Money, Taxes and What We Can Afford

By Dan Kervick

People sometimes seem to suggest that the Western democracies are at the end of the road economically.  They claim that these governments are spent, broke, tapped out.  They insinuate that Western nations can no longer afford to carry out ambitious projects of the kind they organized in the past, and must downsize or dismantle many of the governance systems and public enterprises they currently operate.  They insist that these democracies must hand over yet more of their nations’ destinies to the financial and corporate baronies that dominate the private sector, and give the latter a free hand to arrange whatever kind of future they might deign to mash up for us as a by-product of  their voracious struggles for private gain and glory.

This line of argument is quire wrongheaded and fundamentally illogical.  There is no way that a democratic political community can be poorer than the parts of that community, and contemporary developed nations remain stupendously rich by global and historical standard.  Those riches all lie available for potential use by mobilized, organized and ambitious democratic societies.   Contemporary democracies in the developed world are by no means poor, but are lacking only in morale, political will and determination, and audacious visions of the future.  This failure of will is due in part to the fact that our plutocratic landlords have used the mass media that they own to demoralize and humiliate the public, to divide and distract its discontents, to sow confusion and disinformation, to sponsor unthinking brutality and barbarism, and to convince us to hate our fellow-citizens and hate democracy more than we hate the landlords who buy us and sell us.

To restore clarity, let’s first reflect on some of the basics of political and economic organization.  How is does any organized political community afford any of the things it seeks to do?

Begin with the fact that there are certain large and important tasks that only governments can carry out well, and that these tasks both cannot and should not be entrusted to the hurly-burly business of private sector entrepreneurs seeking their own self-interest in the competitive capitalist ruckus.  Such tasks might call for government direction and enterprise because they require an organizational scale and geographic reach that private firms can’t achieve; or because they require the mobilization of publicly owned resources that private firms don’t control; of because the end results they are meant to produce are diffuse good that can’t easily be divided up and packaged as separate products to be sold in markets to multiple buyers; or because these end results are the kinds of things we want to distribute evenly, and not according to market imperatives based on ability to pay; or because the values the tasks are meant to realize are the fruits of humane wisdom and deep historical experience, and thus exceed the moral capabilities of the mercenary and philistine forces that drive most entrepreneurial profit-seeking.

To carry out these important tasks, the public will often have to shift control of many of the needed resources from private hands to public hands.  For example, suppose the public decides to build a network of new schools and put them into operation.  It will need resources.  How can it get them?

One primitive option would be for the public to obtain the resources it needs by resorting to taxation in kind.  There will exist some people or firms who already own bricks, and concrete, and steel, and glass, and books – or that at least own the resources needed to make these things.  And some people will already possess the skills that enable them to perform the kinds of work that are needed to turn these material resources into schools.  So the government could simply require those private individuals and companies to hand the material resources over to the public, and it could also demand that the skilled workers provide their labor services to the public free of charge.

But this approach would be unfair and oppressive.  The taxation in kind system is unfair because even though the schools are a public need and building them is a public project, only some people would be required under this system to contribute their limited property, time or energies toward the project, while others would free-ride on those contributions.  The system is also oppressive in its treatment of labor, since impressing the few into work for the sake of the many is a practice close to slavery.

What we would like to do is share the costs of the school project fairly, and take equal amounts of the needed resources from each citizen – or rather take those resources in proportion to the citizen’s ability to contribute.  But not everyone has a little bit of concrete, or a little bit of glass, or some of the necessary labor skills.  So what to do?  An alternative approach would be to tax only some of the needed resources form the people who possess them, and then pay those same people for the rest of what is needed.   But with what do we pay them?   We could pay them with ordinary goods and services of the kinds that almost everybody wants and needs, and we could tax these latter goods and services from everyone else.  Everyone could chip in a little bit of whatever it is they have – food, televisions, movie tickets, gasoline, plumbing services – and then those things could be exchanged for the concrete, glass and construction labor that the public needs to build its schools.

