Is Government Deficit Spending A Form Of Tax On It’s People? We’ll It’s Complicated
The doesn’t need to tax you, they’ll just spend it
Table Of Contents (Jump Links)
Introduction
Recently there has been a growing group of people protesting the rapidly growing US Deficit spending which was $1.9 Trillion for fiscal year 2024 (September to September). Many such as Elon Musk are going as far as calling it “Just another form of taxation” on it’s people.
Deficit spending is spending above and beyond what a government collects in tax revenue. For example if the US Government collects $4.9 Trillion in taxes but spends $6.9 Trillion, the unfunded spending which is added to the federal debt, is call a budget deficit.
How is Deficit Spending A Tax?
The relationship between government deficit spending and inflation can be viewed as a form of taxation, the idea is if a government spends more then it pulls out of an economy in tax revenue then new money is created, leading to inflation. This is a simple concept supported by some economic theories, but this perspective isn't universally accepted or straightforward as it’s proponents outline it to be. While in theory it make some sense, it’s a bit more complicated than this, lets take a closer look.
Economic Theories?
Keynesian Economics:
Traditional Keynesian theory suggests that during economic downturns, government should increase spending or cut taxes to boost demand, even if it means running a deficit. The idea is that this stimulates economic activity enough to eventually reduce the deficit through higher tax revenues. Generally speaking in an economic down turn the concern is deflation as the velocity of money thru a system is reduced, their is low risk of deficit spending directly causing inflation, but it still presents other issues like overall debt load to a country.
Monetarist View:
Milton Friedman and other monetarists argue that inflation is primarily a monetary phenomenon. If government spending leads to increased money supply without a corresponding increase in goods and services, inflation can result. Here, deficit spending can indirectly lead to inflation if the central bank monetizes the debt by printing more money.
Keep in mind total money supply isn’t the whole picture. if economic activity as a whole slows down you can have an increase in money supply but still see a decrease in economic activity and prices. That being said most people feel the current deficit levels of $1.9 Trillion is well beyond any current down turn we might seen in the near future.
Modern Monetary Theory (MMT):
Proponents of MMT argue that, for countries with sovereign currency, government spending doesn't need to be directly funded by taxes or borrowing in the same accounting period. Inflation control comes from managing demand, not through balancing the budget. However, they do acknowledge that excessive spending beyond the economy's productive capacity can lead to inflation, which could be seen as a hidden tax.
This is to say that if deficit spending exceeds GDP growth per year on average over time will lead to inflationary forces.
Personally I like this theory. One exception would be during economic downturns deficit spending can help prevent serous deflation which could be seen as advantageous to maintain price stability.
Inflation as a Tax:
Inflation's Effect:
When inflation rises due to excess money supply from government spending, it can erode purchasing power. This is akin to a tax because it reduces the real value of money, effectively taking wealth away from those holding cash or fixed-income assets.
If you go to work 40 hours, a week and you are unable to buy as many goods or services with the same paycheck as you were last year due to inflation caused by government spending, you have effectively had your taxes (Or burden by th government) increased.
Wealth Redistribution:
Inflation might disproportionately affect different groups. Those with variable incomes or who own assets that appreciate with inflation might not suffer as much, while savers, low income individuals unable to raise wages, retirees, or those on fixed incomes programs lose out.
This redistribution effect can be seen as a form of taxation where the less financially agile bear the brunt.
Personally I feel the fact that inflation tends to affect the groups least able to avoid it’s impact the most makes is a particularly regressive form of taxation furthering the wealth divide in the US which is not sustainable long term. The “Rich get richer” effect.
Governments View:
Deficit Spending Is Easier Than Balancing The Budget
Nobody likes taxes and everybody wants something for free. politically it’s difficult to raise taxes but relatively easy to spend money on things people want. This is a flaw in the American political system that we’d all be better off fixing. But the political will just isn’t there with our elected officials. in a world where they need to be re-elected every 2, 4, or 6 years spending money without making people pay for it today is going to always win more votes than raising taxes, or cutting programs people have become accustomed to.
In fact the last time the US government had a budget surplus was in the 1998-2000 budgets which was 24 years ago.
During this time the US economy essentially outgrew its spending, rather than reduction in spending. It was also a relatively peaceful time absent of any expensive wars.
View on Inflation
Governments might implicitly prefer inflation over explicit taxation or spending cuts in certain scenarios because inflation can quietly reduce the real value of debt (as long as inflation rates are higher than interest rates on government bonds).
This reduction in debt's real burden can be seen as a 'tax' on bondholders.
This is especially tru when a governments debt is larger than its GDP, such as is the situation in the US today. the debt burden in the future will be reduced further than the tax burden it creates today. But as we pointed out earlier, these most affected by inflation tend to be the lower class.
