Difference Between Money Users, Issuers

William Ryan’s Letter to the Editor this past Wednesday, “Government has $0: Taxpayers foot all bills,” demonstrates a common misunderstanding of the difference between federal government and state and local government finances.

Let’s start with the basics. State and local governments — and some national governments (such as members of the eurozone) — are currency users. Currency users do not have the power to create either physical or digital currency. Such governments must tax to fund themselves.

On the other hand, currency issuers do have the power to create physical and digital currency. Such a government does not have to tax to fund itself. Actually, Article I, Section 8 of the U.S. Constitution is very clear on this: Congress has the power to coin money. Ergo, the federal government is a currency issuer.

This has tremendous implications for federal as well as state and local finances. Specifically, in light of low inflation rates, it means that the federal government likely is overtaxing Americans. Hence, it makes sense both to cut and to simplify income taxes.

Such a system easily is imagined. Consider a system where all income above a certain threshold, regardless of source, is taxed at a flat rate (as Ryan suggests). That system is much simpler than our current system and retains its progressive qualities.

Such a system is possible, but we have to see our monetary system for what it is — a fiat rather than gold standard system — in order to achieve it.

Originally printed as a letter to the editor of the Richmond Times-Dispatch. Click here to view.