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“Nothing is certain but death and taxes.” You’ve heard it so many times it has become ingrained in our psyches that there must be taxes.
“To pay for the government,” comes the ready answer.
None of us likes paying taxes, but few of us even can imagine a government that does not levy taxes.
And it’s all part of the Big Lie. In it’s simplest version, the Big Lie is: “Federal taxes fund federal spending.”
We’ve discussed the Big Lie so many times, we won’t go deeper into it here, other than to say this: Monetarily non-sovereign governments like states, counties, and cities do need taxes to fund spending. The Monetarily Sovereign U.S. government neither needs nor uses taxes to fund spending.
Even if all federal tax collections fell to $0, the U.S. government could continue spending, forever. That is a fundamental econnomics truth, which you can read about at any of the numerous posts detailing the features of Monetary Sovereignty.
Why then, do we have taxes?
Some history: Being Monetarily Sovereign, the U.S. government has the unlimited ability to create its own sovereign currency. But it was not always so.
The one thing every government has is the ability to pass laws. And some of these laws may reduce the nation’s own Monetary Sovereignty. (The euro nations passed laws completely eliminating their Monetary Sovereignty.)
Deciding to be on a gold standard, where each unit of a nation’s sovereign currency must be matched by a unit of gold, cancels the nation’s unlimited ability to create its money.
During much of our history, the U.S. government has been on some sort of metal standard, and at those times, we were not Monetarily Sovereign. Our government needed to ask our citizens or foreigners for dollars.
This all changed on August 15, 1971 (“the Nixon shock”), when we freed ourselves from the restrictive chains of a gold standard.
Why then, do we still have taxes?
There are four reasons — the first two of which are offered by Modern Monetary Theory (MMT) — reasons MS disputes:
1. To provide Demand for, and therefore, Value to, the dollar.
There is some debate about whether Professor Randy Wray (UMKC), a leading proponent of MMT, believes taxes are necessary for this purpose, or merely helpful. He seemingly has supported both positions.
There can be little doubt that requiring Americans to pay their taxes with dollars, does help increase the Demand for dollars.
There is much doubt, however, about whether taxes are necessary to create Demand. The massive size of America’s economy, America’s huge export and import business, the availability of Treasury Securities as safe-harbor investments, the dollar’s position as a world reserve currency, and the worldwide trust in America’s full faith and credit, all combine to create Demand for the dollar — without the need for taxes.
2. Related to point #1.: The use of taxation to prevent inflation, another position supported by MMT.
In the formula Demand/Supply = Value, increasing Demand and/or reducing Supply will defeat inflation. Taxation reduces inflation partly by increasing the Demand for dollars, but mostly by decreasing the Supply of dollars.
Federal tax dollars are sent to the U.S. Treasury, where they are destroyed. Some critics of MS claim tax dollars are not destroyed, but the evidence for destruction is quite clear. If tax dollars were not destroyed, the U.S. Treasury would have billions of dollars. Yet there are no accounting records that show the U.S. Treasury to have any dollars at all.
Try to find the answer to the question, “How many dollars does the U.S. Treasury have”? and you will come up empty. The U.S. Treasury does not own tax dollars, and cannot provide spending money to the other branches of the government.
To pay a bill, the government (i.e. its agencies) sends instructions (not dollars), in the form of checks or bank wires, to the creditor’s bank. The instructions tell the bank to increase the balance in the creditor’s checking account.
At the moment (not before) the creditor’s bank obeys those instructions, dollars are created. Banks are the mechanism for all dollar creation, much of it is on the instructions of the U.S. government. (Banks also create dollars by lending.)
While taxation reduces inflation by reducing the money supply, taxing cannot efficiently be used as an inflation-prevention or cure device.
Preventing and curing inflation requires a mechanism that can be applied quickly, will act immediately, and can be implemented in small, measurable increments.
Taxation, by contrast, is slow, political and does not lend itself to small, measurable increments.
