A World without Income Taxes

October 12, 2012

Why should the federal government bother to impose taxes when it can use the Federal Reserve to "print" all the money it needs to pay its bills? One can envision a world where there is both apparent price stability and no income taxes. The following is to encourage you to think about possible alternatives to the existing economic order, says Richard W. Rahn, a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

  • Prices of most things in real terms tend to fall over time -- that is, products get better and cheaper.
  • When the world was on the gold standard in the latter half of the 1800s and early 1900s, prices did tend to fall slowly (an average of 1.7 percent year by year), which is known as deflation -- because increases in the production of gold lagged real economic growth during that period.
  • The small amount of deflation was both manageable and useful since each year people were able to buy a little bit more with each dollar.

In recent decades, productivity growth has been increasing at an average rate of about 2.5 percent per year. U.S. population growth has averaged about 1 percent per year. Thus, if the Fed increased the money supply by roughly 3.5 percent per year, the economy could have close to perpetual price stability, with the productivity gains being used to fund government spending.

Currently, the federal government is spending about 23 percent of gross domestic product (GDP); however, up until World War I (before the income tax), the federal government only spent about 2.5 percent of GDP. In the 1920s, it was spending less than 4.5 percent of GDP.

The fact is the United States could have a radically smaller government -- which would not require a federal income tax or some big replacement tax -- without taking away the social safety net or gutting defense.

A smaller government, without income taxes, would mean much higher economic growth and job creation -- and thus would allow a perpetually small deficit, with the profits from the Fed being used to fund part of the government. A government that grows at a slower rate than the private economy and with an annual deficit less than the rate of GDP is a prescription for long-run economic prosperity.

Source: Richard Rahn, "A World without Income Taxes," Washington Times, October 8, 2012.

 

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