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Spending (a Government Finance Issue)


Introduction

In general, to spend money, we need to have money or to be able to get money. We or some individuals within our family usually work at a job that pays us or them for our or their skills and labor. For many of us, income also comes from our investments. The money that we earn can then be spent on acquiring the various goods and services we need or want.

Various businesses and organizations get money from the sales of the goods they produce and the services they provide, from the returns on their investments, and from donations. They then spend this money on such things as the goods and services they need, on their employees' salaries, and on the dividends that they pay to their shareholders.

Our various governments get their money from the various taxes, tariffs, levies, duties, fees and fines that they impose on the production and sale of goods and services, on business and individual income, and on other things and activities. Our governments then spend this money on the various goods and services that they need, and on the various services and benefits that they provide to businesses and individuals.

What we, businesses, organizations and governments can spend is generally limited by our or their income or revenue stream. In many cases, money can be borrowed to support current spending, but only with the understanding that this money must be paid back with interest. Lenders will generally not lend money unless they believe the borrower will have enough future income or revenue to take care of their future spending needs and to pay off their loan obligations.

In some cases, we, organizations and governments do not have enough money and cannot borrow enough to cover our or their spending and loan payments. When this happens, we or they may have to declare bankruptcy so that we or they can spread out or reduce what we or they owe. This may help in the short term but can make it harder and more expensive for us or them to borrow money in the future. Therefore, it is always best to plan and to try to limit our or their spending based on what income or revenue we or they can reasonably expect to receive.

Individuals and Families

Most of us and our families need to spend most of our income on things like food, clothing, housing and transportation. Any money that is left over from what we spend on necessities we can spend on other things like entertainment or luxuries or can save or invest. Those of us who are wealthy can spend a larger share of our income on luxury items and can invest more.

Each of us has our own priorities when it comes to what we want out of life. This can affect what we want to spend our money on and how much money we will need to have the lifestyle we want. This in turn can influence the type and amount of work we do, and in turn how much we can earn. Those of us who strive to earn more money may be able to earn and to spend more money, but we may end up having less free time to enjoy the things we could spend our money on. Of course, even when we end up earning the same amount of money, we may each spend it on very different things.

For some of us, having a bigger or nicer home is important, so we may spend more of our money on housing and less money on other things. Some of us may want to do a lot of traveling, so we may need to cut back on other things to save up the money we need for their trips. Others of us may want to retire early, so we may need to cut back on everything so we will be able to save and to invest for the future.

On the other hand, some of us either do not know what we want or are not very good at budgeting for what we want. In these cases, we can get some appropriate help to figure out what we want and to put together an appropriate plan to get what we want. While we are figuring out what we want and how we can best get what we want, the best thing for us to do is to save our money.

To get the most out of our money, we all need to prioritize and to watch what we spend. We may need to buy certain necessities, but we may be able to get a better deal or to get something without certain extras. For instance, if we need a car, but do not need a bigger or newer car that is loaded with extras, then we could save some money by buying a smaller or older base model car. We can then use the savings to buy something that was a higher priority for us. For non-necessities, we can always choose whether we want to buy something or not depending on our priorities.

We want to spend the money we earn on what is important to us. However, even when we do save for what we want, an emergency may come up that could eat away at our savings. In cases like these, it would have been nice to have put away some extra emergency savings and to have purchased the right kinds and amounts of insurance. Doing either or both things will reduce the amount of money we currently have available to spend but would be a big help in the event of an emergency.

Another portion of our spending that we do not have much real say in is how our tax money is being spent. We do get to vote for our representatives and some initiatives that are put on the ballot, but it is very likely that some of this money is not being spent the way each of us would like it to be spent. Although there are many things that our governments need to do, because these things would be done better by a government, there are some things that could be better handled by private organizations where we could decide whether it was important for us to participate or not. I will talk more about this later.

