. . . but continued to spend at current rates, how much value would the dollar lose?
Checking the CIA World Factbook, the US GDP in 2006 was $13.21 trillion, and federal government spending was $2.66 trillion, or about 20% of the GDP. Thus, as a rough estimate, you could expect an additional 20% inflation a year if the government just started printing money to pay the bills.
I expect it would be as valuable as so much toilet paper pretty soon. Refusing to collect taxes will cause the government to collapse, which would wreck the country, and render the dollar an obsolete currency. Even at the beginning, there would be a rapid crash as countries all over the world frantically dump dollars anticipating the US collapsing.
It wouldn’t make much difference if they spent at the current rate or not.
I don’t quite see how ceasing to collect taxes would cause the government to collapse. Don’t they already spend more than they take in each year?
And we will likely pay the price for that in the future, one way or another. If the government stopped taxing, it would be clear that it HAS no future, and won’t have any way to pay for it. If it spends money it soon runs out, or prints it like mad and renders it worthless. If it doesn’t spend it might as well have no money. People will desert it in droves when they realize it won’t be able to pay them. The military vanishes when it collectively realizes it’s won’t be getting paid, ever. Imports cease as no one out of the country will take the soon to be useless US dollar. And so one; it would be the suicide of America as a nation.
Most likely America breaks up into 50 states, which become 50 nations, since the state governments are still collecting taxes. After plenty of suffering and chaos.
Thing is, what exactly is the US dollar? It is a promise by Uncle Sam that you’ll be able to redeem this piece of paper for goods and services. If it became clear that the government was going to stop collecting taxes, that promise would soon be revealed as worthless. And within days the value of the US dollar would plummet. The people who accepted wheelbarrows full of Federal Reserve notes in exchange for a loaf of bread would be cheated, because they’d find those wheelbarrows of dollar bills were worth nothing.
So the answer depends on how sure everyone is that the US government has decided to enter a death spiral. If there’s some hope that somebody will step in and clean up the mess, the dollar will retain value for a while. If there’s no such hope, within weeks the US dollar will be worth as much as the Confederate dollar.
Confederate dollars have (finally?) appreciated, they are worth more than face value to collectors these days?
They borrow to pay off the difference. The resulting debts are also paid off by taxes. If the government stop collecting income, it would no longer be able to borrow money. If it tried to spend money with nothing to back it, no sensible person would accept it.
To collectors, yes. But just try using Confederate currency to buy a car, a loaf of bread or a newspaper.
OK, I accept that in a real-life scenario, if the US Government suddenly stopped collecting taxes, the resulting panic would render the dollar worthless.
But if the current pattern of habitual deficit spending with no end contemplated can continue without causing such a panic, then we can, in some sense, “print money” to pay for the government’s work as long as it doesn’t get out of hand.
This suggests to me that a government with a much smaller budget–say half a trillion dollars–could function without any revenue at all, provided it had some formal yearly spending limit (set by the Federal Reserve, perhaps) to avoid causing too much inflation.
Well, deficit spending works because the people who lend money to the US government trust that government to repay the debt with interest. Their ability to do this absent tax revenue seems questionable. Since lenders won’t lend if they don’t think they’ll be repaid, no more deficit spending.
It’s not that the US government is “printing” money - it’s borrowing it.
The other thing is, perpetual debt doesn’t mean perpetual inability to pay the bills. Plenty of people have mortgages that put them deep in debt, but this isn’t a problem since they have an income that enables them to meet that monthly payment. And many people move to a new, more expensive house before they have the first house paid off, taking on more debt…except they now have a higher income and a better ability to meet the higher payments.
So even with increasing debt, the economy that the goverment taxes is increasing, which increases the tax base. So if the economy continues to grow then the government’s ability to pay back the debt increases. But note that a large portion of the budget goes just to pay interest on previous borrowing, and just like credit cards if you only pay the minimum you never get out of debt.
So even though we have a deficit and a large national debt, there is still the perception that the government has the ability to pay back those debts rather than default. We could raise taxes, slash services, sell off military equipment, sell off the Washington Monument, and so forth, and pay back that money. And this is the same reason why Donald Trump can borrow millions of dollars from the bank, but you can’t get a loan to cover you till next payday.
An end is clearly contemplated. The government borrows money by selling treasury bonds and there’s a specific payment date on every one. So every debt has a specific end and is paid off by money collected from taxes. The ongoing process is the new debts creating by the issuance of new bonds. If at some point the government decided not to collect taxes, it would have no means to pay off its bonds and their value would become zero.
Think of it in terms of personal finance. If you have a steady job and collect a regular paycheck, you can probably find people who are willing to loan you money. But if you quit your job and told people that you were never going to get another paycheck and were just going to live off the money you borrowed, you’d quickly discover nobody would loan you any more money.
“How much value would the dollar lose?”
I’m not sure whether you are referring to a change in exchange rates (for foreign currency) or and increase in domestic prices (inflation).
Either way, the answer is “A lot”.
From google, I see that Ukraine experienced Hyperinflation with a budget deficit of 13% of GDP. Zimbabwe had a deficit of 24% of GDP. This year its inflation is above 3700%.
How can this be?
If the government cut taxes by 100%, members of the public would spend a portion of that. The increase in consumption spending would permit others to increase their spending, thereby increasing consumption further: economists refer to this as the multiplier effect.
The problem arises when there are capacity constraints. After a certain point, farms, factories and service providers can’t increase their output quickly, so demand converts itself more directly into price increases. Price increases in turn lead to higher wage demands, which fuel more price increases: in the 1970s they called this the wage-price spiral.
In the 1940s Hungary experienced inflation of 4.19 quintillion percent. I would recommend that the US not set its tax rate at zero.
That said, there is another scenario. The central bank could permit interest rates to rise, thus choking off purchases of capital goods and other forms of investment. That would offset the increase in consumption somewhat.
But investment is only ~15% of GDP, which is less than federal outlays. So we would still get hyperinflation.