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Governments Spend Vast Amounts of Money

Where does It All Come From?

Governments take enormous amounts of money in all sorts of taxes from you. They also borrow large sums each year for you to repay later. Yet, just like a drug-addict, it's never enough, they overspend their income each year. Where does the rest of the money they spend come from?

Individuals like you create wealth in the economy. People also band together in groups called companies and organizations which also create wealth. Governments pretend they also create wealth but lack of competition and many other factors ensure government failure.

If governments really were giving value to their customers, why do they make competition illegal? They set up competition commissions to stop company monopolies and cartels, but exempt their own monopolies. That's another way government failure wastes so much of your money.

HongKong prospers with a top salary tax rate of just 15%. Such tax restraint has created enormous wealth and prosperity for all its citizens over the years. They have an enormous budget surplus, and their economic growth is the envy of the world. Could their low taxes and small government be anything to do with their impressive economic success?

Politicians Need your Vote

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Many years ago, I recall Canadian Federal Prime Minister Pierre Trudeau's sophistry. Although he pretended a little inflation would have no effect, his policies actually led to enormous deficits and financial disaster.
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Not that many years later, Jean Chretien, the new Liberal Prime Minister who had inherited the consequences of Trudeau's profligate spending, had to implement very painful but effective policies to get Canada's finances in order.

When politicians tell you something, explore the viability of what they propose. Ask yourself if they could be trying to mislead you for your vote or scare you into supporting economically disastrous ideas such as tax-payers need to bail out failing banks. Remember that politicians are professionally trained to make even the most ridiculous ideas sound attractive. If it seems too good to be true, it usually is!

Where does the Money your Government Spends come from?

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Your productive work creates wealth, yet all governments that expand - supposedly to do more for you - have no choice but to expand the ways they take your money. This makes it difficult to keep the wealth you do create. Realize the money they spend comes from you!

There are just three ways your government parts you from your money. They are:
  1. the taxes you pay

  2. the money they borrow for you and your children to pay tomorrow

  3. general inflation, devaluing the purchasing power of the bank-notes in your pocket
Some governments even attempt to hide their involvement in price increases by making free speech illegal! See the shameful attempts by the Australian government's ex Prime Minister Gillard in the fact-filled Carbon Tax increases report published in Australia's Daily Telegraph.

The Taxes You Pay

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You pay many sorts of taxes, not just income taxes and sales taxes. But many people don't realize the end customer also pays for the taxes that businesses pay - a business goes bankrupt if it doesn't make a profit.
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The business pays the taxes initially, but the money for their business taxes, capital gains taxes, carbon taxes, corporate taxes, environmental taxes, excise duties, export duties, extraction taxes, investment taxes, pollution taxes, etc., etc. comes from their customers - that's you - by increasing their prices.

When a business - or a person - has money left over, that profit becomes capital, your savings, when not spent or taxed. All economic theories agree that capital formation is key to long-run growth. Capital is invested in business and machinery which increases workers' income, see graph. Or it's given it to banks who lend it to other businesses to invest. Without capital formation, there's no economic growth. So government taxes on capital gains and business profits lower your income in the long-run.

You also pay social security taxes, property taxes, vehicle taxes, consumption taxes, airline taxes, energy taxes, health care taxes, road taxes, savings taxes, stamp duty, financial taxes, gambling taxes, gift taxes, import taxes, insurance taxes, land taxes, pension taxes, etc., etc.

The Money They Borrow

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But despite the enormous tax increases that governments have instituted over the past century, they need still more money. Politicians have discovered the ease with which tax-payers can be seduced with freebies ostensibly paid by someone else.

So tomorrow you and your children will pay for the money the government borrows today. Money is fungible, they finance today's spending by mortgaging your future. Borrowing money to invest in a business venture to make a profit is no problem for either business or government. The serious problems come when they borrow to pay for recurrent expenses.

Inflation Decreases the Purchasing Power of your Money

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Yet neither tax increases nor enormous budget deficits are sufficient to pay for all politicians' desires. There's a third way, which has caused the downfall of many governments, including the Roman Empire. Governments take your money by depreciating the value of the currency, the notes in your pocket. This increase in the money supply, the amount of money in circulation, is general inflation, nowadays misleadingly called quantitative easing.

They misleadingly explain it's to buy assets, government bonds to stimulate the economy, yet it also decreases the interest on the borrowed money that government have to pay to savers. Worse, and far more importantly, it decreases the value of the money in your pocket.

But for long-term economic growth, the secret of success is to minimize unproductive government overhead, and for more people to work in the productive private sector. Unless you have the freedom to keep more of what you earn, how can you - or the economy - grow and prosper?

How to Maximize Economic Growth

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James Mirrlees - who won the Nobel Prize in Economics in 1996 - was an adviser to Britain's Labour Party which for decades imposed marginal tax rates in excess of 80 percent. Yet his meticulous research found that:

"the top marginal tax rate should be only about 20 percent; and moreover, it should be about the same 20 percent for everyone ... I must confess that I had expected the rigourous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates.
It has not done so."

The empirical evidence he uncovered was unequivocal - and contradicted his personal beliefs. The labor movement's own Nobel Laureate proved that to maximize economic growth, taxes should be no more than twenty percent of anyone's income.

Food for Thought

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"The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."

Professor Thomas Sowell, PhD, incisive American economist, social theory, philosophy. Prolific author in race relations, education, decision-making, and practical economics

This page builds upon an original article published at

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