View on Growth
Deficit spending could be viewed as a good thing if it grows the countries GDP and thus its future tax revenue thru increased productivity. This can be accomplished thru investments into needed infrastructure such as the power grid, roads, or technology. Especially if the productivity gains last for many years, the hydro-electric dams and highway infrastructure created under the New Deal Programs are a good example of this.
Key phases here is “NEEDED INFRASTRUCTURE”. building extra roads to nowhere and ghost towns like we see in China after its massive infrastructure push do little to grow future GDP and and also be burdensome. This is one reason you don’t see a lot of new highways and hydro power stations being built today in the US, in general it isn’t needed and would be excess capacity. Though an argument could be made that modernization of key parts of our infrastructure could be a good long term move.
However unproductive deficit spending just for the sake of spending such as interest payment, subsidies, and entitlement programs can quickly add to a governments total debt with very little return in future increases in tax revenues. This is the worst kind of deficit spending because not only does it not create any return for the public, it creates no jobs or any form of economic activity, it’s just bigger numbers in a spreadsheet.
Public Sentiment:
There's a noticeable increase in chatter about deficit spending in mainstream media, and on social media highlighting the concern that excessive government spending leads directly to inflation, which acts like a hidden tax.
This view often over simplifies complex economic mechanisms but captures the frustration the general public has had in recent years as they watch purchasing power diminish during a period of much higher inflation than has been seen since the 1970’s.
There is also the frustration that significant deficit spending isn’t leading to tangible improvement’s in every day Americans life as prices go up at home and Billions are spend on 2 new foreign wars, wasteful spending, and huge sums of money are given away to pet projects at home that nobody voted for, with very little perceived benefit to the average American person. Examples being funds spent on migrants, the growing homelessness problem, war on drugs, and other issues that have become burdens to local communities with no meaningful improvements despite the high costs.
Also recently the interest payments on the growing federal deficit has gotten ever closer to $1 Trillion per year (Currently $892 Billion/ year) many are becoming increasingly alarmed at the rapid growth of this burden.
Counter Arguments:
Not Always Inflation:
As discussed earlier deficit spending doesn't always lead to inflation if the economy has slipped into a down turn or if deficit the spending leads to increased productivity that reduces costs to the average person, such as cheap power, better roads, education etc leading to increased future tax revenues it could be seen as a great investment.
However in recent history the general public has grown skeptical of how productive government spending with many examples of wasteful or even currupt spending being highlighted in man stream media.
Fiscal vs. Monetary Policy:
Inflation might be more directly influenced by monetary policy (central bank actions) than fiscal policy (government spending and taxation). If the central bank controls money supply growth, inflation might not follow from deficits.
While I personally agree with this line of thinking it has become increasingly difficult for central banks to maintain liquidity in the monetary system without increasing the supply of money, it’s hard to absorb nearly $2 Trillion dollars of deficit spending without it coming out somewhere if the spend it big enough.
Economic Cycles:
Inflation can be influenced by numerous factors beyond just government spending, like global supply chains, oil prices, or technological changes.
Some of these factors are not in the US Governments direct control, or related to spending. For this reason it’s important to not simply state inflation is a “Tax”. However some actions from the government do act as a tax via inflation, it’s important to remember inflation is a complex topic and while government spending certainly can have an effect on it, it is far from the direct cause.
Conclusion:
While there's a logical pathway where deficit spending could lead to inflation, which might then act as a form of taxation by reducing purchasing power, this isn't a mechanical or guaranteed outcome in all economic conditions.
Economic theories differ on the directness and inevitability of this link. If government deficit spending is done in a thoughtful way that invests in the future growth of a country is can actually help reduce the costs of day to day goods and services by delivering them more effiently, raising GDP and leading to future growth in tax revenues making it a worth while endeavor.
Public opinion often simplifies this into a more direct causative relationship, but economic analysis suggests a more complex interplay of fiscal policy, monetary policy, and broader economic conditions.
Personally I do think there is some merit to the concerns, even if the general public doesn’t appreciate the nuance to this topic, if their was ever a time to get the federal budget back closer into balance I think a period of elevated inflation and growing GDP would be a good time to take a serous look at the budget. the fact that nearly $2 Trillion per year of federal spending is unfunded without a specific reason (such as trying to stimulate an economy out of a depression) is completely unacceptable. deficit spending should be a deliberate act in which the intent that is clearly communicated to the public.
Government deficit spending has gotten to concerning levels in both it’s rapidly growing scale, and increasingly less productive deployment. This is an area many countries (Not just the US) would be well served to take seriously and ensure money being spent provides value to its population.