Businesses and Organizations

In some ways, the spending done by businesses and organizations has similarities to the spending done by individuals and families, but usually on a much bigger scale and with some important differences. The most important difference concerns their spending priorities. Since the goal of most businesses is to make money for their investors, a high priority may be placed on growing the business or on providing good dividends. On the other hand, many organizations are in business for a specific purpose like helping the poor or promoting some cause, so they would prioritize their spending accordingly.

To make money for their investors, most businesses will prioritize their spending so that they can earn the best return on their investors’ money. For instance, if spending money on something would improve efficiency or productivity to the point where the money to be spent would be recouped in an acceptable time frame, then a business would probably spend the money. Of course, a business would want to evaluate all the different spending options to see which ones would give them the best return to maximize their profits. That is, they would do an appropriate cost versus benefit analysis on each option to determine which options give them the best return on their investments.

In many instances, businesses and organizations will spend some of their money in ways that many of their investors or contributors do not approve of. When we do not like the way a business or organization is spending their money, we can try to change its spending behavior. Bigger investors and contributors may have a big enough influence on these businesses and organizations to do this. Of course, we always have the option to move our money to a different business or organization that spends its money the way we want.

Governments

Governments can do some things for us better or cheaper than we can do them for ourselves. The job of protecting us from our enemies and criminals is probably the best example of this. If our federal government did not maintain a military, the burden of protecting us from foreign invasion would fall on those of us living near our borders. If our governments did not maintain police forces, courts and prisons, then we would need to provide our own protection, would be left to meter out our own justice, and would be at the mercy of everyone else’s justice.

In addition, many of us want our governments to provide much more for us than just some level of protection. Of course, anything that the government does will cost money, which must come from someplace. In general, this money comes from a combination of taxes, tariffs, levies, duties, fees and fines. Eventually, one way or another, to some varying degree, these will all come out of our pockets. Even when we just consider our sales, use and income taxes, anything that we buy ends up costing more. Of course, without the protections offered by our governments, most things would probably end up costing us even more.

Few of us, if any, really like paying taxes. The issue comes down to the question of whether we feel that the things our governments are doing for us are worth what we are paying in taxes or not. This can be an extremely difficult thing to judge. Our money is mixed in with everyone else’s money and then spent on such a large diversity of different things that it is difficult to identify what our money is being spent on. This is all complicated by the fact that few of us would agree on what our governments really need to be doing, on how much they should be spending on what they are doing or on what priorities they should be setting for what they are doing.

Before deciding on what our governments should do and how much they need to collect in taxes, there are several big questions that must be asked. These would include such things as the following.

  • What things are better done by our Federal, State and Local governments and what things are better left up to us?
  • How much money is needed by each of our governments to effectively do each of the things they need to do?
  • What relative priorities should we place on the things that each of our governments should be doing?
  • What types of taxes, tariffs, levies, duties, fees and fines should each of our governments collect?
  • How much should each of us pay?
  • How will paying these taxes affect us and our economy?
  • What should we do when our governments cannot collect enough in taxes, tariffs, levies, duties, fees and fines?

The following are a few general guidelines that we can use to help answer these questions.

  • If a government needs to provide a service or to do a project, it is best to move it to the lowest level government possible so that those effected will have more control over how these services and projects are administered and how much is spent on each.
  • If possible, it is always best to allow us to make our own spending decisions, so if private businesses can effectively provide the service, then we should be allowed to decide whether to get this service from one of these businesses or not.
  • It is always best for a government to get the money for a program or service from the individuals and businesses that cause the need for it and not to force others to pay for it.
  • It is better to have individuals and businesses pay the appropriate taxes, tariffs, levies, duties, fees and fines so they pay the true cost for the portion of the services they get and/or the amount of harm they do than to give them financial incentives to do the right thing.

Using the above guidelines, we can look at a few spending examples here to see what changes we should make. We will then look at some others in the following sections.

Local Services and Projects

For a community to fund its local services and projects, it needs to raise enough money. Some of those funds could come from some combination of taxes and fees, and from state or federal grants. If a community can raise enough from taxes and fees, then it could control and fund all their services and projects without any interference or assistance from the state or federal government.