While this is certainly fairer, it represents a dauntingly complex logistical and bureaucratic undertaking.  The added costs of administering that comprehensive taxation and distribution plan seem wasteful.  And the results will still probably not be as fair as we want, since not everyone owns the kinds of goods that are generally wanted.  One thing we might try to do instead, then, is distribute certain certificates or vouchers to the people who are providing the concrete, glass, bricks, labor, etc. for the schools – vouchers that they could exchange almost anywhere for whatever it is they want, and whose exchange value is roughly equal to the value of the goods they are providing to the public, minus the value of their own fair contribution.  But to make this work, we need to guarantee that almost everyone is willing to accept these vouchers in exchange for some good or service they provide.  For that to work, the vouchers must have some value for the people who receive them.

But this is precisely what we have with a publicly administered and legally backed monetary system coupled with a supporting system of monetary taxation.   We can issue a large sum of tokens or certificates, and demand that each person delivers back to the public a certain quantity of these tokens, according to any system that seems fair.   In this way we can create a demand for the tokens.  We can then pay the suppliers of the building supplies and construction labor with the tokens.  The tokens will have value to the recipients because there is now a broad general demand for the tokens, and so those recipients will find a market for the tokens among people who need to obtain some to pay their tax obligations.  In order to make the system work we only need to credibly commit to taking something from people who do not deliver up the required quantity of tokens.  To discourage shirking and make the system work effectively, we should probably commit to taking something from any given person of substantially more value than the anticipated exchange value of the quantity of tokens that comprise that person’s tax obligation.

This approach probably solves most of our administrative problems by letting the broader public work out most of the distributional details among themselves.  Instead of taxing some of the goods we want from a construction company and taxing other goods from many other people with which to pay the construction company for the rest of what we want, we just give the company tokens that have acquired value by being attached to tax obligations that are simpler to manage bureaucratically.  Then we let the construction company exchange the tokens with others for goods and services of the company’s choosing.  This tax-driven monetary system is a good way for the public to provision itself with goods and services that are also provided by the same public, especially when the units of the goods and services that are needed cannot be provided in equal shares by all members of the population, but where it is nevertheless considered desirable that the rule for provision be just, and that everyone contribute a fair amount to the provision.

But the method described is only one way of organizing the public mobilization of resources for public purposes.  We don’t need to focus on the monetary system in order to understand the fundamental reason why the citizens of a country can always afford major investments in infrastructure and long-term strategic projects when they have the material resources and labor power they need to build the infrastructure and carry out those projects.   Money is just a tool for conveying resources from one place to another.   Ultimately, what the country spends on the projects it carries out is not the money it uses to move resources, but the resources themselves.  The country can afford to use its resources for the desired purposes when the value generated for the nation by achieving those purposes would be greater than the combined value of the resources consumed and the pains of the labor expended, and when that value is greater than the value of anything else the country could do with the resources instead.

As we noted, in order to carry out its purposes the public usually has to shift control of resources it needs from private hands to public hands.  This might be somewhat easier for a country that runs its own currency system, but it can always be accomplished one way or another by a resource-rich country with an effective government, and no monetary innovations or special monetary cleverness or insight are needed for the task.  Even if the United States of America, for example, were dependent on an external monetary system that it did not control (for example, if Americans used the Euro), the US would still not be “out of money” or “broke”, since a whole political community is not constrained by the present distribution of private property within that community.  The US would just have to harness the resources it needs the old-fashioned way via the tax system, relying on whatever monetary tools it happens to use to make payments and collect taxes.  Every country can always afford to employ unemployed resources and unemployed people, and if its privately-owned economic systems show themselves manifestly incapable of doing that job completely and effectively, then government must be used to summon these resources into action.  Anything less is a waste.

So the reason we can afford to develop and improve our countries has little at bottom to do with the monetary system.  We can continue to develop and improve our countries because we haven’t run out of material resources and human resources; because we haven’t run out of the capacity to invest our nation’s resources intelligently in building a better future; because real progress is better than stagnation and decline; and because our systems of governance are still effective enough to accomplish the job so long as they are prodded and animated by an energetic, organized and mobilized public that knows what it wants.

