Budget Deficits: Federal vs. Personal
Have
you heard, or read the following (or something like it) before?
"Many Americans are very
critical of how the federal government is handling the federal
budget. Yet, many Americans have the same issues within their
own household budgets. The problem with both is actually very
simple. We are spending more than we are making.
"The federal government
will take in $2.17 trillion in 2011. They will spend $3.82
trillion. This means they are spending $1.65 trillion more than
they will make. On top of that, they owe $14.2 trillion in
debt".
The preceding was taken
from: http://debbiking.wordpress.com/2011/05/02/federal-budget-vs-household-budget/
Do you know what's
wrong with it, how it's out of touch with reality?
Well, as you
might expect, we'll tell you, on the off chance you don't know.
That's what were here for.
In a
sentence: There is a VERY BIG difference between the Federal Budget
(or any government budget at the state, or local levels) and our
personal budgets, which means deficits in each mean something
very different.
Here's why and how:
ONE
WORD: Income.
Budgets
involve income and expenses. Deficits arise when
expenditures exceed income. We all know this.
And government budgets and
personal budgets are the same in that they both involve
expenses.
Where they are vastly different is their income,
how they get the money they use to pay for expenses.
|
|
We earn income by
having jobs.
The
government's income is primarily from taxes, plus
various fees.
Okay,
so here's a possible sticking point, the notion that
somehow taxation can be overdone, etc. For now,
let's leave that for another discussion. |
Why is the difference in the source of income so important?
Well...because it means that government income is pretty much
tied to your income. The more you earn and spend, the more
tax income the government gets. Of course, the government
can also raise tax rates, especially the rates that apply to
those with the highest income.
Now, maybe
this doesn't seem all that important, but there are a few very
important
consequences that merit mentioning:
1. Economic down-turns (aka recessions): It is NOT
just a matter of rampant government spending that creates
government budget deficits. Yes, that can contribute, but
equally important is the consequence of economic downturns.
In this latter case, the government hasn't budgeted to spend any
more than in the past, but all of a sudden it has less income to
meet its existing budget obligations. So there is a deficit.
2. Economic growth: Since
government income derives from taxes, its income goes UP during
growth periods without any raise in taxes. And, given
there is no increase in expenditures and the growth is large
enough, this can result in budget surpluses.
3.
Government spending results in government income:
Most folks either don't know about, or ignore this reality
(fact). As a
result of income via taxation, when the government spends money
that goes into the hands of the citizens, it creates taxable
income (even those on social security now have to give some back
in the form of taxes, when their total income exceeds certain
amounts). And when the citizens spend the
money such that it goes into someone else's hands, that also
produces tax income for the government. Depending on what
it is spent on, such as merchandise, it can return to local
governments in the form of sales tax.
To make this clear, imagine
the government gives Fred $100, which Fred spends by buying
something from Bill. Say the income tax rate is 10%, in
which case Bill returns $10 of those $100 back to the
government. Then Bill buys something for $90 (what he has
left of the original $100) from Sally, who then pays back $9 in
taxes to the government. She then buys something from
Harry, who returns 10% in taxes, then Harry buys something from
Mildred, who returns 10% of that income in taxes. By the
time that original $100 goes through the economy, it all gets
returned to the government in taxes. Of course, that is
only if there is a good economy with money moving rapidly
through the hands of the citizenry, a topic we discuss in our
article about money and cash flow.
To
read about sources of financial success
To
read about three types of economic systems (socialism, communism and
capitalism)
To
read about limits to free market competition
To
read about unemployment
To
read about how money (cash) functions in our economy