However, most communities cannot raise enough money on their own to fund all their services and projects. The problem is that individuals and businesses in the community are already taxed so much by the state and federal governments that they cannot afford to pay a lot more in local taxes.

These state and federal taxes leave most local communities without enough money to fund a lot of their services and projects like roads, bridges, community centers, police, schools and other priority projects. Therefore, they need to compete with other communities to try to get some of their funding from the State and Federal governments. However, there are a few serious issues with this system.

Theoretically, having the state and federal governments control the purse strings could allow for better management of services and projects. The idea is that the state and federal governments would be in better positions to prioritize what is best for the state and for our nation. In some cases, this may be true, like when the service or project is for the benefit of more than the local community. However, in most cases, the local community would know what would be in a better position to know what its citizens need and want.

Everything would be fine if a community was able to get state or federal funding for their top priority services and projects. However, the federal or state government may not consider their services or projects a high enough priority. Therefore, the community may end up trying to get money for one or more of their lower priority projects, because the state or federal government may consider them higher priorities, and the community may feel it is better to get some money for what they can do rather than no money at all.

Instead of local communities spending their time and money trying to get money back from the federal and state governments, they should be spending their time and money deciding what is best for them. This means shifting the collection of the appropriate tax revenues back to the local governments from the federal and state governments. Then the local communities could spend their own funds on the local services and projects that they decided were most important to them. In conjunction with the other economic changes in the previous and upcoming sections this will give each local community a better shot at creating its own prosperity.

Government Subsidies

Our federal and state governments currently subsidize many industries and programs, and in turn, their products. These subsidies artificially reduce the cost of these products, which allows more of them to be sold than there would have been at a higher price. Those of us who do not buy these products and those of us who are low volume buyers are therefore subsidizing, through our tax dollars, those who buy a lot of these products.

Even if we all bought similar amounts of these subsidized products, they would still end up costing us more through higher taxes than they would have at higher unsubsidized prices. This is a byproduct of the rules of supply and demand. At a lower subsidized price, we will buy more of these products, even though the true cost must include the higher taxes needed to provide the subsidy. If we eliminated this hidden cost, we would adjust our purchases of these products to reflect their true cost.

For instance, government subsidies to the oil industry lower the cost of petroleum products like gasoline. This lowers the cost of operating a gasoline powered car, which increases the number of us who will drive them instead of driving an electric car. Since the tax money for these subsidies comes from all of us, that means some of the tax money coming from the electric car drivers is going to subsidize the gasoline car drivers. This is bad in many ways.

First off, those of us buying and using a product should be paying for it, and not those of us who do not buy or use the product. By forcing us to pay part of the cost, this is just a form of stealing. In addition, by making a product seem cheaper than it really is, more of us will buy and use it, even if that product would cost more without the subsidy than an alternative. By subsidizing a product that would cost more than an alternative, we are just encouraging waste.

In the case of gasoline, its cost is already lower than it should be, since we do not include all the indirect costs of using it. Therefore, if we want to subsidize a product, it should be the electric car. However, the better option would be to add the appropriate indirect costs to the price of gasoline. That is, add a tax that would reflect the true total cost of using gasoline.

National Flood Insurance

Another example of a government program that uses tax money from all of us to subsidize a few is the government’s national flood insurance program. Those of us who build in areas at a high risk of flooding would need to pay very high premiums to get flood insurance from private insurance companies, if we could get it at all. Instead of paying high private insurance rates or simply not building their homes in high-risk areas, some of us can get relatively inexpensive subsidized flood insurance from the government.

Each year the government pays out far more in claims than it collects in premiums. The extra money to pay these claims comes from our tax money, so we end up paying for the high-risk behaviors of others. The solution is quite simple; raise the premiums over some reasonable amount of time until they reflect the true cost of insuring these homes against flooding.

