Mendacity on the Potomac

"As you know, many economists believe that a consumption tax would be best from the perspective of promoting economic growth — particularly if one were designing a tax system from scratch — because a consumption tax is likely to encourage saving and capital formation."

~ Federal Reserve Chairman Alan Greenspan

Like most libertarians, I have a fairly skeptical view of government. I naturally assume that anything government officials say is steeped in evasion and dishonesty. I openly doubt the effectiveness of most government spending programs and generally discard the political process as a scam designed to enrich the "power players" in the system at the expense of the productive sectors of our society.

By and large, my opinion of government is so low that almost nothing it does is surprising or unexpected.

Given that background, the congressional testimony given last week by Alan Greenspan was so breathtaking in its mendacity that even I was taken aback. The headlines announced that Fed Chairman Alan Greenspan was suggesting that the US government adopt a "consumption tax" (either a sales tax or a value-added tax), possibly as a substitute for our current income tax. He waxed eloquently about the wonderful economic benefits of frugality, and how this sort of a tax would encourage people to save and would discourage undisciplined spending.

I am forced to conclude that Mr. Greenspan is either suffering from multiple personality disorder or believes that all Americans are idiots with the attention span of brine shrimp.

The principle economic reality of our time is the wildly irresponsible spending habits of our government and a large portion of our citizenry. Saving rates have collapsed to nothing. The US current account deficit is growing exponentially as Americans run up their credit cards buying gadgets from the Chinese that they can’t afford. Our budget deficit has exploded under the management of fiscal "conservatives" in the Bush Administration and the Republican-dominated congress.

Alan Greenspan and the Federal Reserve have spent the last several years pushing interest rates to below-market levels while simultaneously manipulating the money supply and continuously debasing our currency. What is a dollar worth today compared to its value when Mr. Greenspan became Fed Chairman back in the 80’s? Even at a "low" inflation rate of 3% per year, the greenback has lost over half its value on his watch.

What are the effects of below-market interest rates and chronic currency debasement on our nation’s economic behavior? Both policies serve to encourage spending at the expense of saving. With interest rates dirt cheap, why not borrow and spend? That is the whole purpose of the policy. Such behavior is said to "stimulate the economy". Why save money if a CD or bond has a mere 2 or 3% interest rate? Why save if the currency in which your savings is denominated is continuously eroding in value?

This "easy money" policy has created an America with truly horrific financials. Greenspan’s policies have also fueled numerous speculative bubbles, most notably in the real estate sector. People are "taking out" the bubble-driven equity in their homes and using the paper profits for consumer spending. They are thus raiding their one last major source of wealth in a giant spending spree the likes of which has rarely been seen in history.

For Greenspan to turn around and begin preaching about the need for higher savings and less spending is too much for even the most cynical libertarian to bear. It’s like having the town arsonist begin lecturing the public on the virtues of fire safety.

Even taking him at face value, the suggestion itself is absurd. First, there is absolutely no chance that the federal government will ever get rid of the income tax (except under the duress of a truly revolutionary uprising).


First, the income tax brings in too much money. Since its inception, it has become a cash cow for the political class. It has allowed the malignancy on the Potomac to metastasize way beyond the wildest nightmares of our Founders. Second, the income tax has become an instrument of social control. Using the income tax, the feds collect massive amounts of private data on the financial activities of all Americans. And knowledge, as they say, is power. Furthermore, the tax code is so complex that no one (not even the IRS) really understands it. This is "convenient" in that it gives the feds the power to intimidate any citizen by threatening him with selective prosecution based on incomprehensible laws.

Third, the income tax code creates a myriad of opportunities for the political class to shake down special interests for campaign contributions. Any proposed change in the tax codes sets off a huge scramble in DC among vested interest groups to try to mold the new law to their own benefit and to the detriment of their competitors. Buying influence is a necessity when the laws in question can literally destroy your company or industry.

The stark reality is that the only way we will ever have a national sales tax is if it is in addition to our existing income tax.

A national sales tax will just be one more political football for our masters in Washington. Numerous questions abound. For instance, will all goods and services be taxed? Will everything be taxed at the same rate? Will there be exemptions? Will the rates change based on how "socially desirable" the product is? Will we tax bean sprouts at the same rate as Burger King? Will we tax the purchase of an SUV at the same rate as one of those glorified golf cart hybrids?

Obviously, there are a lot of details to be worked out, and you can bet that there will be no shortage of graft and back-room dealing when the time comes to actually set up the system.

The only legitimate way to handle our tax problems is to lower the existing taxes IN CONJUNCTION with spending cuts. We should begin by going through the budget and axing everything that is not specifically enumerated by the Constitution as being a permissible area of federal jurisdiction. As the spending drops, we can continually lower the income tax rates. Eventually, we could shrink the government down to a size where the income tax is no longer needed at all.

I know this sounds far-fetched, but the federal government got along just fine for over a century without an income tax or a national sales tax.

Either way, no one should delude themselves into thinking that Greenspan’s proposal is going to shrink our government or increase individual liberty. In reality, it is just another step along the road to serfdom.

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