Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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The Tea and Republican Parties wish to cut federal taxes. In this, they are wise. For a Monetarily Sovereign nation, federal taxes have no positive function; they serve only to destroy money. The federal government neither needs nor uses tax dollars.
While, in theory, taxes can prevent inflation, in actual practice, tax changes would be inefficient and damaging. They are far too slow (When will they be collected?), far too political (Which taxes?) and not incremental (How much?). Although the federal government has managed to control inflation, federal taxes have not been the controlling device; interest rates have.
The Democrats wish to increase federal spending. In this they are wise. Many functions, beneficial to Americans, could use more federal support, including Social Security, Medicare, Medicaid, food stamps, research and development, food & drug inspections, infrastructure, education, homeland security, inspection and supervision of many industries, and on and on.
All three parties wish to reduce federal deficits. In this, all are unwise. A growing economy requires a growing supply of money, and federal spending is the method by which the government increases the money supply. It is absolutely impossible to stimulate the economy and/or to cut unemployment — our two most serious problems — without increasing federal deficit spending.
I suggest the one simple step that instantly would stimulate the economy and reduce unemployment would be to eliminate the FICA tax. I first recommended this in 1995, in my book, “The Ultimate America,” then in 1997 in “Free Money,” and more recently with this blog’s post, “Ten Reasons to Eliminate FICA.” I suggest you read it to see the 10 reasons.
FICA is paid, ostensibly, half by salaried employees and half by employers. But, in true effect, it is paid 100% by salaried employees, because employers base salaries on total cost to the company. If FICA were eliminated, several things would happen:
1. Employers would be encouraged to hire more people or to pay higher salaries, because the basic cost of salaries would be reduced by the 15% FICA cost. More people employed, having more money to spend, is perhaps the most powerful economic stimulus. And/or
2. Corporate profits would increase, allowing for more corporate investment, another powerful stimulus. And/or
3. More dollars would go to so-called “fat cats” (company officers), who would spend or invest those dollars, thereby transferring dollars to other people, who also would spend or invest. All that additional spending and investing would be highly stimulative.
In total, the elimination of FICA would grow business, eliminate recessions and reduce unemployment, by adding dollars to the economy. How many dollars?
FICA collected by the U.S. government is projected to reach $935 billion in 2011. (Budget of the U.S. government) This compares with overall federal receipts of $2,567 billion or 36% of total receipts.
The projected 2011 cost of Medicare and Social Security is $1,233 billion, compared to projected overall federal spending of $3,833 billion, or 32% of the total. So depending on how you wish to look at it, the elimination of the FICA tax would reduce federal taxes by 36% or increase spending by 32%, assuming the federal government would pay for Medicare and Social Security, just as it pays for all other federal agencies.
The federal deficit would rise from a currently projected $1,266 billion to $2,201 billion.
Because Medicare and Social Security already are federally-run programs, the elimination of FICA would not increase the “intrusion of big government into our lives” as the Tea/Republicans profess to hate. There would be no change whatsoever in so-called “intrusion.” Nor would this be a step toward the “socialism” the Tea/Republicans also profess to hate. Further, it need not reduce benefits offered by these social programs, an effect the Democrats (or at least the Democrat voters) say they will not abide.
Yes, the federal deficit and debt will increase, but a Monetarily Sovereign nation can pay any debt of any size, any time, merely by instructing banks to credit the accounts of U.S. debt holders – which the government can do, endlessly.
So, but one question remains: Will the resultant increase in the federal deficit and debt cause inflation, (and if so, is this a worse outcome than recession and unemployment?)
Would a 73% ($935 billion) deficit increase cause inflation? From a percentage standpoint, we have had many such increases. The 2007 – 2008 increase was 186%. The 2008-2009 increase was 208%. Back in 1982-1983 the deficit increase was 780%. At none of those times did deficit increases cause inflation.
What about that nominal dollar increase of $935. Well, in 2008-2009, the deficit increased from $458 billion to $1,412 billion, an increase of $954 billion. No inflation. In fact, there has been no relationship between federal deficits and inflation for at least 60 years.
(You can see the lack of relationship between federal deficits and inflation discussed further at Item 12.)
Summary: Today’s huge problems are recession and unemployment, not inflation. Eliminating FICA would greatly stimulate business, reduce unemployment and increase wages, all without causing inflation.
Let’s do it now.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
If FICA is eliminated employers everywhere will reduce salaries by the FICA amount(they consider all this money theirs). They will not allow every employee to get a pay raise(on their take-home pay) which is what eliminating FICA amounts to. This will give employers more money and will be stimulative to an extent but unless employees benefit by getting more money they will not be interested in supporting your proposal. Even if it is made illegal to lower salaries it will be ten years before anyone sees a pay raise.
