Saturday, February 13, 2010

Do it Yourself and Taxation

One of the seldom discussed advantages of owning a home compared to renting an apartment is the do-it-yourself opportunities it allows. Homeowners can pick a few, or many, of the maintenance and repair chores to do themselves. Where renters pay rent it must cover the full cost of commercial maintenance and repair; homeowners can provide untaxed labor that reduces their need for cash flow and income.

I am unaware that Congress or the state legislatures consider the do-it-yourself effects of their policies and taxes. Mostly they do the opposite because the U.S. economy depends on the volume of spending. To keep the economy going our governments would rather pressure us to work like demons and spend like maniacs.

Back in the great depression farmers produced a cash crop for market, but cash earnings were only part of their income. Fruits, vegetables, maple sugar and a high percentage of everything put on the family's table could be produced on the farm. Do-it-yourself production does not require a transaction but it means consumption and supports a family's standard of living in the same way dollar income producing on the job supports consumption.

In today’s economy we can drop our magazine subscriptions, our cable TV and the health club, but notice the recent “Cash for Clunkers” and tax breaks for first time home buyers provide help for spending and spenders, but not for those out of work and looking for ways to save. Policies of aid give aid to those with cash to pump up spending.

For the unemployed homeowner, or those with periods of unemployment, the pressure to pay property taxes continues without relief. America’s property tax system pressures people to keep their property in use or sell it to someone who will. If the United States was a country without property taxes, it would give those who owned homes a better opportunity to withdraw from the market place and turn more to do-it-yourself work.

America primarily uses a combination of income taxes, property taxes and sales, use and consumption taxes that demands a relentless tide of cash. As long as our politicians want us to spend our way out of recessions that is not likely to change.

A tax system that reduces income, payroll and property taxes in exchange for more emphasis on sales and consumption taxes would increase cash flow from wages and permit people to keep more of their interest earnings from saving. Higher consumption taxes on goods and services raise more revenue from those with the income and preference to spend, but lets others choose more do-it-yourself opportunities.

Recently I was speaking with someone who grew up on a farm in the 1930’s. He told me his father was required to grade and maintain the county road that went along their property as were all the farmers in the district. Well of course, it makes sense with farmers short of cash but time and equipment to exchange for taxes. It sure beats eviction.

Americans have millions of people short of cash like the hard pressed farmers of the 1930’s. America can give them better choices than the have now.

Tuesday, February 2, 2010

Public Debt and Private Debt

The United States Treasury will lose borrowing authority when the national debt reaches the legislated ceiling passed by Congress. Treasury Secretary Geithner will have to ask for an increase, which the Congress will grant, but he is bracing for the usual politics. Many in Congress use the opportunity to make government debt their number one worry in order to attach conditions eliminating programs they don’t support.

It is common for them to make comparisons between Government debt and personal debt. “My constituents pay their debts and keep their house in order and it’s time for the government to do the same.” That one is a favorite, but most of the announcements from members of Congress play on constituent anxiety and bias about their personal debts.

When people think of their private debts they worry they won’t be able to pay, but that is not the problem with public debt. The public debt must be managed as part of every administration’s duty to manage the economy. Federal Reserve Bank monetary and interest rate policy gets lots of attention, but without mention that it is also debt management.

When the Federal Reserve wants to lower interest rates to expand the economy, it begins buying outstanding Federal Bills, Notes and Bonds. Payments are by check and when the checks are deposited into bank accounts or converted to cash they become part of America’s money supply.

Buying Federal Bills, Notes and Bonds converts outstanding Federal debt to money and the government and Federal Reserve Bank can do that at anytime and in any amount.

Because the government and Federal Reserve Bank have money in any amount officials could retire the entire federal debt at anytime. They don’t do that because the increase in the money supply would generate inflation and retiring the debt is not a goal of economic policy.

The Federal Government also owns assets and has taxing authority and Federal officials could double or triple taxes and begin selling off its land and other assets to pay off the federal debt. They don’t do that either because it would depress the economy and cause deflation and retiring the debt is not a goal of economic policy.

The British government has done some of its borrowing using a bond called the British Consol, which has no maturity, but is sold in perpetuity. The owner gets periodic interest and can sell their Consol to someone else, but the government has no obligation to pay the principal, ever.

America does not have any equivalent to the British Consol. That’s because Americans think of debt as a symbol of excess that should be retired and they want a date when that will occur. They regard public debt as the equivalent of private debt.
Truth is America’s debt will never be retired, but will go up and down as meets the needs of economic policy. The politicians know this and they will raise the debt ceiling, but in the meantime we will have to listen to their excess.