If you have not read Part 1 and are unfamiliar with the concept of Modern Money Theory [MMT], click here for a brief introduction. In Part 2 I cover 4 of the 5 reasons taxes are still necessary even though MMT explains that taxes do not fund Federal spending, click here to read about the first 4 reasons. Below, is the 5th reason for collecting taxes in an economy that honors the MMT economic descriptions.
The most popular feature of the MMT description of how money is created, circulated into the economy, and then ultimately destroyed is undoubtedly the approach to taxes. In the previous entry I described 4 reasons why taxes are collected even though the MMT description does not require tax receipts to fund government activities. Instead government activities are funded by money creation and taxes are ultimately destroyed. But MMT’s description of money creation limits that act to funding government expenses that serve a public purpose. Currently, in the news we have an expenditure that cannot be described as providing a public purpose. I use the example of the cost of maintaining a lavish and separate lifestyle for Mr. Donald Trump and his wife more for its notoriety than its dollar amount.
If we were funding government expenditures solely by creating whatever is required to pay for everything that is an expense, what is the public recourse? While there is little truth to the near myth that printing money will cause inflation, there is as my language indicates a path to that occurring. Also as I noted in the previous blog, should inflation start to accelerate, then raising taxes would brake that situation. To take the Trump example a little further, without a lever that the public can exercise to prevent extravagant spending by not just the President, but by all elected officials; who would gladly use that power to enrich each other along with their friends and others as well. It becomes evident that eventually the power will be abused and even with a remedy at hand (raising taxes) a better approach would be to allow tax receipts to be “allocated” as an accounting trick to certain government expenses.
This will allow taxpayers the right to proclaim, as they do now, that they do not want to pay taxes for Trump’s lifestyle choices. Taxes to serve the public purpose of maintaining citizen sense of ownership. In fact it’s more than a sense of ownership, it is real ownership. Something that rounds out the public purpose of spending. The question is then, how are public purpose expenditures separated from operational expenses that will not enhance serve the public purpose? One possible way is to fund all maintenance costs from tax collections. This would be items like road repair, upkeep of National Parks, along with salaries and expenses of Federal office holders and their direct staff. One critical expense would be all military spending, unless there is a true declared war.
Spending via money creation would be on all capital expenses. New infrastructure, Health Care, Social Security, Federal Job Guarantee, Basic Income Guarantee, and Public Education come to mind immediately. These are all items that serve a public purpose. Under the present arrangement these are the costs that are deferred, cut back or never even considered because it is believed we cannot afford it.
There are political advantages to restricting some expenses to be budgeted according to tax revenues. Using the model of assigning maintenance costs to those revenues is not perfect. There will be public purpose spending happening, but since the maintenance areas are the ones people care about the most means there is less push back from taxpayers when they have well maintained parks, roads and power grids.
There is one last caveat to the capital expenses that must be understood. The MMT descriptions only apply to the Federal government’s expenses, states, counties along with city & towns still must collect taxes to pay their bills. With an MMT model we do get more done with less taxes, but as I have shown taxes are a necessary and critical component of a healthy economy and a component essential to a dynamic democracy.
(I plan to write some more on other MMT aspects such as the Basic Income and Job Guarantee along with why it describes money so well and other descriptions are lacking.)