The #GOPTaxScam has finally brought up the subject of economics into the mainstream. People are paying more attention to that dreary science. And in 95% of the stories most people hear or write about the #GOPTaxScam they are wrong about it, whether they like the policy or not. Nearly every MSM and the MSM wannabes review places the impact that the policy will have on our debt and our deficit. The other common denominators are calling the policy a transfer of wealth, or a boon to corporations. From the plan’s detractors you hear how this policy is going to crash the economy and trash the Republican chances of holding their majority in Congress. From it’s supporters you hear how the lower taxes on wealth will spur investment, add jobs, increase salaries, and maybe even balance the budget. Both sides are wrong, and even worse on many points both sides are lying.
But they also both speak some truths. The supporters note that the Middle Class especially will see lower taxes. And that is true. But it is also true that taxes on wealthy people and corporations will be lowered even more, by any mathematical measure. The detractors point out that the higher tax rates return in 2025 for the Middle Class and that the Middle Class will lose some deductions, which are not tied to inflation effectively raising their tax rates at a proportionately higher rate than on wealthy people.
Here is what that means. Initially the Middle Class and to a lesser extent, the poor will have more money to spend, businesses who already have enough reserves to meet the increased demand will likely expand, add jobs, and even increase pay. Still the vast bulk of their tax savings will go to shareholders and offshore untaxed accounts. As the effective taxes on the Middle Class increase each year, there will be slower growth until by 2025, growth will be back to our current level of stagnation. That is, unless inflation such as we have not seen since the Nixon years takes hold; and this plan puts the US at risk for that to happen.
Additionally, there will be so-called deficits. This is the lie that both sides agree on. These deficits will be used by supporters as an excuse to cut back nearly every single social benefit funded by the US government. Again, the initial boom will make it appear that the deficits are not as bad as predicted, but by after 2019 election, the deficit numbers will put pressure on Congress to impose austerity. This is an actual lie which is at the heart of the #GOPTaxScam. That initial boom potentially could kick off a round of inflation since there are no tools that I am aware of in this plan for managing that risk.
There is no deficit, there hasn’t been since Richard Nixon took us off the Gold Standard. Money is created into existence. Taxes serve two primary purposes, and neither one is to fund the federal government. Money is created by the US spending. It is not recycled as revenue, it is destroyed. When we, the users of money spend, the money is recycled so it’s value to the economy is greater that its nominal value. That is why tax cuts for the wealthy are useless, their money is not recycled rapidly if at all. But the Poor and the Middle Class spent nearly all their income. Taxes force the US Dollar to have value and be universally accepted. Taxes also remove excess money from the economy to regulate inflation. More money does not create inflation but less money slows inflation.
Last of all, there is no such thing as taxpayer money. All taxes are destroyed, not used to pay for wars, not used to pay for Presidential vacations, legislators benefits, or even your Social Security. #LearnMMT
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.)
If you have not read Part 1 and you are unfamiliar with the concept of Modern Money Theory [MMT] then please click here for a short introduction. There are 5 reasons why taxes are necessary even in an economy built to take full advantage of MMT descriptions of money. A central observation of MMT is that taxes are not required to fund the government. But still taxes have an essential role and of the 5 reasons the first 4 are listed below. The last reason will appear in a separate blog following this one.
- Collecting taxes payable in US currency establishes the dollar as a legitimate currency. If taxes must be paid, and you provide a service where you collect your pay in a barter agreement, then how will you pay your taxes? Some may romanticize using such a system for payments, but it is just not practical. Using dollars allows us to spread out our debts into manageable chunks, paying taxes in dollars reinforces that the dollar has a critical value.
