How the Rich Use the Big Lie to Cheat You: Chapter V: Taxes

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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.

But why?

“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
Monetary Sovereignty


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.


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.

Monetary Sovereignty

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.


Mitchell’s laws:
•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..


–What should the U.S. do next? Hunt like a lion

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.

A reader, KK Tipton, asked what I suggest our government actually do, since being monetarily sovereign, it has the unlimited power to create money, without support from taxes or borrowing. First a little background:

Yes, the spending by a monetarily sovereign government is constrained neither by tax receipts nor by borrowing. So with no financial constraints, it could, as KK humorously suggests, build “ . . .two walls of aircraft carriers, end to end tomorrow, to protect our shores. Why not?

Well, the “why not?” has to do with the only constraint on federal spending: Inflation. There is a point at which federal spending could become so massive as to cause inflation. Pump $100 trillion into the economy next month and I can guarantee a great big inflation.

However, we are nowhere near that point, and have been nowhere near that point since 1971, the year in which the U.S. federal government became monetarily sovereign. Even the inflation of 1979 was not caused by federal deficit spending, but rather by oil prices.

Graph 1

The above graph shows that inflation (red line) generally reached its peak at a time when federal deficit spending (blue line) was reaching a trough, and that inflation peaks correlated most closely with peaks in energy prices (green line).

Because federal deficits stimulate the economy and are constrained only by inflation, the goal is to maximize stimulation while keeping inflation at an acceptable level, perhaps 2% – 3%. Modern Monetary Theory (MMT) holds that inflation can be cured by increasing taxes. This is true, but it’s like preventing facial acne by cutting off your head. Increasing taxes removes money from the economy, which is anti-growth, causing recessions and depressions. (See: A quick summary of the facts )

I prefer to prevent and cure inflation by increasing interest rates, which increases the reward for owning money. This increases the demand for money and makes money more valuable. MMT followers say high interest rates increase business costs, thereby actually causing inflation. Nice theory, but not in accord with the facts. Contrary to popular wisdom, there is no relationship between high rates and slow growth, or low rates and fast growth. See: Interest Rates . Both Chairmen Greenspan and Bernanke may have learned this after 20 rate reductions accomplished nothing.

Given all of the above as a background, here’s what I suggest we do:

1. Eliminate T-securities. A monetarily sovereign nation does not need to borrow the money it created earlier – money it can create without limit. This would end all federal debt along with the misguided concerns about federal debt – concerns that have helped destroy our economy..

[All of the next suggested activities would be done incrementally, the way a lion stalks its prey. Make a small move, then stop to see what happens, then make another move, always getting closer and closer to your goal of maximum growth with acceptable inflation.]

2. Eliminate the FICA tax. This is a tax collected weekly or monthly, so it neatly allows for the “lion stalking” approach. A more complete discussion is at Ten reasons to eliminate FICA, but briefly, this would put about $1 trillion (See: Budget of the United States Government 2011) into the economy next year, exactly where it is needed most: Half in the hands of business; half in the hands of employees.

3. Eliminate taxes on business. These are projected to be about $300 billion next year, less than 12% of total federal projected receipts of $2.6 trillion. Business is the engine of our economy. Pulling money out of the engine is the worst way to grow an economy.

4. Gradually reduce personal income tax collections, which are projected to be $1.1 trillion next year, by increasing the standard deduction. We could begin by freeing from taxes, anyone earning less than $50,000 a year. Then we could incrementally raise the amount, until the last people in America paying personal income tax would be Bill Gates and Warren Buffet. (Of course, we would have to find jobs for all those accountants, tax lawyers, IRS employees, prosecutors and federal prison guards, whose livelihoods depend wholly or partly on income taxes. But a healthy growing economy should take care of that.)

As you can see, I would begin by slowly but persistently eliminating taxes, and putting the money back in the hands of the people. After the tax situation was resolved, I would begin to increase spending, on humanitarian things like Social Security, universal health care insurance and unemployment insurance. I would fund the states by providing a per-capita allowance. Being monetarily non-sovereign, they cannot create money, and so require outside support (See: “–Here is the financial solution for your state, county and city”).

So there you have a quick summary. Like a lion, creeping up on a covey of ignorant debt hawks, I first would reduce/eliminate taxes, then increase federal spending.

What are your thoughts?

Rodger Malcolm Mitchell

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”