Visualize the U.S. Congress, faced with impending or actual inflation, trying to force all political parties to pass tax laws that can be implemented in small, measurable increments, and immediately will affect inflation.
If you were in Congress, which tax change would you be able to get through all the vested interests, and have immediate, incremental, measurable effects?
By contrast, the Fed instantly can raise interest rates by tiny increments, and these higher rates quickly will increase the Demand for dollar-denominated securities and for dollars themselves.
(MMT disagrees, claiming that higher rates increase business costs, thereby inflating prices. But the proof, as is said, is in the pudding. The Fed effectively has used interest rate to controls inflation, for a hundred years).
3. The third purpose of taxes is to guide behavior. “Sin” taxes on alcohol and cigarettes, reduce the usage of these harmful products by making them more expensive.
4. The fourth, most important reason we still levy unnecessary taxes, is to widen the Gap between the rich and the rest.
Consider the most extreme case of an unnecessary tax designed to widen the Gap: The FICA tax. This tax supposedly funds Social Security and Medicare, though no tax funds federal spending. FICA is a tax that applies only to wages, salaries, tips and self-employment income, and for most of the tax, it applies only to wages below $119K.
FICA does not apply to all sorts of income other than wages, salaries, tips and self-employment income (interest, capital gains and various forms of passive income — i.e. the income the very rich have)
In short, the rich pay a negligible amount of FICA, if at all, compared with their incomes. FICA is the perfect tax for widening the Gap between the rich and the rest.
Now consider sales tax. While there is no general federal sales tax, the federal government does levy taxes on alcohol, tobacco, guns, and ammunition. The cost of purchasing these products constitutes a greater percentage of middle- and low-incomes than of high incomes. In that way, these federal sales taxes widen the Gap (although the primary purpose is to control and limit consumption).
More serious, however, are local sales taxes. Being monetarily non-sovereign, Cities, counties, and states claim they need sales taxes to fund spending. These sales taxes constitute a huge proportion of middle- and low incomes and are greatly regressive.
Are local sales taxes really necessary, as the local governments claim? Yes and no.
Yes, if local tourism, business taxes, property taxes and other forms of income are insufficient to pay for local government spending.
No, if the federal government will simply use its unlimited ability to create dollars, and use those dollars to pay economic bonuses. (See Prosperity Step #3: Provide an Economic Bonus to every man, woman, and child in America, and/or every state a per capita Economic Bonus.)
1. Federal taxes do not fund federal spending. They are destroyed upon receipt. Federal spending is funded ad hoc, with new dollars created at federal agency instructions.
2. Federal taxes cannot function as an inflation control. They are too slow, too political and not precise or incremental enough. The Fed successfully has used interest rates to control inflation.
3. To justify federal taxes, the rich have co-opted Congress, the media, the economists. The purpose: To widen the Gap between the rich and the rest.
Federal taxes can, and should be, dramatically reduced, while spending on social issues is increased. That is, the deficit should be increased. This is the point of the Ten Steps to Prosperity.
Rodger Malcolm Mitchell
Ten Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually Click here
8. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income. (Click here)
9. Federal ownership of all banks (Click here and here)
10. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.
10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt
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.
1. A growing economy requires a growing supply of dollars (GDP=Federal Spending + Non-federal Spending + Net Exports)
2. All deficit spending grows the supply of dollars
3. The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.
4. The limit to non-federal deficit spending is the ability to borrow.
THE RECESSION CLOCK
Recessions begin an average of 2 years after the blue line first dips below zero. A common phenomenon is for the line briefly to dip below zero, then rise above zero, before falling dramatically below zero. There was a brief dip below zero in 2015, followed by another dip – the familiar pre-recession pattern.
Recessions are cured by a rising red line.
Vertical gray bars mark recessions.
As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.
•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money.
•The more federal budgets are cut and taxes increased, the weaker an economy becomes..
•Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
•The single most important problem in economics is the Gap between rich and the rest..
•Austerity is the government’s method for widening the Gap between rich and poor.