- Taxes are the simplest means the government has to control the money supply allowing it to manage inflation, which by the way does not happen if the government creates more money. But, should other external events like the 1970’s energy shortage in the US and inflation gains momentum, raising taxes can take the wind out of that sail real fast. But, the tool also goes both ways, taxes can also be lowered to provide stimulus during a slowdown. Ideally, in a well-managed economy the tax tool will be needed infrequently. MMT, by noting that we overburden taxes by assigning conflicting economic tasks creates an economy that is easier to manage by lessening the workload we currently needlessly assign to money.
- Taxes and fines can be used to manage socially positive behavior. We do this now with taxes on alcohol and cigarettes, along with fines on selling those items beyond the legal parameters. This may be the most controversial issue of what taxes (and fines) but one must also consider that the use is not just for “sin” taxes but is also the justification behind a carbon tax and other environmental issues. Encouraging, not just people but business interests as well into acting for a Public purpose or not acting against a public purpose is a critical role of a civilization, and taxes are a powerful tool for enforcing that. Also, by adhering to the principle that taxes are not needed to fund the government’s expenditures, means that these sin taxes don’t end up as necessary to fund the government.
- When taxes are not driving all expenditures then tax collections can do all of the previous three tasks and help in the redistribution of unequal wealth acquisition. Yes, Robin Hood taxes may not actually redistribute wealth, but it does, at a certain point, force high earners to reconsider whether or not being paid only 30 cents of each dollar earned is a wise way to make more money. Forcing wealthy, highly paid persons to truly push their wealth back into the economy can significantly help to reverse current income trends.
In the next post I will discuss the 5th reason for we need taxes. And that reason is based on politics, not economics.
We all know that the US collects taxes and then uses those tax dollars to pay for whatever expenditures the US has. We also know that for nearly every single year of this nation’s existence, the taxes, tariffs, fines and fees collected were not enough to pay for those expenses, so the US borrowed money by issuing Treasury notes, to cover the difference. That is the annual deficit. Of course the deficit borrowing gets paid back with interest from taxes, tariffs, fines and fees [TTF&F] or new borrowing as each Treasury note matures.
All pretty well known and nearly universally accepted. Except, it does not represent fiscal reality. That reality is neatly described in an economic philosophy called “Modern Money Theory” [MMT] which posits that since all US Dollars originate from the US government (a legal fact, try to print your own US Dollars!) and all TTF&F must be paid in those same US Dollars. Then as those dollars come back to the Treasury where they were first created, each one of those dollars are effectively destroyed. That means that every dollar spent by the US is created by the Federal Reserve, an agency that was created for that purpose. The amount of money it creates is not in any manner solely dependent upon any part of the TTF&F collected. I suggest obtaining J.D. Alt’s book on Amazon that explains how this all works with simple language and drawings of bathtubs and other plumbing artifacts by clicking here.
But even though the US does not need your tax money to pay its expenditures, it still must collect taxes. In fact there are 5 reasons it needs to levy and collect taxes. I will cover those 4 of those reasons in a blog to be published in the next day or two, followed by a blog covering the 5th reason a day or two after that.
The moment you apply the rules of balancing your books to a national budget, you have made a colossal mistake. Read on, let me know if agree.
It is Budget season on Washington when various caucuses and even the President all submit a different budget for consideration. And certainly there are many differences between the President’s budget, the Progressive Caucus Budget, the Democratic budget and this year’s winner, the Republican budget; which passed through both the House and the Senate. Now for all the complaints about the Republican budget and the others as well, they all share one very critical trait that deserves closer examination. But before I get to that, there is another item that is very important. A budget for the US Government is just an outline. There is little in there that enforces any cuts or increased spending. And the little that is in there for cuts and increases can be overridden when an actual bill is passed and signed by the President. It is all for show.
Back to that critical trait I mentioned, which is not just for show. All expenditures must be accounted for by taxes, tariffs and fees that the government collects. Any shortfalls are made up by selling Treasury notes that are repaid with interest. Similar to any loan that many of us take to pay for a house, car or college education. I call this method of funding the government Tax to Spend. The term is temporally correct since, first the government sets tax rates, then, as the money is coming into the government coffers, Congress authorizes spending. When there is a shortage, the Treasury Bonds are issued and sold. Those bonds represent what is called the deficit and every budget brought up in Congress targets reducing the deficit until the budget is balanced. In fact a balanced budget is the proclaimed purpose of creating a budget in the first place.
