My goal of this entry is to try to disabuse you of the silly and false belief that, to be very blunt, the purpose of federal taxation–the power of our federal government to levy some tax obligation on its public–is to pay for things. In an era of unprecedented corporate welfare, tax havens, and extreme concentration, Zucman and Saez help us understand that wealth is power. Obscene wealth concentration through extra-legal tax “loopholes” (tax shelters, corporate welfare, etc.) leads to an extreme concentration of political influence, allocating power and coordination rights into fewer hands, thus subverting healthy democratic function. I argue that the real purpose of taxation is to more equally distribute wealth (disseminating the power to a democratic majority), change behaviors (discouraging the purchase of cigarettes or overly unhealthy products), and (perhaps most importantly) mitigate inflation. Our federal government’s constraints to fund a better future are political, not financial. Policymakers and an aspiring well-informed citizenry cannot be hampered by a flawed understanding of how the macroeconomy operates, because (to take from the beloved Pitchfork Economics) bad ideas lead to bad policy, which then lead to bad outcomes.
When Bernie Sanders and Alexandria Ocasio-Cortez (among others) propose Medicare for All or Universal Pre-K, people from every corner of this country asks, “..but how are we going to pay for it?” But why is it that you seldom hear how the U.S will pay for military defense spending or even corporate welfare vis a vis tax cuts? In Warren Mosler’s 1993 paper “Soft Currency Economics,” he asserts that “We are told that we cannot afford to hire more teachers, while many teachers are unemployed. And we are told that we cannot afford to give away school lunches, while surplus food goes to waste.” It was as early as 1946 that Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, posited that taxes for raising revenue are obsolete. Once you understand the basic logic behind federal taxation (and, although not particularly pertinent to MMT, the broader historical context of taxation, i.e. slavery), can you begin to reconcile a fresh perspective with surviving mythology.
The “how will we pay for it” question is nearly useless, but one central to the discussion concerning how our federal government finances projects. Implicit in the question is that the government somehow needs our money, that they need to collect enough in tax revenue before they can finance public projects like universal healthcare, pre-k, and so forth. This is what Stephanie Kelton, professor of public policy and economics at Stony Brook University and a leading proponent of MMT, calls the TAB(S) model (taxes and borrowing are necessary to collect before the government has enough money to pay for things we want). But the mechanics of collecting taxes out of need prior to spending cannot be true.
Consider the circular flow diagram, standard in several ‘Money & Banking’ courses required in the undergrad economics curriculum. There exists households (people who spend the money) and firms (those who pay money to households) as operative entities in the economy (what MMT would call “currency users”). Betwixt them, the market for goods & services and the market for factors of production (like raw materials). Notice how this standardized model does not take into account any story of how money was injected into the economy in the first place. It simply takes it for granted that money just exists. To explain this, MMT’s fundamental premise dictates that there are issuers of our currency (the U.S government, a public monopoly) and users of our currency (households and firms), but ultimately, that the U.S have full monetary sovereignty over its own currency.
Since the U.S is the monopoly issuer of our currency, they (we) do not have to worry about meeting obligations as they come due because our money is free floating and decisions on how to spend need not be hampered by how much of a commodity it is linked to. To understand this concept, context is necessary. Before 1971, there existed a fixed exchange rate system in the U.S, otherwise known as the “gold standard,” in which the federal government had to cover spending costs of financing projects by relying on revenue collected solely from taxation. The era of the gold standard necessarily tied our money to the amount of gold reserves kept, thus forcing the value of the dollar to be directly linked to the stock of gold. Said another way, the value of money when we were on the gold standard was necessarily linked to how much of it we kept in circulation (the “supply & demand” of gold reserves). This was a bad idea because gold is a tangible commodity that you can definitely run out of. Today, the US pays for, prints, and collects debts, and levies tax obligations in its own free-floating currency, knows as fiat money. This fiat money functions as a social unit of account and is indeed a public monopoly–only the U.S government can legally print it, otherwise the it’s counterfeit. The value of our dollar today comes from the issuing authority imposing a tax obligation on its public, which then, in turn, creates a demand for the currency (not how many dollars are in circulation, because there is nothing inherently valuable about our money–the public and our federal government determine the value).
Professor Kelton shows in The Deficit Myth that our red ink is someone else’s black ink, and vice versa. Both sides of the accounting ledger are important indicators. If government spends $10 into the economy and taking $6 out in taxes, not only does that control inflation, it injects necessary dollars into the economy, yet registers as a debt in the books. Our debt is held in UST bonds and other promissory notes. If the debt was eliminated it would eliminate the value for everyone who holds claims to those future assets.
Because the government has to spend money into the economy before it can take it back out in taxes to mitigate inflation (because if the U.S government only spent without taxing anything back the economy would be “overheated,” thus causing hyperinflation). Professor Kelton shows that, insofar as you do not believe that the U.S has a long term inflation problem, you should not be worried that it has a long-term debt problem. Professor Kelton also highlights that our debt can be too big, but in fact, our current debt is is too low (evidence: unemployment. This suggests that the government has under-utilized resources and that it is effectively choosing how many people it wishes to keep unemployed). Even the United State’s debt-to-GDP ratio is far lower than other nations (like Japan), further indicating that our debt (public deficit spending) is too low. We have far less public debt compared to the might of our production capacity than Japan, and you don’t see them battling a hyper-inflation problem. Further evidence suggests that our taxes are too low compared to other developed countries. For example, Robin Einhorn, author of American Taxation, American Slavery, notes that, According to the Organization for Economic Co-operation and Development (OECD), “American governments (federal, state, local) take less of our incomes in taxes than the governments of other countries with comparable economies. In 2002, American taxes amounted to 26 percent of GDP. This was only half the burden in the true high-tax countries, Sweden (50 percent) and Denmark (49 percent), and well below the average for the thirty member countries of the OECD (36 percent). In fact, taxes were lower in the United States than in all except three OECD countries (Japan, Korea, and Mexico)—which means that taxes were higher in countries ranging from Canada, Britain, and Germany to Poland, Turkey, and Greece.”
A properly functioning democracy would not be so committed to protecting wealth, whereby gains from the economic pie are so grossly concentrated in the uppermost echelon of the income threshold. Taxing billionaires is not required for the explicit purpose of revenue raising. The federal government does not need their money to pay for things we need like robust medicare expansion, excellent public infrastructure, or any other project that would otherwise strengthen our safety net for the most economically vulnerable (which overwhelmingly and unequally burdens marginalized groups).
While “theory” is indeed in the name, this phenomenon functions precisely as a description of monetary operations, and how we can attain a sustainable future, putting our fetishization of growth above all else to bed. To unlock the power that the United States has to care for the public and its welfare, we need robust tax justice and realize that MMT can help us unlock a future by which we decide what kind of economy we want to have first before deciding how to collect the money. Once you understand that the cost of doing our best to reverse or slow down the effects of climate change is whatever is necessary to have a livable planet. The cost of no unemployment is, in fact, whatever it takes. The notion that we do not have enough money to do anything is utterly nonsensical. These are matter of policy choice. Governments don’t budget like households, so why do we think they’re still cash-strapped like them?
There is nothing inherently “bad” or “good” about the national debt. It just…is! Injecting necessary money into the economy where we need it most signals what the U.S values. And at this moment, signals as to what we value, by virtue of what we spend and how much, are very telling. Our needs to improve our country and bring it up to pace in the 21st century come with behemoth political barriers, not financial ones. The economy is whatever we make it to be, not some inevitable force of metaphysics that we can’t change. We can focus on what matters most to us. We have real constraints to worry about, and the money to solve them.