•Until the 99% understand the need for federal deficits, the upper 1% will rule.
•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..
16 thoughts on “How the Rich Use the Big Lie to Cheat You: Chapter V: Taxes”
I suppose the exception is for countries that borrow in foreign currency. If you borrow in foreign currency, then you have to tax exporters.
Correct. If a country borrows in foreign currency, then the country must service its debt in whatever currency the creditor requires (per the original loan agreement). However, this does not mean the government must increase taxes on its own people in the government’s own currency. Instead, if the country cannot pay its “external debts,” then the creditor can (and usually does) exact repayment in the form of free access to the nation’s natural and / or human resources.
With nations that do not have their own currencies at all (e.g. Eurozone nations) if they do not have a sizeable trade surplus, then they must borrow all their money, and they must tax their people to pay back creditors.
For the USA, which does all its domestic and foreign business in US dollars, and which is nowhere near having an inflation problem, federal taxation is gratuitous. It does not “drive money.” For the USA the purpose of federal taxes is (a) to widen the Gap, and (b) maintain the power of the federal government over all other levels of government. That is, the purpose is entirely political.
Regarding the first reason about the need for taxes: there is a joke about Americans not knowing the meaning of the expression “rest of the world” (in the same joke, Africans don’t know about food, Europeans about scarcity and Saudi Arabia about opinions). It is probably true that the peculiarities of America’s economy you mention are enough to create demand for US dollars even without taxation, but what about the rest of the world? It seems reasonable that a smaller economy needs a way to force its citizens to use its own currency instead of adopting a foreign and supposedly safer currency. Taxation is not the only way of doing so but, as you mention, people believe taxes are a part of life; they might try to find a way to pay less but not really dispute their legitimacy.
Taxation is one of many factors that maintain demand for a currency. Other factors include laws, propaganda, social habit, and the basic human need to have a stable medium of exchange and a stable means to measure and account for wealth.
What I disagree with is any claim that taxes are the ONLY thing (or even the MAIN thing) that maintain demand for a currency.
Cool and Carlo,
I agree with both of you. What works for America may not work for less financially powerful nations, even those that are Monetarily Sovereign.
The only commonality is: Every nation is run by the rich and powerful, with finances skewed toward widening the gap between the rich and the rest.
This blog tries to help the “rest” understand that and not just agree to be shorn like sheep.
Destroying tax dollars is not literally what happens.It’s just, as you have said, that tax becomes numbers as soo as paid into government coffers. It can never become money as it’s never used again.
But then what happens? I understands these numbers are transferred to a ledger in Treasury.- for accounting purposes.
Do you know is the same ledger used to account for the Fed’s net credit operations? It seems sensible to have a way of balancing the two operations to see instantly how the government is progressing regarding its budget. The tax is used for that purpose. But it’s not restrictive as to spending operations.
How many dollars are in that ledger? How many dollars does the U.S. Treasury own?
Whatever the numbers say at any moment. Does that mean you don’t understand the question? It’s just about the book keeping.
No, it means that nowhere on earth will you find the answer to the question, “How much money does the U.S. Treasury have?”
The reason you won’t find the answer is that there is no bookkeeping answer — no answer at all.
The Treasury has no money, or has infinite money, because it creates dollars, ad hoc, as it pays bills. So looking for a bookkeeping answer would be useless and nonsensical.
For a Monetarily Sovereign nation, dollars are like laws. They are in infinite supply.
Just as the Treasury creates dollars and takes dollars back, Congress passes laws and Congress destroys laws (i.e., “takes them back.”).
Yes, records are kept of the laws that are “taken back.” But laws taken back are not saved for issuing new laws.
It would make no sense to ask how many laws Congress has, just as it makes no sense to ask how many dollars the Treasury has.
You can ask how many laws exist in public, just as you can ask how many dollars exist in public. But you cannot ask how many laws Congress has, nor can you ask how many dollars the Treasury has.
And, just as Congress does not save old, destroyed laws to issue new laws, the Treasury does not save old, destroyed dollars to issue new dollars.
