This is the third of a short series of posts that explores the nature of taxes.  In the first post, I looked at the property nature of taxes: whose money it was, both before and after, the taxation process.  In the second post, I looked at a second set of questions: the nature and purpose of government and the purpose of government spending.  In this post, I answer a question concerning the utility of revenue neutrality for tax program changes.

We established in those earlier posts that money continues to belong to us and not our government after it has been allocated to government in the form of taxes.  We  established subsequently that what our government is permitted to spend our money on is quite limited.  From these, we can now answer that third question: is revenue neutrality in changing (by a little or with a wholesale replacement, in the manner of a Cainian 9-9-9 replacement, for instance) our tax system useful or necessary?

The answer to this turns out to be quite straightforward; although, it depends on a couple of circumstances.  Even though the money is ours and not government’s, and even though permitted government spending is quite limited, enclosed by those bounds are these simple facts.   Government has a purpose clearly defined by us in our social compact, and within that purpose, government must spend in order to achieve that purpose.  There is a minimum level of government spending, defined by that purpose, which our government must do.

Separate from this, but no less important, is the simple fact that people and our markets adapt to a government spending régime.  We always seek the optimal allocation of our money within the bounds of the economic environment within which we must operate, and we tend to stabilize there and form habits of spending and acquisition appropriate to those parameters.  Free markets adapt very quickly to changing conditions, but they do not adapt instantaneously: habits are hard to change, and changes take time to ripple through an economy.

Thus, the straightforwardly dependent answer to our question is this.  Plainly, since the money is, and always will be, ours regardless of whether it sits in the coffers of free market participants or those of our government, revenue neutrality from tax system change is not necessary, per se, and so it has no inherent appropriateness.  However.  Were our government’s spending already at that minimum level needed for government to achieve our purposes for it, then revenue neutrality would be necessary to maintain that minimum level.

On the other hand, were our government’s spending significantly above that threshold level, then a degree of revenue neutrality would be needed in order to avoid unnecessary market disruption while the new tax system is put into place.  Neutrality should not be absolute, here, however; with government spending exceeding its necessary amounts, some degree of revenue reduction in the year of enactment, is not merely acceptable, but necessary—as a first step in a separately needed sequence for getting that spending back down to where it belongs.

Our current government’s spending is wholly out of control: it vastly exceeds revenues, it is allocated to wholly inappropriate matters (vis., loans to government-favored enterprises), its allocation to welfare far exceeds what is appropriate or necessary (vis., paying people for two (or more) years for not working), and its allocation to entitlement programs which are bankrupt, or nearly so, is inherently wasteful.  Thus, we find ourselves meeting the second criterion above: too much spending.  A degree of revenue reduction in the year of enactment of a tax system overhaul or replacement is entirely appropriate.  Revenue neutrality is not at all necessary or appropriate today.