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
So many, many people are upset. Some are Democrats, probably most Democrats. but Republicans are as well, but probably not most. Last of all, every single person that does not pledge allegiance to either the Democrats or the Republicans are upset. Of course they are upset that in an era with a reported low unemployment rate, jobs are scarce, for those with jobs their pay is barely keeping up with inflation. They are upset because we are at war all over the world, and once a month we hear about a soldier or two being killed in a country that many Americans never heard of. They are upset because every week another mass shooting takes place, or an unarmed black youth is gunned down by the police. They are upset because on the news all they hear about is how horrible the President is, and so they believe it. But they are also upset that their health insurance rates are skyrocketing, the Russians have taken over our elections, and oil is being spilled in our oceans and in our water supplies.
Anger and frustration is expressed by every single American. Sure, some of these things anger different people. Perhaps you don’t believe Russia is controlling our elections, but instead you are angry that our election vote counts are unreliable and unaudited. Our anger at the status quo exposes the common line of thinking that we are a nation divided. We are not divided. We may not all be angry about the exact same things, but we are all angry that the status quo is not working for the American people. We are united on this fundamental issue. We are united in the knowledge that most of what see and hear on the TV news and opinion shows only tells us half the story, and nobody reads more than one newspaper – if that, radio is over flowing with sports talk and heavily biased opinion, and who can tell what is true on social media. But on all that mishegas we are united.
This is what happens when resume trumps truth. We saw that in our last Presidential election. With only two candidates that we could choose from with the knowledge that one of them would win, their main credential for the job was their resume. Republicans refused to look into the basis of Donald Trump’s boasts of accomplishments, which in hindsight it seems impossible that he personally accomplished anything. Democrats took the list of jobs that Hillary Clinton did within government service and never dug very deep into her accomplishments. Resume trumped truth. (pun so very intended)
But here we are on the verge of losing unfettered access to the web’s cornucopia of information and entertainment, implementing tax reform that will accelerate all the wrong things and as a result it will not bring back a strong and large middle class or create pathways for the poor to improve their lot, starting a potential nuclear war with a second-rate nation in a real world reenactment of the Marx Brother’s “Duck Soup”. This all, to be blunt, is caused by the complete takeover by a single party. Democrats abdicated their participation in choosing to follow the republicans lead in both domestic and foreign policy. All they do to separate themselves from Republicans is a more tolerant social policy. And even that has withered into a shadow of what it needs to be. But even then, it is sufficient to keep Republican voters hating on all Democrats. Take away the labels, and we become united.
When someone tells you how divisive Donald Trump is, or that the nation is divided, remember that we, the people, are united. We want prosperity and we want peace. We may have disagreements about what to fix and how to fix it, but we agree that fixes are necessary; the rest is called democracy.
The Senate Tax Reform package will eventually become the text book model for how to do all the right things wrong. Reducing taxes is a good way to increase economic output, the Republicans accomplished that. Modifying deductions and using progressive tax rates as a tool to reallocate income distribution. Done. Using taxes or lack of taxes to discourage or encourage certain behaviors? They do that as well.
Sound, economy boosting tax reforms would have all of the attributes of the Senate tax plan. Reducing taxes does do exactly what Republicans say it does. It allows more money to remain in circulation, thereby increasing economic activity. Individual deductions are part of the income tax code to account for living expenses, increasing personal deduction moves us somewhat towards that goal, but any improvements on that intention were erased when state and local taxes became limited on the amount that could be deducted from gross income. Likewise many deductions such as homeowner mortgage interest, charitable contributions, and medical deductions were further limited than they had been in the Reagan era. These events ultimately impact middle class taxpayers from seeing any significant decrease in their tax bill; which by the way the tax rates are all scheduled to expire. And lets not forget that by eliminating the Health Insurance mandate only increases the cost of living for those that have insurance. that made up,were given limits they did fail to add a metric for it to keep pace with a hopefully rising. Very little will come from the Middle Class to help stimulate the economy, except for maybe in the 2019 tax season in 2020.
Progressive tax rates is one of the best tools that the managers of macroeconomic policy have to make certain that individuals that are living below the cost of living are not taxed, and persons whose incomes are exorbitantly beyond the cost of living, even after considering that a higher pay scale usually means a higher cost of living, pay a share of their excess income in order to totally remove that money from circulation. The harm to the individual is close to nil, since it is money they were not ever planning on returning into circulation. In other words, they are hoarding.
But, if the Republicans put in place a tax plan that eliminated any taxes on persons that earn the cost of living, with unlimited and unrestricted itemized deductions for those earning less than the average wage, higher taxes that eventually exceed 50% of income on the wealthy and restricting the amounts that they can itemize, we got a plan that will make America into a haven for the middle class, the poor will not be held back by the use of wage slavery and virtual poorhouses, and the wealthy will still earn outrageous sums.
So please do not talk about the Federal Debt, or deficits, keep your eye on the prize. The plan passed by the Senate is a great start, but it is upside down, and will work that way in the economy. What will happen is this; trickle down has never worked, it won’t this time. Austerity will spread like a disease throughout the entire economy forcing entire populations into poverty, all the wealth generated will remain at the top and coalesce there.
What is wrong with the Republicans finally getting to implement the agenda they have been carping about ever since Ronald Reagan left office? In a word, everything.
Of course, even though they have not gotten everything they wanted since Reagan, the economic policy followed by Bush I, Clinton, Bush II, and Obama still adhered to the general themes laid out during the Reagan years. Minimal taxation for the wealthy and corporations, decreasing overall deductions for the middle class, expanded deductions for corporations with lowered tax rates for capital gains. There has been an on-going outsourcing of government services at all levels of government along with a near total deregulation of banking. And last of all a new common denominator for how government structures trade agreements and government projects, both are designed to improve the profitability of corporations.
The new tax plan proposed by Republicans is built on the foundation of the above Reagan era economic thinking with exactly zero thought about what the problems are in our economy that need to be addressed. And how can the tax code be used to help solve the problems.
Our economic problems are multiple, but the most pressing problem is our debt. Not the nation’s debt. The debt of the people who live here. Is there any provisions to reduce debt. especially the debt owed by the 99%? Nothing, in fact the plan exacerbates individual debt. Wage stagnation is a huge problem. For the 99%, their wages have stagnated, for the 95% their real wages have actually dropped when measured against inflation. There is a tool that has been used in the past to help wages keep pace with inflation, it’s called taxes on the wealthy and corporations. Employers would rather raise wages and pay a lower tax rate than pay lower wages and pay a higher tax rate. These two issues, personal debt and wages, combine to keep our economy on a dual track where the wealthy and the corporations are gathering up all the available money supply. They are not investing in expansion, because the demand is not there. Demand is not increasing enough to push up wages and add jobs. And, at the end of the day, demand drives the economy. We increase demand by putting more money in the pockets of the 98%, the people who will by necessity spend it all.
Flipping the GOP tax plan on it’s head, restore full medical deductions for everyone and restore full interest deductions for everyone. Dramatically increase taxes on the wealthy. End lower tax rates on capital gains. Introduce a job guarantee, free public college tuition, tax deductions for all post high school education in the private sector, a living wage for a minimum wage, increase SS retirement payments and eliminate family ceilings, and of course Medicare for All.
These things and more will fix our economy so tat it can grow organically. Instead of thinking about the Federal debt, think about the debt of families all across the nation. If their debt is lowered, if their wages are increased, if their opportunities for jobs and education are real, then maybe, just maybe we can have resurgence of a Middle Class.
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.