A short and simple tutorial…
“It’s taxpayers’ money,” is an all too familiar cry, from media reporters when they try to expose spending waste, welfare cheats, or excessive expense claims by politicians. It resonates well with taxpayers. It’s good promotional advertising for those with an agenda, whether it be a current affairs program, a publicity-seeking politician, or community groups unhappy about their latest funding cuts.
It even floats into the general conversation around the barbeque or the dinner table. Everyone uses it to add emphasis to their point of view.
The problem is, it’s not true.
Taxpayers’ money is never spent. Taxpayers’ money does not fund federal government spending. As hard as it might be for the average worker to grasp this simple fact, when the penny does finally drop, it can’t be un-dropped. Once the average person understands the purpose of taxation and its relationship with public spending, an intelligent conversation can begin. But not before.
So, pay attention
The simple example of the bucket with a hole in the bottom should be enough for people to realise how wrong their perceptions about taxation have been. The tap that fills the bucket with water, is government spending, the hole at the bottom is the collection of taxation. They are two quite separate functions.
All federal government spending is new money created by the government through the agency of the Reserve Bank. It deposits funds into the commercial banking sector to generate economic activity. It guarantees the reserves required by the banks to lend money. All it needs, is one computer to digitally transfer a set of numbers to another computer. That’s it!
At the other end of the process, money is drained out of the system to maintain a balance that ensures just the right amount remains in circulation to maintain stability. We call it taxation. How hard is it to understand this?
What happens to the taxation money that is drained out? It is credited against the money the government has spent, thus reducing the overall level of money created. In the banking system, that is what happens when you repay a loan. Your repayments are credited against the outstanding balance, thus reducing your liability to the bank.
Taxation reduces our liability to the government that created the money.
So, is that so hard to grasp? If you have ever borrowed from a bank, you should know how that works. Now simply apply the same procedure to government spending and taxation. Voila!
So, the next time you hear anyone complain about taxpayers’ money being wasted, you should be able to say quite comfortably, “It’s not taxpayers ‘money.”
Of course, there will be those who will counter this explanation by saying that there is a limit to the amount of water in the tap. Not our tap! It can’t run out of water anymore than a scorer at a football match can run out of scores, or a mathematician can run out of numbers. A currency issuer (our federal government) can never run out of money to issue.
Furthermore, a shortage of taxation revenue, in no way, restricts a currency issuing government from spending.
There are those who know all this and try to explain it to others only to be rebuffed and ridiculed. Perhaps it is because the explanations have been too complex. Perhaps it has been because the recipient has been so indoctrinated by the media, our schools and universities that for someone to come along and challenge such time-honoured maxims is too much to absorb.
There’s an election looming. Perhaps they could be reminded that a flat earth was also once a former time-honoured maxim. Bon chance mes amis.
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