Income and expenditures

The federal budget is a hot and devicive debate recently. Battle lines have been clearly drawn between conservatives and liberals but I wonder if both sides really understand the battle each is fighting against the other. So in an effort to help both sides understand one another better, and hopefully have more productive conversations, here are a few things we need to keep in mind.

Income

The only income the government can collect are taxes from productive citizens. This is what conservative groups like the Tea party are mostly focused on. I wonder how many liberals remember that the tea in Tea Party stood for “Taxed Enough Already”. Their major point of contention is the amount of income the government takes in at the expense of the productive citizens.

Expenditures

Expenditures is what a money is spent on. Its tempting to say that expenditures are what income is spent on, and I think this is what many people are assuming, but the reality is that our financial system makes it possible, indeed encourages, the use of non-earned income. For the federal government this means printing money while attempting to “manage” the resulting inflation.

Why are they different?

There are thousands of different businesses in existence. It is not uncommon to find two businesses with the same amount of income but with vastly different expenditures. It all depends on what they are in business for.

Conversely, it is also possible to find two different businesses with the same expenditures, but without the same income as one could be relying on credit. Generally we don’t see businesses with expenses that outstrip their income lasting very long, except if they are banks. Or the government. Or if they qualify for the magic label of “too big to fail”.

The liberal point of view

When a liberal complains that the rich aren’t paying their “fair share” what they are focused on the expenditures. They assume the expenditures are a given and that the only variable is the income.

The conservative point of view

When a conservative says that taxes should be lower they are assuming that both the income and expenditures are variable.

Conflict of ideals

The failure in communication between both groups is the assumed, but unstated, output goal of the government. Both liberals and conservatives (and yes, even libertarians) understand that there are some things the government must spend money on. Only an anarchist would argue that the government shouldn’t produce a functioning court system and means of enforcing laws. But what about other things?

Liberals generally tend to see anything that can be construed as a “indispensable public good” to be an expenditure the government should have on it’s books. Thus welfare, medicaid, fire departments, healthcare, etc. all get lumped into what liberals see as nessiciary items the government should have in it’s shopping cart.

Conservatives, on the other hand, don’t think that just because something can be construed as an indispensable public good it logically follows that government should be the one in charge of it.

So in discussions about the upcoming budget, it may be helpful to divide the issue into inputs and outputs. What many liberals may be startled to know is that many conservatives actually agree with them about the outputs (ie. public education) but disagree on the best way to pay for it. Or, in some cases, whether to care about paying for it at all as in the case with Medicare.

Likewise, many liberals may share the same concern for lower government income, but because they are hung up on an ideal which demands high outputs they see taxes as a necessary evil in order to pay for (or appear to anyway) the things they see as necessary expenditures.

What both camps would do well to do is ask themselves what limits there are on both income and expenditures. With income we know there is a clear maximum of taxing all citizens at 100% (ie communism). However finding the limit to expenditures can be difficult since our monetary system is not independent of government manipulation. But that is the subject for another post.

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