From: wag5@quads.uchicago.edu (john peter wagner)
Subject: Tax vs. Spend
Reply-To: wag5@midway.uchicago.edu
Organization: University of Chicago Computing Organizations
Distribution: usa
Date: Tue, 15 Sep 1992 22:04:18 GMT


	I noticed that there is a lot of hostility to the
massive debt incurred by the Federal Government. I think one
anti-Reaganite said $4 trillion.  Then, while the Repubs call
the Dems tax-and-spend, the Dems call the Repubs borrow-and-spend.
I thought it would be worthwhile to look into what is going
on and maybe shed some light on the two systems.
	In a previous post I explored the nature of the adverse
effects of taxation, well, some of them.  Overburdensome taxation
would have the long-run effects of depreciation of the value
of the taxed currency, i.e., inflation.  The result of inflation
is that, in a sense, it is more difficult to survive on a fixed amount
of income.  Thus, risky business is more costly.  There are a lot
of 'bads' involved, including the fact that a person without a
guaranteed source of income or without a lot of money can be
threatened with starvation.  Thus, the 'job' becomes more important,
rather than the 'goal-oriented contract.'  This has nothing to
do with the risky behavior of the banking system, because the
banking system has no fear of risk thanks to the FDIC.
	When one takes out a loan, as the government did, the
borrower agrees to pay an opportunity cost to the lender, commonly
called interest.  This interest is roughly equated with the amount
of money it could have earned if diverted to other sources.
If I gave a small business $300 dollars with, say, 10% annually
compounded interest, I would expect that the business would be
able to generate more than 10% on that money, equating with a profit.
As it is doing that, the business employs people and provides services
which are in demand by the people.  Thus, we reap the advantages
of trade, etc., and everyone is happy.  The currency even begins
to increase in value, since now more things can be bought with it.
	When the government taxes or takes the money from the economy,
the economy is suffering the loss of the opportunity of that money.
For the moment we will ignore the spending side since both borrow
and tax methods end up in government spending and thus cancel out.
The economy experiences inflation, it has trouble competing with
foreign markets, etc.  HOWEVER, in taxation, the opportunity cost
of the money is not returned to the economy.  The economy suffers
not only a loss of the original currency but the opportunity also.
When a government borrows, it illustrates the amount of currency
and the value of that currency over time which the government has
taken.  In essence, the $4 trillion is an ugly pimple showing through
the veneer of Congressional politics.  That $4 trillion would have
come from the tax payers money and would not be now so obvious.
	Reagan executed a master stroke then, which illsutrated the
effects of spending.  Democrats would love to cover and hide the
efects of depriving an economy.  The fact is, the money lost to
taxation equals the money lost to borrowing, but in taxation who
bothers to calculate the opportunity cost?  The government is now
faced with the effects of its spending.  It must either increase
taxation, which is a serious mistake, go default on the loans,
which are just as bad, or decrease spending, which scares the hell
out of the Democrats.  Just think, if we had taxed instead of
borrowing, we could blame the current state of the economy
on the weather rather than the government.

				J. Wagner

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