But what happens when there is an economic downturn? When millions of people suddenly turn to government to help fulfill their basic needs. Among those are unemployment payments and since the unemployed have no income they need subsistence assistance like food stamps so their lack of work does not let their families starve. Often economic downturns occurrences are coincidental with changes in the workplace so education and job training assistance are needed to provide access for the unemployed into this modified workscape. But also day care help makes certain that children are cared for when their parents are in a school or training or working at entry level wages. When more persons are suddenly in the low wage end of the income spectrum, how should government pay for it all? Most Conservatives will insist that by supplying people with “free” unemployment checks, education, low cost food and even housing the government is encouraging bad behavior, so just level fund all the programs so people will go get themselves a job. Liberals will usually insist that we raise taxes on those that are still doing real well and use that increased tax income to fund all the programs and also create jobs. Conservatives counter that by taxing the wealthy, the wealthy will be unable to expand their businesses and restore jobs.
Surprise! The Conservatives are correct. Raising taxes in tough economic times increases the pressure on business to contract when demand is shrinking. And taking taxes from persons with no income is very much out of the question. The government could “borrow” more to cover all the increased expenses during a downturn, but that just means that persons of considerable wealth are getting paid (interest) to put their money into the government instead their business. Putting money into funding the government where the interest rate certainty outweighs the risk of investing in any business and profits are not guaranteed. So we are left with a choice of increasing taxes or paying the wealthy to fund government expenses.
But, there is another way that government gets money to pay for implementing all the items in the budget, as they are enacted in law. The US Government and the US Government alone has the authority to actually ‘print’ or coin money. Ever since President Nixon took the US off of the gold standard, the US Dollar is a floating currency. It’s worth is based on what people are willing to pay for it. Just like a Realtor will always tell you that your house is worth what a person is willing to pay for it, the same is true of the US Dollar. What this means is that probably by the stroke of the President’s pen alone all all tax deficits can be funded by the US Treasury requiring the Federal Reserve to “print” the necessary currency. (Side note: Money is not actually printed, it is just an entry typed into the US’s ledger by the Fed)
With the funding question now addressed, what a bout taxes? If we eliminate them entirely why would Americans or American businesses use the US Dollar. That is because, by taxing as well as only accepting the US Dollar as a tax payment a value actually gets assigned to the US Dollar. It also turns out that taxes can be a great tool by which government can implement economic management via the tax collectors. I call this the Tax to Manage economic model. Managing economic conditions is something that all governments do, but with its spending role mostly eliminated the management function grows in importance. For example, historical evidence indicates that income inequality increases as the range of marginal tax rates shrinks. So, it would seem that by raising the highest tax rate over 50%, probably to 75%; income inequality will diminish. Also, since that rate will stay consistent across economic upticks and downturns, the negative impact of raising taxes on the wealthy is minimized. At the other end of the spectrum, taxes on lower income persons can be lowered significantly, especially if no taxes are collected until pay reaches past a living wage.
One last word about what most skeptics will reflexively bring up. Hyper Inflation. And they are right, it is a risk, but not very likely. High inflation will occur when some critical resource that is needed by nearly everyone becomes scarce. The correction, when inflation starts to rise, is to simply manage it away by raising taxes and by addressing the shortage by some reasonable substitute. Once the economy stabilizes, return the tax rates to normal. In the final analysis, we need to alter how we fund government activities, so that government can meet the promise made in the preamble to US Constitution when it declares that the government as defined by the Constitution will “Provide for the general welfare”. By making money collected in taxes the major source of government income the US has weakened itself economically so that money cannot be used to mange the economy.