How does the federal government “pay for” a big federal tax cut?

How does the federal government “pay for” a big federal tax cut? The same way the federal government pays for a big federal spending increase. By creating dollars from thin air.

Back in the early 1780s, there were no U.S. dollars. Then, suddenly, the U.S. federal government created millions of them, simply by creating laws.

Just as the federal government faces no limit to laws, it faces no limit to the dollars laws create.

Today, the government continues to create dollars from thin air. Here’s the process:

When any agency of the federal government writes a check to pay a creditor, that payment actually instructs the creditor’s bank to increase the balance in the creditor’s checking account.

Those new dollars are added to the nation’s M1 money supply.

The check then is cleared through the Federal Reserve Bank, and the world has more dollars.

Image result for bernanke and greenspan
How do we get these guys to understand that federal taxes don’t fund federal spending?

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Alan Greenspan: “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. A government cannot become insolvent with respect to obligations in its own currency.”

St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e.,unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.

That is how the federal government “pays for” spending and for tax cuts. Thus, the federal government cannot unintentionally run short of its own sovereign currency, the U.S. dollar.

Though paying bills is the method the government uses to create dollars, you wouldn’t know that from reading articles that confuse federal finances with state and local government finances.

How Democrats’ tax obsession could backfire
W. James Antle III

When Sen. Kamala Harris (D-Calif.) announced her candidacy for president, she promised a laundry list of new federal programs — Medicare-for-all, universal pre-kindergarten education, debt-free college — plus the “largest working-class tax cut in decades.

Answer: Our Monetarily Sovereign federal government (unlike state and local governments) can pay for anything. It cannot unintentionally run short of dollars.

How did she propose paying for that tax cut?

By getting rid of President Trump’s tax cut for “corporations” and the “top 1 percent.”

But there’s a flaw in the plan: While repealing the Republican-passed tax cut in its entirety, including the parts of it that benefited neither corporations nor the top 1 percent, would save an estimated $2 trillion, Harris’ big ticket items would undoubtedly cost trillions more.

In other words, her grand tax plan just doesn’t add up.

It doesn’t “add up,” because it begins with the false assumption that federal finances are like personal finances, or like state/local government finances. It begins with the false assumption that the federal government needs tax dollars in order to spend.

It begins with the false assumption that deficits are a burden on the federal government and on taxpayers, when in fact, federal deficits are necessary for economic growth, and are a burden on no one.

This is a problem not just for Harris, but across the Democratic 2020 presidential field.

The candidates — and their voters — want a big increase in federal spending to support new social services.

But they seem to have yet to realize that simply nudging the top marginal income tax rate back up won’t pay for it all.

Deficits are already spiking even without this new spending, and over the long term, Republican tax cuts only account for so much of the red ink.

Red ink is a burden for state and local governments, for businesses, and for you and me. But federal “red ink” is what grows the economy.

When we don’t have federal red ink, we have depressions or, at best, recessions.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

And there’s another downside to the idea of hiking the top marginal income tax rate: It could alienate affluent, college-educated suburbanites, which have become some of the Democratic Party’s most valuable voters.

Many of them used to vote Republican but refused to vote for Donald Trump. While many of them are in their peak earning years, they’re not wealthy enough to absorb a major tax increase. In fact, such an increase could drive them back into the GOP’s arms.

Nevertheless, freshman Democratic Rep. Alexandria Ocasio-Cortez (N.Y.) has suggested raising the top marginal tax rate all the way back to 70 percent, where Ronald Reagan found it 38 years ago.

She wants the cut-off to be at the “tippy top” — people making around $10 million a year. That won’t raise much revenue, but applying it to everyone who pays the current top rate would start dipping into valuable Democratic voters’ pockets.

Those are the people, who have the education and financial experience to understand Monetary Sovereignty, if it is explained to them.

Sadly, the Democrats are afraid even to try.

Sen. Elizabeth Warren’s (D-Mass.) “wealth tax” is a little bit different, and may be a more viable option for Democrats.

She wants to hit those Americans who have assets in excess of $50 million with a 2 percent tax, in addition to a 3 percent levy on those whose assets top $1 billion.

Economist Emmanuel Saez estimated to The Washington Post that the tax would raise $2.75 trillion over 10 years.

There is a real purpose for raising taxes on the very wealthy: Not to send dollars to the U.S. Treasury which has no need for income, but rather to narrow the gap between the richest and the rest.

The single most important problem facing America and the world — even more important Image result for poor in america 2017than the suicidal push to reduce the money supply — is the large and growing Gap between the rich and the rest.

That large and growing Gap is a direct threat to Democracy, for it gives the rich excessive power to bribe our politicians, to own our media, and even to influence universities and their economists.

The author of the above article, W. James Antle III, doesn’t understand Monetary Sovereignty, nor does Sen. Kamala Harris.

Either that, or they do not have the courage to disagree with the popular but false wisdom that federal financing is like personal financing.

Such a pity, because the understanding and then the application of Monetary Sovereignty, as discussed in the Ten Steps to Prosperity (below), could end poverty, and turn America into the “shining city on a hill” that of which President Reagon spoke.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereigntyFacebook: Rodger Malcolm Mitchell


The single most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:
1. Eliminate FICA

2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.


2 thoughts on “How does the federal government “pay for” a big federal tax cut?

  1. I would say that ” not having the courage to disagree with the popular wisdom that federal financing is like personal financing” is the result of wanting to keep their jobs and still look/sound like the rest of their constituents. This is called ” The Blind Leading the Blind, or as I like to say, Spineless is as spineless does.


  2. MSNBC just showed Velshi and Ruhle discussing MMT with Austin Goolsby. He does not completely understand it, still thinks in terms of econ 101 remedy through taxes; NO mention of quicker interest rate action by FED. Still hung up on the “need to pay back.” Did you catch it ..anyone?

    Better than nothing. It’s at least a start. Hope springs eternal!

    Liked by 1 person

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