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jt,
Some employers will keep all the FICA money, which they will invest in business growth (good), which would include more hiring (good) or pay to executives, who in turn will spend (good) or invest (good) the money.
Some employers will keep just 1/2 the FICA money, which they will invest in business growth or pay to executives, who in turn will spend or invest the money. The other 1/2 half of the FICA money would go to employees (good), who will spend (good) or invest (good) it.
Some employers will give all the money to employees in the form of raises (good) or additional hires (good).
I don’t see the word “bad” anywhere in this. What is it you don’t like about eliminating FICA?
Rodger Malcolm Mitchell
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I don’t dislike the idea of eliminating all taxes(FICA included)in favor of money creation. My point is that workers won’t be fired-up to support the elimination of FICA if they won’t get more money out of it. I will bet that MOST employers will keep the money. I can just see it: It is announced that FICA is being eliminated and the next day millions of employees are called in for mandatory meetings at work where it is explained to them that their pay is being reduced by the FICA amount(but not to worry, their new pay is equal to their previous take-home pay). Perhaps you should stop emphasizing FICA and just keep reiterating that all taxes are bad.
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jt,
All federal taxes remove money from the economy, which is economically depressing. However, some taxes have an alternative value, i.e. taxes on smoking and drinking, which in some small way, reduce these “sins.”
Rodger Malcolm Mitchell
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Roger,
This is (supposed to be) a free society so these “sins” don’t have to be reduced. I think the view that some taxes should be eliminated but some should stay around(sin taxes, state and local taxes) is wishywashy. When people hear you talk this way about taxes(and about some employers keeping the FICA money mentioned in your above reply) they will exclaim,”Hey, Rodger Malcolm Mitchell makes claims that are half true and says we will benefit but maybe not benefit entirely so lets not get fired-up to support him and go back to watching television.” The reason the Tea/Repubs are winning is because they are not wishywashy in their total wrongness.
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JT,
Pardon me, but that “free society” is what all the extremists say. The Tea/Republicans always call for a “free” society, but their definition of “free” is, “I want to be free to carry a machine gun and a few hand grenades anywhere, teach my religion in public schools and do any other damn thing I want, and to hell with any one else’s opinion.”
Frankly, I don’t care if you want to kill yourself with smoking and drinking, so long as you don’t blow smoke my way or crash into my car because you’re stupid drunk — and free. I do care however, if young people, who have not yet acquired common sense, take up these sins.
As for taxes, I’m not going to take an extreme (and wrong) position, just to convince a few morons of my ideas. If you think not being an extremist is wishy-washy, that’s your problem.
Rodger Malcolm Mitchell
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If you don’t care if people smoke and drink then why advocate sin taxes? I am not against laws against drunk driving. Parents can teach their kids common sense. It is not clear sin taxes are needed. If taxes are not needed why should there be any? Extremists are not the only people who say they want a free society. People who love freedom say it too. You imply that I like the Tea/Rebublicans but I dislike them as much as you do. I don’t mean to antagonize or irritate you in any way. I’m sorry if I did.
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I thought the idea was that taxes give our money value. So, it follows that eliminating all taxes would greatly reduce the value of our money, right?
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That is an MMT idea, and is one of the places where Monetary Sovereignty differs. MMT believes people would not accept sovereign currency were there not the requirement that taxes be paid with it.
However, that merely is a legal requirement. How about a legal requirement that bills be paid with a sovereign currency? I see no difference.
Rodger Malcolm Mitchell
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So then how do we give our money value, by the Fed raising interest rates? Sorry, I’m kind of a novice, but I definitely am moving away from Paul Krugman and toward you and James Galbraith.
Thanks for a great website.
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Tyler,
Money is a commodity. The value of a commodity is based on supply and demand. The demand for money is based on risk and reward. The reward for owning money is interest. Increase interest and you increase demand, thereby increasing value.
Rodger Malcolm Mitchell
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Did you agree with Paul Volcker’s anti-inflation campaign of 1981?
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Tyler:
Yes, he raised interest rates, which cured the inflation. Also, the Volcker rule prohibited banks from proprietary trading and running funds. I agree completely.
Rodger Malcolm Mitchell
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Hi Rodger,
How long do you estimate it would take for a full payroll tax holiday to get us to full employment?
Thanks,
Tyler
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“Full” employment usually means something on the order of 5% unemployment, and we’re almost there.
I don’t value employment so much as I value narrowing the income/wealth Gap between the rich and the rest. I, after all, am unemployed, and have been for more than 6 years.
So, am I worse off than someone who is employed and earning minimum wage?
That is one area where I think MMT is wrong.
Randy Wray, a leader in MMT, has a Center for Full Employment and Price Stability.
He should have a “Center for Economic Growth and Income Equality.
Eliminating FICA would move us in that direction.
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