How the Government is Funded

The government does not “create” wealth or print money. It takes loans out from its bank. Contrary to popular belief, it’s the Federal Reserve that retains the ability to print money for the United States and is completely separate from the orders of our government. Kind of like how you can’t tell your bank what to do when you are the one asking for a loan. For every dollar printed by the Reserve, our government must pay that back plus interest. When a request is made for more money (printing money) the value of our dollar decreases for every new dollar printed.  (Remember that for later)

Since the government doesn’t make money, how does it pay for the loan? The United States Government obtains its money from 2 sources:

1. Intergovernmental Loans : The following countries own 40% total of our debt through loans (not including interest):
• China (30.7%)
• Japan (20.5%)
• UK (6.2%)
• Foreign Oil (5.8%)
• Brazil (4.6%)
• Russia (3.2%)
2. Public Debt: 60% of our debt is paid for by individual Americans through taxation. Methods of taxation on individuals include:
• Federal Income: the U.S. uses citizenship in addition to residency in determining whether a person's income is subject to U.S. taxation.
• Payroll: taxes taken from every paycheck of every person in the U.S.
• Social Security
• Medicare
• Unemployment
• Corporate Income
• Transfer: Otherwise known as the “death” tax
• Gift: levied on wealth transfers during the transferor's life
• Estate: levied on transfers made after the transferor's death.
• Generation Skipping Transfer: levied on transfers made during life or after death to individuals removed by more than one generation from the transferor, for example, from a grandmother to a grandson
• Excise: Social “sin” tax on items/services like gasoline, tobacco, firearms, airfare and alcohol, tanning, etc

Realistically, the only income that the government does have to pay for the loans through the Federal Reserve and Intergovernmental Loans is through taxation. So the bottom line is that the money comes from us as individual citizens. Hopefully I didn’t lose you.

So let’s break down the different taxes that affect the middle and lower classes, since that’s most of the general public. Side note: currently, 49% of the general public does not pay income tax because they don’t make more than the poverty level. That being said, the average person and business will pay a payroll tax (if they are receiving any paychecks) and excise taxes. What most of the general public doesn’t know (and most politicians and public figures don’t want you to know) is that we are also paying corporate taxes as well. I’ve explained this in my economic model for a business; you can review that at any time.  Businesses are another way for the government to tax the public without directly saying they are taxing the public.

Everytime a politician explains that they will raise the taxes from Corporations, they are in effect, raising taxes on the public as a whole.  Especially if the Company provides a service or product that most of us use, like oil for example.  From the economic business model, we know that a tax is treated like an expense, which means that a business has to compensate for that loss in some way.  Employment, stocks, job benefits and the cost of goods are the choices businesses have to adjust as a result of the added expense. 

Part of the reason why the price of goods go up is because taxes are raised. If any of a companies expenses can't be cut, usually the price of their service does to make up that loss. In addition, when money is printed, the devaluing of the dollar also raises the price of goods since it takes more money to equal the "true" value of a dollar. The consumer, or individual, ends up paying.  Since we make up the majority of the country, its the middle and lower classes paying.

So, in short, our government makes money by taking money from the people they serve.  Businesess are essentially tax collectors by transferring the money they collect from the public to pay the government.  Add the excise taxes and we're footing the bill.  Adding government programs without streamlining or fixing the ones we have, means a new tax.  More funding for broken systems means a new tax.  As the deficit increases, and talk of raising taxes on businesses come up, you now know what that means.

Mind you, I covered the Federal level; remember the State taxes you as well.