DAVID BROOKS ALMOST GETS MMT: Sovereign Currency is a Tax Credit

By L. Randall Wray

In an interesting post today David Brooks wrote this:

“You might say that a tax break isn’t the same as a spending program. You would be wrong. David Bradford, a Princeton economist, has the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion ‘weapons supply tax credit.’ The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!”

He then goes on to rail against tax credits, not quite recognizing the major intellectual breakthrough he has made.

What is a sovereign currency? It is (mostly) a keystroke that results in an electronic entry on a bank’s balance sheet. (Yes it can also be shiny coins, paper notes, and watermarked checks—but those are increasingly less important.) To be more accurate, it is two entries: an entry in the deposit account of the fighter plane’s producer and a reserve credit at the central bank for the producer’s bank.

In the case of a modern “fiat” sovereign currency, what does the government promise? To “redeem” its currency in tax payment. When the fighter plane producer pays taxes, the keystrokes are reversed: the deposit is debited and the bank’s reserves at the Fed are debited. Presto-change-O the sovereign currency disappears in redemption.

The fighter plane ends up at the government. That, of course, was the whole purpose of the keystrokes.

Now let’s take Bradford’s example. Instead of keystroking a deposit, the government issues a “tax credit” to be used later in redemption of its tax liability. When tax time comes, the tax credit is sent on to the Treasury (presumably, it will be an electronic entry so little electrons pulse their way to Washington). Presto-change-O the tax credit is gone.

Yep, Brooks has that part right. It is exactly the same thing. The fighter plane is moved to the government.

After all, that’s what it is all about, right? From inception, the purpose of the monetary system is to move resources to the public sphere.

And then the private sector gets all sorts of bright ideas about other uses for the monetary system, such as making subprime mortgage loans to those with no income, no jobs, no assets, packaging the trash into still trashier MBSs that get tranched and re-packaged into CDOs, which are further tranched to produce CDOs squared and cubed. And off we are to a GFC that the Fed then tries to resolve through keystroking $29 trillion of bail-out funds to save the banksters.

But that’s a story for another time. Let’s congratulate David Brooks for (finally!) getting one thing right.

One Response to DAVID BROOKS ALMOST GETS MMT: Sovereign Currency is a Tax Credit

  1. Why not go one step further and just pay for the plane with “tax vouchers”?

    A Tax Voucher is not “money” as we commonly think of it, but it “spends” just like money. Also, I think they would work much better on a state level rather than the federal level. In that case, we would call them “State Tax Vouchers” or “STVs”.

    An STV is an instrument issued by a state government that can be used to pay back any taxes that are owed to any level of government within that state. But the key to making them work is that they must be bearer instruments. That way, they can be circulated throughout the economy amongst those who pays taxes, which is practically everyone. That gives them universal value.

    Another key feature to STVs is that they must have an expiration date, either annual or biannual. This actually adds value above and beyond any numerical amount assigned to them and helps keep greater control over the whole program.

    And, finally, the most important aspect is that they be exactly the same size as Federal Reserve Notes, and in similar denominations. That way, people can easily think of them as “money” and will use them, thus.

    When California had to issue IOUs (“registered warrants”, as they called them) a few years ago, they should have, instead, issued California State Tax Vouchers.

    Why stop there? A state could partially pay its employees in STVs.

    I first got the idea for tax vouchers three years ago after reading about The Miracle of Worgl.