However, once we run out of intelligence, or run out of the willingness to cooperate, then it won’t matter any longer how rich we are in resources and people, or what kind of monetary system we have.  Social isolation, ignorance, lack of community spirit, lonely rage, and the prevalence of radically individualistic laissez faire outlooks that atomize and weaken the public are all forms of national poverty.  If we continue to succumb to pervasive corporate entertainment-system messages that encourage us to think anti-socially and individualistically, to despise our remaining democratic institutions and our fellow-citizens, to worship interpersonal domination and subordination, to disdain equality, to wallow in shallow and imbecilic barbarism, and to value forlorn self-assertion over cooperation, then we will horribly degrade the value of the resources we still possess in abundance.

26 Responses to Money, Taxes and What We Can Afford

  1. This might be a silly question.

    Is there anything in the EU charter where a country has to only accept Euros as payment of taxes or could the country accept something else in addition to Euros?

    If not, could the sovereign Euro denominated sovereign debt of a Eurozone country be accepted as payment for taxes of that Eurozone country? Could that convert sovereign debt into currency?

    • Not a silly question at all, but a very smart one. As Dan notes below, that is in essence an idea of Warren Mosler, sometimes called Mosler Bonds, and would go a long way to solving Europe’s problems.

  2. Alex Seferian

    Dan – Very helpful post as you describe two examples of government appropriation (taxing) and allocation (spending): one with money (your certificates or vouchers) and another without (channeling the concrete, glass, bricks, labor, etc. directly to build the schools). The end result can be the same except that with money the system can be much more efficient and potentially fair.

    On the issue of fairness, your example also alludes to the “distributional aspects” of government policy. Different “agreements” pertaining to what “public purpose” should be, will result in different outcomes in terms of the allocation of benefits – or income distribution. Your schools’ example is one that would result in a widespread benefit for society as a whole, but not all public expenditures are as even handed.

    Also, the wealth of the concrete and glass owners, versus that of those who produce the other goods that “everybody wants and needs”, will vary depending on how the related exchange is calibrated; something that in turn will be affected by the tax structure.

    Even though introducing money into the equation does make the system more efficient and fair, it does not do away with the fact that a great deal of debate is still to be had. Some may think public purpose calls for more butter, others for more guns. Especially when a country faces limitations (in the sense that it does not have all the real resources to meet all the possible public needs), then decisions related to “resource” appropriation and “resource” allocation, will affect the relative “resource” distribution of its society.

    I like highlighting the distributional aspects of government policy because MMT makes it clear that many of the barriers that some argue exist – and that supposedly limit a government’s policy space – are more myth than anything else. I think this is why some do not warm up to MMT; they don’t want the cat to be out of the bag, and/or are hardwired to exclusively think of their individual “private interest”; they do so without fully realizing that they are also part of the “public”, and that there is a broader and worthwhile “purpose” that can make the cake bigger for all.

    • Mr. Kervick

      In a few short paragraphs, I believe you have captured the immorality of the political and economic program that has been ascendant for the past thirty years and shown that there is a way forward. Your discussion of the nature of money and how a society with resources and labor can always pay for Public Purpose, if only the political will can be summoned, is clear and easy to understand. It is also a pretty good introduction to some of the ideas of the MMT perspective.

      This is a great post for a general audience. It deserves to be widely distributed.

      • Thanks Ohioprole!

      • Dan, excellent! For me this awesome excerpt from your essay succinctly describes the cause (plutocrats) and effects of our economic malaise while giving all of us a call to action:

        “Contemporary democracies in the developed world are by no means poor, but are lacking only in morale, political will and determination, and audacious visions of the future. This failure of will is due in part to the fact that our plutocratic landlords have used the mass media that they own to demoralize and humiliate the public, to divide and distract its discontents, to sow confusion and disinformation, to sponsor unthinking brutality and barbarism, and to convince us to hate our fellow-citizens and hate democracy more than we hate the landlords who buy us and sell us.”

    • reserveporto

      A large part of the distributional problem seems to come from differential tax rates. Over time, those differences build up into large concentrations of money in the low tax sectors driving high inflation in those sectors and those higher prices pull in even more money. The high tax sectors find themselves to be cash poor which restricts price inflation which further restricts credit formation. Since these sectors all live in the same economy, where they overlap, those people who live in the high inflation sector find themselves easily able to purchase the output of those who live in the low inflation sector, while those in the low find it hard to buy in the high. High taxes on wage income are restricting product prices and low taxes on financial products are inflating asset prices.