For new homes or homes rebuilt after a flood, we would immediately start charging the higher premiums. If we knew we would need to pay the higher premiums, then we can decide beforehand whether to pay the higher premiums or build someplace safer. Then the rest of us would not be burdened with the higher taxes that would be needed to cover the flood losses of others.

Economic Growth

With our current economic system, there is a continuous push towards economic growth or growing the economy. Increased economic activity is seen by many as a method that can create jobs for the unemployed and that can help to create wealth. There are numerous problems with the way in which we are doing this.

One important problem is that to increase economic activity, we need to spend more, which increases the wealth of the wealthy, but decreases the wealth of us who are overspending. In addition, when we do not have any extra money to spend, especially when the economy is already doing badly, we cannot help to increase economic activity without going into debt.

Instead of growing the economy, we need to concentrate our efforts on doing what we can to make it easier for us to make our lives better. Most of us care about the happiness, safety and stability of our lives and the lives of our families, our friends and our neighbors, and not about helping the rich become wealthier. If we have more control over our local economy and finances, we will be able to spend and to save based on our own priorities and have a better chance of being happy and prosperous.

Cost-Benefit Analysis

One of the best tools to use when deciding what to spend our money on is Cost-Benefit Analysis. This is true whether it is for personal, business or government spending. By doing cost-benefit analysis, we can decide what will get us the most for our money, businesses can decide what will give them the most return on investment and in turn the most profit, and governments can decide what services and benefits will provide us with more and better results for our tax dollars.

A cost-benefit analysis is a process by which we compare the projected or estimated costs and benefits (or opportunities) associated with doing something to determine whether it makes sense from a personal, business or government perspective. If the projected benefits outweigh the costs, we might decide it would be good to proceed. On the other hand, if the costs outweigh the benefits, we might decide it would be best not to proceed.

To do a cost-benefit analysis, we must first determine what we are trying to accomplish. We want to know if we are deciding whether to do something or not, or we are deciding which option is best for something we know we must do. As part of that, we must decide on what metric to use to decide. It may be the highest return on investment, the most that can be done within our budget, or something else.

Then we must identify all our projected costs and benefits. We would create separate lists for each and include any dependencies between the costs and benefits. That is, if we spend a little more or a little less on some element of our project, then how would that affect the benefits.

For our costs, we want to start with our direct costs, which would include the money needed to create our project. Then we need to add the indirect costs, which would include the money needed to run our project. For instance, the costs to build and to maintain a bridge, road or building. We also want to include any intangible costs, which would include costs incurred while creating the project. For instance, the costs incurred for police and commuters while building a bridge, road or building due to blocked roads. Any lost benefits like those lost while pursuing one project over another should also be included as opportunity costs.

For our benefits, we want to start with our direct benefits. For a road, bridge or building, this might include emergency personnel getting to a scene earlier. Then we need to add the indirect benefits. For a road, bridge or building, this might include constituents getting to work, to home or to other locations faster and easier. We should then add in the intangible benefits, which might include having happy constituents. There might also be competitive benefits like making the community a more attractive place for individuals, families and businesses to relocate to.

Once we have all the costs and benefits, we need to assign values to them all and to tally them up. Once we know our total costs and total benefits, we can compare them based on the metric we decided to use and determine whether to go ahead or not.

Currently, our governments do not always use cost-benefit analysis. Instead, our representatives prioritize the political benefits they can get from their spending decisions. That is, they will try to get as much money spent in their districts and states as they can, which will make it look like they are increasing the wealth of their constituents. Which might be true if they can get more money spent there than the average spent elsewhere. However, without cost-benefit analysis, we may in fact be decreasing the wealth of our state or nation.

However, if we did a cost-benefit analysis for all our government spending and only spent our money on the worthy programs and projects, then we could be sure that we were increasing the wealth of our state or nation. In addition, if we made sure to balance these programs and projects throughout our nation, then we could be sure that we were increasing the wealth of all of us.

Next Section

Taxes - Making paying our taxes simplier and fairer.

Last Updated:
Friday, January 12, 2024
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