Regular readers of this blog know that our position on the Internal Revenue Code is that it is unnecessarily complex. Including all the regulations 'n stuff, the whole thing totaled more than 72,000 pages — more than 5.5 million words — in 2011. The reason (at least in our opinion) is that the tax code has been "hijacked" to conform to the demands of Keynesian economics. People must be forced to save so that there will be sufficient financing for new capital formation that will create jobs.
What makes tax paying and tax collection so taxing (sorry) is that Congress has to balance several contradictory demands. Contrary to the principles of chartalism ("Modern Monetary Theory") embodied in Keynesian economics, the tax system has to raise some of the money to run government. It cannot discourage productive activity too much. It has to encourage people to cut consumption and save. It can be (and is) used to distribute pork and encourage politically desirable behavior.
All of this makes for a pretty shaky tightrope to walk. It should come as no surprise that the rope is close to breaking and will (in all likelihood) soon drop the country into bankruptcy — and the safety net has rotted away.
As readers of this blog are aware, things would be much simpler if the tax system were used exclusively to raise money for government to meet legitimate expenses, leaving it to people to meet their own needs through their own efforts. The only exception is in emergency situations when it is expedient (politically prudent) to make a redistribution of existing wealth to keep people alive and in reasonably good health.
To allow people to meet their own needs through their own efforts, the Federal Reserve was established. The original mission of the central bank of the United States was to provide the private sector — "the people" — with an asset-backed elastic currency by rediscounting qualified bills of exchange accepted by member banks representing the present value of future industrial, commercial and agricultural capital. This was to be supplemented with limited "open market operations" in bills accepted by non-member banks or drawn by businesses or individuals.
To prevent the government from being able to use the Federal Reserve to finance operations, the bank was not empowered to accept or purchase government securities, except to retire the National Bank Notes of 1863 to 1913, which were backed by government debt. Within two years, however, the government had figured out a way to monetize its deficits by getting the Federal Reserve to purchase secondary government securities ("bills of credit") on the open market, and by the 1930s had effectively stopped all financing of private sector projects, except for politically motivated bailouts.
The bottom line here is that the income tax that was intended to finance government operations is now being misused to generate savings for private sector investment, while the Federal Reserve that was intended to provide financing for private sector investment is being used exclusively to finance government and politically motivated investment. Consequently, the private sector is starved for financing, and the government has (arguably unconstitutionally) been creating money at a furious rate backed only by its power to collect taxes from a rapidly decaying private sector economy. The question becomes what to do about it.
In the short term, you can join CESJ and the Coalition for Capital Homesteading at the Federal Reserve Board of Governors building on Constitution Avenue in Washington, DC this Friday, April 20, 2012, at 11:30 am to 1:30 pm to rally in support of reforming the monetary and tax systems and the passage of a Capital Homestead Act. In the longer term, you can learn more about the Just Third Way by tuning in to this blog tomorrow.