads of all would-be tax lawyers: delaying taxation is the next best thing to not being taxed at all. And you can’t “delay” anything any longer than until you’re dead. Well, technically that’s not true – as the very-wealthy, their lawyers, and their servants in government have contrived means to hide much/most of that wealth from a supposed inheritance tax, even after one is dead.

There simply isn’t time/space to explain how and why income and consumption taxes oppress the majority while wealth taxation promotes both prosperity and economic egalitarianism. I do so in great detail in my previous work (including simple numerical examples to illustrate these principles). What there is time and space to note is that by definition a wealth tax encompasses everything in our societies.

What this directly implies is that a (flat) wealth tax would replace all other taxation in our societies: no income taxes, no consumption taxes, no corporate taxes, no capital gains taxes. Would it be beneficial to have capitalist economies which stopped taxing income, consumption, corporations, and capital gains? I think that is a question even the charlatan economists could answer.

Switching from our intentionally complex, confusing, and oppressive system of taxation to wealth taxation would not only cease all of the harm we are doing to our economies with this hopelessly flawed tax system, but it would function as a free “stimulus package” – at a time when nearly every Western economy is struggling with ultra-high unemployment, and doesn’t have a dime to spend on promoting employment growth.

I have already clearly hinted at the direction in which we need to go in order to institute (dynamic) economic systems which actually heal and promote our economies, rather than more of the same (static) suicidal dogma which has brought the entire Western economic system to the brink of total collapse.

In the conclusion in Part III, I will do much more. I will specifically work through the dynamics of how addressing our revenue crisis (rather than pretending we have a “spending crisis”) can/would result in a dramatic and positive metamorphosis for all of our economies.

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Jeff Nielson
...
written by Jeff Nielson, April 27, 2012
Can't disagree with any of that Jeff! Too much spent through unfunded wars etc. I might be missing something here: I agree that we have massive austerity cuts going on all around the world as governments bail out banking. The man in the street is paying for wars and the effects of the banking crisis. He is also going to pay again through inflation after the money printing. But surely the fundamental problem is government (over)spending? As you suggest above, the cutting is in the wrong areas .... But why look at this as a Revenue issue? And I agree with a previous Part 1 comment that the multiplier effect of any cuts (i.e. the reversing of the fractional reserve effects) is not always factored into possible outcomes.
Still not sure what you think about that Davies presentation. Are you both using precisely the same definitions?


Norbull, sorry if the last reply didn't quite connect the dots.

Once again here the key is lying about inflation. If you grossly understate inflation, then (as we see with the blue, government line) you can make FLAT spending look like an exponentially rising curve. THAT is what Davies is talking about.

So his entire analysis is irrelevant, since you can't base VALID analysis on fantasy-numbers.

Meanwhile, the propaganda-machine TOTALLY ignores the (obvious) revenue crisis. If you PRETEND that the budget ONLY has one component (spending), then you can keep the SHEEP focused on "cutting spending" - even though (in real dollars) it was already flat.

Meanwhile, the revenues chart is totally unequivocal: revenues have fallen off a cliff. So if spending is flat, but revenues have fallen off a cliff then by definition we EXCLUSIVELY have a "revenue crisis".

At the same time we see now MILITARY SPENDING and INTEREST PAYMENTS (to the Bond Parasites) has been used to SQUEEZE OUT all spending on PEOPLE.

So as I noted previously we DO need to make spending cuts - so that we can RE-ALLOCATE our spending from totally WASTING IT (military, interest payments, corporate subsidies) to PRODUCTIVE USES (education, health-care, and other social spending).

So you will KNOW (on the rare occasions) when someone from the mainstream actually "gets it" when they are talking about RE-ALLOCATING spending dollars rather than simply slashing spending (in absolure terms).
Norbull
...
written by Norbull, April 27, 2012
Jus had to re-read Pt 1 again!
Your definition of Gov spending is that of spending on the populus, and I agree that it has effectively reduced to fund unfunded wars etc (although it's mostly paying interest on government borrowing).
There's another short video somewhere (can't find it right now) where another professor demonstrates that historically, even when income tax has been 95% for the wealthy, the total government tax revenues have always worked out at 17 or18%. That's not to say that a better wealth tax wouldn't work!
Norbull
...
written by Norbull, April 27, 2012
Can't disagree with any of that Jeff! Too much spent through unfunded wars etc. I might be missing something here: I agree that we have massive austerity cuts going on all around the world as governments bail out banking. The man in the street is paying for wars and the effects of the banking crisis. He is also going to pay again through inflation after the money printing. But surely the fundamental problem is government (over)spending? As you suggest above, the cutting is in the wrong areas .... But why look at this as a Revenue issue? And I agree with a previous Part 1 comment that the multiplier effect of any cuts (i.e. the reversing of the fractional reserve effects) is not always factored into possible outcomes.
Still not sure what you think about that Davies presentation. Are you both using precisely the same definitions?
Jeff Nielson
...
written by Jeff Nielson, April 26, 2012
Interesting presentation here from Professor Antony Davies on ZeroHedge.
http://www.zerohedge.com/news/which-came-first-spending-or-debt


Norbull, you saw the chart in Part I.

Use the government's PHONY inflation numbers and it can CREATE a "spending problem". Use the REAL inflation numbers and spending topped in the 1980's - in ABSOLUTE terms, except for ANOTHER war at the beginning of the 1990's and the hand-outs to Wall Street in 2008.

But let's get SPECIFIC here. Where IS there a "spending problem"? Note that most of the deficit spending has been spent CREATING the massive war-machine - and then paying (more and more) interest on the debts that were created forever.

Then there are the $100's of BILLIONS per year on corporate subsidies, and all the drones the government has hired to administer the subsidies. But WHAT do the politicians and media talking-heads talk about cutting?

The war-machine? No.
Interest payments to the bond-parasites? No.
The subsidies to the Oligarchs? No.
The drones to administer the subsidies? No.

Health-care? YES.
Social Security? YES.

So if anyone wants to talk SERIOUSLY about the U.S.'s "spending problem" then I'll be happy to do so. Until then I'll just keep pointing out it is currently going through the worst REVENUE CRISIS in history...
Norbull
...
written by Norbull, April 26, 2012
Hi Jeff,
Interesting presentation here from Professor Antony Davies on ZeroHedge.
http://www.zerohedge.com/news/which-came-first-spending-or-debt

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