Never a Waste of Taxpayer Dollars (Ever)

If there’s any bad habit that transcends political alignment it is denouncing government projects as a “waste of taxpayer money”. If you’ve been following my posts on deficit spending and inflation you should be comfortable by now with the idea that the only constraint on government spending is the risk of inflation, and it shouldn’t be too much of a jump to see that taxes are not analogous to financing that spending.

Recall that the true purposes of government spending and taxation are to redistribute wealth and counteract inflationary pressures; that the nature of spending is to create money and taxation to destroy it; that inflation is for all intents and purposes an indirect regressive tax on those unable to protect their wealth through safe investment; that in the long run inflation represents more money chasing the same quantity of goods and services. It follows that some form of tax is inevitable: either government-imposed taxation reduces the nominal value of your bank balance, or the “invisible” inflation tax reduces the real value of it. For a given level of output, no amount of tax can change the amount of goods and services that can be bought with it. The uncomfortable conclusion is that in the long run and in aggregate these taxes are equivalent. In the short-run and at the individual level most of us are much better off with progressive government taxation than regressive inflation tax.

It’s not a trick. To the same degree that the tax system is fair, as taxpayers we are simply better off without “our” tax dollars. Rather than taxation removing value from the private sector and spending putting it back in somewhere else, both of these operations have both effects. Taxation does not remove value from the private sector, it reduces numbers in bank balances and can only shift real value around. How the government chooses to spend money is a separate issue – once taxed, the money is effectively destroyed. It cancels out a government bond at the central bank and ceases to exist. Taxation can still be unfairly distributed, too high or too low, and government spending can still be wasteful – but the notion of spending or wasting taxpayer dollars is meaningless.

4 comments to Never a Waste of Taxpayer Dollars (Ever)

  • N

    Your point seems a little obfuscated/subtle – that governments can print money and fund projects without taxation? and that taxed money is unavailable for an individual’s own choice of investment?

    Well, perhaps, but the phrase “waste of taxpayer money” _means_ that the specific government spending in question is wasteful, which you agree happens.

  • [law]

    > and that taxed money is unavailable for an individual’s own choice of investment?

    That’s exactly the misconception I’m trying to correct. Let me try again. Taxing money does not remove any purchasing power from the private sector in aggregate, because relative scarcity of money will be reflected by a reduction in the price level; conversely a relative abundance of money will be reflected by increased prices.

    Consider the extreme example in which every project denounced as a ‘waste of taxpayer money’ is cancelled so that the taxpayers can keep their money. Imagine you’re a low income earner trying to be responsible with your money. You diligently try to save extra cash, but because most people are using it to buy luxuries the price of luxuries are boosted higher, becoming ever more out of your reach. Eventually the inflation spreads to essentials and (eventually) wages. The rich benefit disproportionately because they are relieved of taxation of a greater portion of their income, and protected from inflation by a portfolio of investments which aren’t available at your income level.

    Effectively your purchasing power has been eroded to an even greater extent than a direct tax from the government ever could have done. All that government-imposed taxation does is alter the distribution of the effect. This is what I find objectionable about the phrase ‘waste of taxpayer money’ or the more sarcastic version, ‘my tax dollars hard at work’ – it was never your money in any meaningful way. If taxation doesn’t detract from your spending power then how can government spending be a waste of it?

    A more accurate complaint might be ‘waste of resources’ – but it doesn’t carry the same emotional heft as ‘taxpayer money’.

  • Aaron

    I think I’m beginning to grasp your argument. Is this an attack on using the phrase ‘waste of taxpayers money’ because it was never in the bank in the first place? What was spent by the government (or central bank, I’m not sure) has effectively been removed meaning that the taxpayer never possessed the money in the first place?

    I suppose as an income earner I view my taxes as a proportion of my annual income. That proportion makes me perceive that it was originally mine to begin with but I guess it never was. As a consequence I guess everyone feels like they’re handing money over to the government to be ‘spent wisely’ and not wasted.

    Am I getting close? I apologise if I’ve completely misunderstood your post.

  • [law]

    > I suppose as an income earner I view my taxes as a proportion of my annual income.

    If you and only you got to keep that extra chunk of your income you might be able to buy more things with it. But consider what would happen if everyone got to keep that extra chunk of income – there’s still only a limited amount of things to be bought, and the extra demand from everyone feeling a bit richer would quickly push up prices. If everyone was being taxed a flat 66%, and you doubled the income everyone got to keep by reducing taxes to 33%, would you expect that they would be able to buy twice as much stuff, or would you expect that they would be able to buy the same amount of stuff at double the price? Probably neither, but the real answer would be closer to the latter than the former.

    Now consider what happens when prices are rising across the board – people holding cash find themselves able to buy less with it, and people with money in bank accounts find inflation eating up most of their interest, or even (like in the US today) receiving essentially negative real interest as inflation rises faster than the nominal interest rate. Smart investors can switch from holding cash to holding bonds or equity – but that option isn’t really available to most people, so the rich get to preserve their purchasing power while the poor find it eroded away.

    By taking away a proportion of your income, and a bigger proportion of a richer person’s income, the government actually increases the amount of things you can buy – at the expense of decreasing the amount of things that someone else (someone richer than you) can buy. The key here is realising that taxation alone, even without spending, always shifts purchasing power from one income group to another. “Taxpayers” as a group never lose anything of value in taxation – it only changes the distribution of value.

    > What was spent by the government (or central bank, I’m not sure) has effectively been removed meaning that the taxpayer never possessed the money in the first place?

    Almost. I prefer to use the word ‘destroyed’ than ‘removed’, because ‘removed’ to me suggests that the government still has it. When the government spends, the banks find themselves with excess reserves, which they use to buy government bonds. When the government taxes, the banks find themselves with insufficient reserves, so they sell government bonds. If the government repurchases the bond its net position is zero. Since this all happens electronically, the money just disappears from existence. If the central bank holds the bond, then the government still pays interest on it, but being pure profit to the central bank it is paid straight back into the government’s account. Eventually the bond matures and the money disappears from existence.

    > Am I getting close? I apologise if I’ve completely misunderstood your post.

    Sounds like you’re on the right track. The whole point of this blog is to educate, so I’m more than happy to answer any questions.

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