John earns $100 by working at his job at the government center.  $28 are withheld for taxes, so he is paid $72.

He buys a new toaster for $18.70 at WalMart, and pays $1.30 in sales tax and has $52 left.

He then pays Fred $50 to mow his lawn, and he has $2 left.

WalMart pays $3 in corporate income taxes on the $18.70 John spent there.

Fred pays $14 in taxes on his $50 income.

Fred pays $35 to Bob to wash and wax his car, and has $1 left.

Bob pays $9.80 taxes on his $35 income, and has 20 cents left after he pays his 20-year-old son $25 to trim some limbs off the trees in his yard. The son pays $3.75 income tax on the $25, and spends $18.95, plus $1.33 sales tax, at WalMart and has $0.97 left.

WalMart pays $2.96 in corporate income taxes on the $18.95 Bob’s son spent there.

The federal government has collected $28 from John, $5.96 from WalMart, $14 from Fred, $9.80 from Bob, and $3.75 from Bob’s son, for a total of $61.51 from the $100 John originally earned.  Without income taxes, all these transactions could have been executed with a beginning amount of $38.49.  Put another way, John’s earnings would give him nearly twice the purchasing power he now has.

Note: This is but one typical, albeit elementary, scenario. It doesn’t consider the federal taxes paid on such things as gasoline, or excise taxes paid on jewelry, tires, batteries, etc.

Of course WalMart deducts operating expenses and cost of goods sold, as does Bob’s Car Wash, before paying income taxes, and Bob’s son probably didn’t report his $25 at all. But you get the idea that the federal government profits continuously as money moves from hand to hand, and the cycle starts over each time money is re-spent into the economy. Government takes a bite every time money changes hands. That is the point I want to illustrate here.

Envision a huge spherical tumbler, similar to the kind used for mixing up raffle tickets before a drawing. Now imagine all the money in circulation being gradually poured into an opening at the top of the tumbler. This illustrates money being spent – or injected – into the economy. Imagine there is an opening at the bottom where money falls out like leaflets from an airplane, and drifts down to the ground where it is spread among the people.

Now imagine the people’s money being dumped again into the top of the tumbler, to illustrate their spending it back into the economy. Can you picture the cycle now?

Now picture an opening halfway down on the side of the tumbler. To this opening is attached a plastic hose which is attached to a very powerful vacuum cleaner. The dust bag of the vacuum cleaner represents the federal government (the suction hose represents the IRS). As the money circulates repeatedly through the tumbler, from its top to its bottom, the vacuum cleaner continuously sucks money out the side and into the dust bag, reducing the volume which falls out the bottom.

At some point, can’t we assume that most ALL of the money will eventually end up in the dust bag? Of course we can. How, then, does money continue to circulate in the economy? Why, the government keeps printing more and more of it and dumping it into the top. And the more money that is dumped into the top, the less it will buy (and the more government sucks off from the side). That’s how inflation occurs. Today (2004), there are 12 times more money in circulation than there was in 1992 (January 2009: Now, it’s 25 times more).

For clarity: If you reduce the amount of money which INITIALLY goes to the government, by letting the people keep more of what they earn (tax cuts or reduction in tax rates), then more money comes out the bottom of the tumbler and is subsequently spent back into the top of the tumbler. Therefore, it re-circulates and is taxed again and again, resulting in more revenues being sucked into the dust bag. That is simple mathematics that few liberals understand.

Some will tell you that the value of gold (and other things) is going up, but that is not true. Gold has a constant VALUE. What goes up is the PRICE of gold, as measured in dollars, because there are more and more dollars available which makes each one less and less valuable. The more money there is in circulation, the more you have to pay for the unchanging VALUE of gold. Theoretically, if half the money were to be removed from circulation, the PRICE of gold – in dollars – would be cut in half. But there would be no change in the VALUE of gold.

In 1200 A.D., an ounce of gold would buy a quality tailor-made suit for a man, a hand-crafted belt, and a pair of shoes. Today, an ounce of gold will buy a quality tailor-made suit, a hand-crafted belt, and a pair of shoes. The PRICE of an ounce of gold has increased from the equivalent of a few dollars to more than a thousand dollars today.

ADVERTISEMENT: For up to date financial headlines, be sure to read A Nickel’s Worth of News at Flying Eagle Gold & Silver

I urge everyone to study this subject until you understand it. Unfortunately, few people DO understand it. We could change lots of things for the better if more people understood.

© February 2004; Fred Marshall Jr.

May be reproduced and distributed in its entirety only.  All rights reserved.

Republished on the Federal Observer, January 27, 2009.

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