I’m well on board for what you say. However you only touched on my question about record keeping, in your third last paragraph. Do you know how they do that? It’s not a silly question, even if you may think it so.
The problem is most people cannot get their heads around the idea that tax is “destroyed”. I mean the moneys there, so why not reuse it? We know why, but how do we explain it?
If I can say that the tax records end up in Treasury that’s not the whole story. I need to be able to say the records are [say] kept for bookkeeping purposes and can be used to keep a record of government expenditure as a double entry accounting process. So when government announces a deficit or a surplus they have referred to Treasury records. It’s in a way completely separate from money destruction issues. It might soften the difficulty as to how the MS government actually uses money, help them to understand.
How many points does a scoreboard have? When we start a new game, and we set the scoreboard at zero, what happens to all the points from previous games?
THIS WEEK IN CRAZY
Well, there are two circuits in the economy: the circuit of government money and the circuit of wealth/resources, and they circulate in opposite directions to one another. The qualifier “government” added to money is intentional. There is more money than government money, but the trick is getting it accepted… :). It is true, as outlined by MMT, that government money can be produced at will by the government, and it does not need any taxes to do so. However, in order to function, it does need wealth/resources (electricity, gasoline, food, clothes, etc). As a non-productive entity, it needs to obtain these from the productive/private sector, and it obtains these through taxation. The money it taxes reduce aggregate demand, and then the government can come in with its own demand to fill the aggregate demand back to what it was without taxes.
For some reason, MMT concentrates only on the money circulation, and ignores the wealth circulation. The wealth circulation closely resembles the orthodox economic narrative about money circulation. I think this is one big motive why people have problems accepting MMT. They intuitively feel this wealth circulation in between the sectors, and they conflate it with the money circulation, greatly helped by the fraudulent orthodox narrative. Then when MMT says it is the other way around, the general public feels it in their bones that its wrong. MMT should acknowledge the wealth flow, and then maybe it would be easier to propagate the message.
MMT/MS briefly does a hat-tip acknowledgment of real resources when it says governments are not money-constrained, they are resource constrained, and then leaves it at that.
Telling the public that yes, their intuition is right, but it applies to wealth, whilst the government money are a government creation, and it circulates the other way round, and we are in no way constrained in money, as we can create it at will. – might get us further down the path and increase the penetration of the progressive message.
I know it is hard, I am not holding my breath, but I am still hoping… 🙂
“As a non-productive entity, (the government) needs to obtain these from the productive/private sector, and it obtains these through taxation.”
Actually, this is not true. The government obtains resources the same way the private sector does: By paying people to work.
It creates the dollars, from thin air, by sending instructions to banks, telling the banks to increase the numbers in checking accounts.
The government obtains nothing from taxation. Tax dollars cease to be part of the money supply, the second they are received. In short, taxes are destroyed upon receipt.
A Monetarily Sovereign nation (the U.S.) could eliminate all taxes and still continue purchasing goods and services, forever.
There is one type of tax that can easily and automatically rein in inflation without the side effects of raising interest rates: the Universal Exchange Tax (UET), a very tiny tax (no more than 0.1%) on all electronic transactions, period. As the velocity of money accelerates and/or the money supply increases, the UET would take a larger and larger bite, effectively applying the brakes automatically and effortlessly. And it is highly progressive in practice, since the rich tend to make a much larger volume of transactions. The UET also has the added benefit of discouraging excessive speculation and money laundering, as these will both become increasingly expensive as well.
High-velocity trading is not necessarily related to inflation. But my biggest concerns are:
1. The tax takes dollars out of the economy, which is recessive.
2. Like all taxes, it is not quickly controllable. Congress would debate endlessly about every move to change the tax.
3. HIgh-velocity trading is quite different from “excessive speculation.” The last recession’s “excessive speculation” was in real estate.
4. While the rich, having more investment in stocks, do trade more often, but they don’t do high-velocity trading. I question whether Bill Gates trades very often at all.