  3. golfer1john

    “for example, if Americans used the Euro…”

    So what are you saying about Greece, Spain, and the rest? Are they failing to take some action that they could take to end the horrendous unemployment? What action?

    • Each of those periphery nations should tax the pants off the rich, dismantle the plutocracy and plow those indolent and idle funds and rental incomes into a massive and much-needed program of public investment in the future of their countries. These programs can employ the entire workforce.

      It would definitely be better if the Eurozone had an activist and democratic central fiscal authority to go along with its centralized monetary authority, and if EZ then used that system to embark on on a bold program of deficit-driven development that yoked the fiscal engine to the monetary engine. But since they don’t have such a system, and since reverting to national currencies is apparently not popular with people still committed to the long-term cause of European union, then tax and spend is the only way to go.

      The wealth of a country does not lie in its money or monetary system. It lies in the country’s people and material resources – in advanced modern nations, it lies with the people primarily. The crime that is contemporary Europe consists in the fact that there are millions and millions of unemployed people who are being deprived of the ability to build their own futures and the futures of their nations by the system of exploitative and concentrated plutocratic ownership. If the people who currently own the means of production and tools of capital refuse to employ them to build the country and provide work opportunities for the ready armies of the unemployed, then the people must seize those resources and use them themselves. It doesn’t matter what kind of monetary system they have.

  4. Dan,
    what should a country like Greece do if the rich are taking their money out of the country and parking it in offshore bank accounts? Send the Greek navy to Cayman islands? Your response here seems to imply that there are capital controls in place and that the funds are there for the taking.
    Alex

    • Let them take their money. As long as they can’t take the resources, islands, cultural treasures and people out of Greece, then the Greek people have everything they need to grow their country.

      • golfer1john

        Dan, please elaborate. Are you saying that the government should confiscate the cruise ships and resorts and cultural treasures, and that tourism will provide the funds for the government to spend? Is the profit margin that high? Doesn’t most of the gross revenue (90% or more, I’m guessing) already go to the workers in that industry, and other costs of operation, including taxes?

        My impression was that what was lacking was money, and demand. Owning real resources doesn’t provide money for the government, except the profits from operating the businesses they support. Is that enough? As long as Greece has net imports and savings demands, doesn’t government still have to run a deficit, and isn’t a large enough deficit still prohibited while they are on the Euro?

        • I’m saying that it’s not about the money, Golfer. A monetary system is certainly a great convenience, but ultimately a government doesn’t need “funds.” If it has lost control of the existing monetary system and the movement of capital funds within that monetary system, then it can employ some other approach. If the government is going to carry out a plan of public investment and national development, then what it needs are resources to do work with, a system for organizing the work of people willing to do the work and a system for capturing some of the value that is generated so that it can be distributed back to the people who did the work to compensate them for the job well done. If it is still the governing authority of the country, and still has the support of the population, and is sufficiently determined to do what it takes to develop the country and make it more prosperous, it can always get the job done one way or another. It’s legislature can pass whatever laws are required. It can nationalize resources; it can pass taxes and issue tax credits that would be used to pay them.

          Think about how inherently absurd it is for a country to reason like this: “A bunch of rich people left the country and took a lot of the pieces of paper and bits of metal with politician’s faces on them, and won’t let us move the electrons around in their bank accounts, so we’re paralyzed.”

          Everything the Greek people need to grow is right in front of them, right in their own country. It’s always that way.

          • Alex Seferian

            I agree with Dan. The monetary system is a convenience theoretically, even though in practice, it is a must. I would never advocate expropriations or anything of the sort, but that is a political statement. I do think however, that MMT is a great tool to make people realize that government policy has relatively little limits when it comes to its distributional potential. The only limit are the real resources. Every time someone defines “public purpose” to be x, y or z, or whenever there is government spending and taxation, some distribution is taking place. When there is a deficit, there is an added layer of complexity, and that is inflation… but even that has distributional implications.

            • “Expropriation” is just another word for “taxation”. Something that was private property is converted into public property. In the modern world, the thing that is usually expropriated is money. But a country could expropriate other things. It’s up to the people of the country to decide whether and what to take, and to assess the fairness of the procedures for taking it.

