Government $ Deficit = Non Government $ Surplus (Net Financial Assets)

Explanation why:  Taxes are liabilities that the state has the authority to impose on private sector’s balance sheets.  It is a unilateral transaction driven by a hierarchy relation (not by contractual arrangements).  At the moment a new tax is approved (and before it is paid), the net worth of the private sector is reduced.

Under current institutional arrangements, when a tax liability is due and private agents pay their tax, they write a check to the US Treasury.  The commercial bank issuing the check debits the account of the taxpayer, and the check is cleared directly with the Fed. The Fed debits the bank’s reserve account and credits the General Account of the US Treasury at the Fed.

While the tax payment has no further effect on the net worth of the private sector (dollars are paid while a tax liability is written off), it cancels a government’s claim (thus reducing the ‘government deficit’ for the period), and simultaneously reduces the net financial assets owned by the private sector.  If the government returned the tax paid (as it happens with a tax credit), the deficit will increase and the private sector net financial assets will increase dollar-by-dollar.

Therefore, for any change (increase or decrease) in the government deficit, there is an identical change in the net financial assets (or financial surplus) of the private sector.  On the other hand, the US private sector may decide to make some purchases from foreigners.  In this case, the US private sector’s financial surplus will fall, while foreigners’ financial surplus increases. Foreigners receive dollar payments in the form of bank account balances in the US system, so as long as they decide to store dollars they own an account in the US.

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