              If a country operates its own monetary system then it has the option of simply manufacturing more of the customary monetary payment asset, and exchanging that asset for the stuff it wants. Done intelligently, this need not cause inflation because the multiplier impact of the purchases causes an increase in the output of products sufficient to offset the increase in money.

              There is no reason in heaven or hell why a democratic country that possesses enough real resources and healthy people to provide a decent and fair material life for all of its citizens has to sit back and watch its economy shrink, watch its wealth redistributed toward the top of the wealth pyramid, watch its young people reduced to dependency and watch its old people reduced to beggary. It can always do what needs to be done to seize control of its domestic economic destiny.

              • Alex Seferian

                ““Expropriation” is just another word for “taxation””. Good point, although there is a difference in that the former typically involves a lawsuit. Think Argentina, where the Government recently took over, from the Spanish company Repsol, the nation’s oil & gas company, YPF. That was an expropriation. When the Argentine Government was taxing Repsol for years before that, it was a totally different thing. Was the expropriation a good move, in the interest of “public purpose”? That is a hotly debated topic, but the facts seem to be that now YPF lacks the capital to execute even the most basic of CAPEX programs, and the nation’s energy bill is increasing to the point where an oil and energy rich country is having to import related natural resources.

                More broadly, I hear you on many of the points you make. However, it all boils down to people. If you have people in government making the wrong choices, defining “public purpose” unfairly, or even worse, being corrupt, then it is a recipe for disaster, especially if you follow MMT to its logic conclusion and allow those Governments a free hand when it comes to spending, taxation, and deficit related questions… again, many Latin American countries come to mind when I write this.

                However, the same applies to the private sector. Staff the top companies with villains, and the results can be as bad, or even worse. In any event, all that is a debate which is beyond what I felt was the scope of your excellent explanation of how a sovereign government, mechanically speaking, can in theory at least function without a currency. All that helped underpin a point that I like to make at that some MMTers ignore: the distributional aspects of government policy.

              • There is no reason in heaven or hell why a democratic country that possesses enough real resources and healthy people to provide a decent and fair material life for all of its citizens has to sit back and watch its economy shrink, watch its wealth redistributed toward the top of the wealth pyramid, watch its young people reduced to dependency and watch its old people reduced to beggary. It can always do what needs to be done to seize control of its domestic economic destiny.

                +100

          • golfer1john

            If they issue tax credits, how is that different from asserting their own monetary sovereignty, and issuing Drachmas? And if they didn’t, and simply nationalized the resources, what would they use to mobilize the workers? It doesn’t seem realistic that they would revert to a non-monetary society, and organize the efforts by force alone.

            • It isn’t that much different. But I believe Warren Mosler researched this issue last year and discovered that issuing tax credits was permitted under the Mastricht treaty. So Greece could keep the Euro as its legal currency and unit of account, but extend the currency domestically and get around ECB monetary policy restrictions by issuing the tax credits.

              • golfer1john

                OK, so if it’s “not about the money”, then your solution would not involve tax credits, but would involve nationalizing resources, assuming that the rich will not sit still to have their pants taxed off, and would move themselves and their money out of the country, and abandon their real resources. How do you mobilize the effort to employ the people, without using money?

          • reserveporto

            All this can-do spirit can do is shove the problem of providing the needed gov’t deficits that provide the funds to satisfy the demand for savings on some other country – well, other than possibly creating a more equitable society within Greece. That’s what Germany did in the mid-00’s. The liquidity that savings represent still needs to come from somewhere and, ultimately, that liquidity must come from the deficits of the issuers of currency. Then again, I’m certainly willing to trade US dollars that can be produced at a keystroke in exchange for real labour from foreigners. I don’t even have to worry about inflation on most items from all these keystrokes because these crazy foreigners all want to move here and, when they do, they’ll just bring all those keystrokes back and dump them in higher property prices. Win-win if I happen to own land.

  5. Very good article, Dan! explains it all in good straight words, and it is the first MMT article that I dared share with my friends… 🙂

    Keep it up!!

  6. financial matters

    Well done!!

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