Taxes and the Public Purpose

By L. Randall Wray

In previous instalments we have established that “taxes drive money”. What we mean by that is that sovereign government chooses a money of account (Dollar in the USA), imposes obligations in that unit (taxes, fees, fines, tithes, tolls, or tribute), and issues the currency that can be used to “redeem” oneself in payments to the government. Currency is like the “Get Out of Jail Free” card in the game of Monopoly.

Taxes create a demand for “that which is necessary to pay taxes” (and other obligations to the state), which allows the government to purchase resources to pursue the public purpose by spending the currency.

Warren Mosler puts it this way: the purpose of the tax is to create unemployment. That might sound a bit strange, but if we define unemployment as a situation in which job seekers want to work for money wages, then government can hire them by offering its currency. The tax frees resources from private use so that government can employ them in public use.

To greatly simplify, money is a measuring unit, originally created by rulers to value the fees, fines, and taxes owed.

By putting the subjects or citizens into debt, real resources could be moved to serve the public purpose. Taxes drive money.

So, money was created to give government command over socially created resources.

As Warren puts it, taxes function first to create sellers of real goods and services, and have further consequences as well, including what falls under ‘social engineering’, which are political decisions—something we’ll discuss a bit more below.

This is why money is linked to sovereign power—the power to command resources. That power is rarely absolute. It is contested, with other sovereigns but often more important is the contest with domestic creditors. Too much debt to private creditors reduces sovereign power—it destroys the balance of power needed to govern.

We also know that money’s earliest origins are closely linked to debts and recordkeeping, and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean,” and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin.” The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins”—or as Margaret Atwood says, “our sinful debts.”

Records of credits and debits were more akin to modern electronic entries—etched in clay rather than on computer tapes—than to what is erroneously called “commodity money” such as stamped gold coins. And all known early money units had names derived from measures of the principal grain foodstuff—how many bushels of barley equivalent were owed, owned, and paid.

All of this is more consistent with the view of money as a unit of account, a representation of social value, and an IOU rather than as a commodity. Or, as we Chartalists say, money is a “token,” like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.

Indeed, the “pawn” in pawnshop comes from the word for “pledge,” as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves who pawn their stolen goods), while “Old Nick” refers to the devil (hence, the red suit and chimney soot—and “to nick” means to steal) to whom we pawn our souls.

The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) originally had nothing to do with sex and adultery but rather with receiving them as pawns for debt.

Somehow, the admonition “Don’t covet thy neighbor’s donkey” just doesn’t have the right ring to it today.

We all know Shakespeare’s admonition “neither a borrower nor a lender be”—and religion typically views both the “devil” creditor and the debtor who “sells his soul” by pawning his wife and kids (and four footed friends)  into debt bondage as sinful—if not equally then at least simultaneously tainted, united in the awful bondage of debt.

And, as we know, Lucifer records the debts—of the souls he will collect. He’ll sell you a good time now, but your soul lies in the balance. You buy now, you pay forever. Sort of like Student Loans in America.

For most of humanity today the original sin/debt is to the tax collector, because as they say, the only things in life you cannot escape are death and taxes. Old Nick has a lock on both of those—the tax collector who calls at death.

It is said that only death can “wipe the slate clean” as “death pays all debts;” however, once your soul is sold, there is no escape because hell is the roach motel—you’ve checked in and you will never get out. But Christ is the redeemer—he’s a sin eater, repaying your debts to let you sinners get to heaven.

You can redeem your tax debts by delivering the sovereign’s own IOUs in payment. Widespread  debts to the sovereign ensure widespread acceptance of the sovereign’s own IOUs. This means that many will work for the sovereign, or work to produce what the sovereign wants to buy. Even those without tax debts will work for the sovereign’s IOUs knowing that others need them.

This is now the most common way that sovereign government moves resources to the public sector: In recent centuries through taxes, although as we go back in time, other liabilities such as fines, fees, tithes, and tribute were more important.

Of course, there are other ways to move resources to the public sector. On one end of the spectrum of alternatives we have the military draft or eminent domain. On the other we have volunteerism—Peace Corps or VISTA.

For many purposes, however, “monetization” has proven to be more effective for a variety of reasons that need not detain us now. Monetization proceeds in two steps: the first is to impose a monetary tax and the second is to put a monetary price on the resources government wants.

(That leads to issues related to pricing power and hence inflation—topics for another day. As monopoly issuer of the currency that is required to “get out of jail free”, sovereign government potentially has a great deal of power to set prices that it pays, far more than it normally exercises. Not saying that it necessarily should exercise those powers, however, this is part of MMT’s answer to hyperinflation hyperventilators.)

From this vantage point, taxes do not “pay for” government spending. Indeed, no taxes can be collected until government has spent. Taxes create a demand for the government’s spending and logically precede that spending.

As we’ve argued, it is neither correct nor politically sensible to link “give to the poor” policy to “tax the rich” policy. The purpose of the tax is to free up resources to pursue the public purpose—including anti-poverty programs.

But our tax system is already doing a HECKUV A JOB creating unemployed resources. We can spend on the poor (and on a full range of other public policies) and thereby mobilize those unemployed resources. We do not need more taxes—now—to cause even more unemployment.

If Congress ever got hold of its senses (no, I’m not holding my breath), it would increase spending (or reduce taxes) to employ idle resources. At some point (probably later rather than sooner) we could come up against resource constraints. At that point we might need to curtail spending and/or raise taxes.

We can examine how to deal with the happy problem of chock-full employment later—we haven’t seen it in the US since WWII and it isn’t on any horizon at present.

Taxes can serve other purposes, too, as I’ve argued earlier in this series. We can use taxes to discourage “sins”—in which case the purpose of the tax is to eliminate “sin” so the optimal sizing of the tax would eliminate sin and hence raise no revenue at all.

Previously, I argued that we can view excessive riches as a sort of “sin” that we want to tax away. Some commentators have argued that high tax rates on high incomes in the early postwar period “worked” by discouraging corporations from paying high incomes to top executives. Exactly! That is how sin taxes are supposed to work. The goal is not to raise revenue but to reduce sin.

I have argued that “predistribution” rather than “redistribution” works better. Once you’ve let the rich become super rich, they have the incentive and the power to defeat the effort to tax them. In my view, those horses have already got out of the barn.

Warren Mosler puts it this way: it is better to tackle inequality at the source. You tackle inequality at the bottom by providing jobs. MMT supports the job guarantee.

You tackle it at the top by constraining the rewards. Warren agrees that high tax rates on the rich is a legitimate political decision, and falls under what he calls social engineering (not to raise revenue but to change behavior).  However, he’s proposed what might be more effective measures, such as eliminating treasury securities (that provide interest income to rentiers), banning stock ownership by pension funds backed by the federal government (PBGC), and regulations to constrain and narrow permitted banking activities–all of which remove most of the highest incomes in question at the source.

I’d add limits on executive pay packages at corporations.

We’ve already hinted that a broad-based tax makes sense if the goal is to move resources to the public sector. However, we need to also look at issues of fairness and incentives.

This series will continue with a look at which taxes make the most sense from a public policy perspective.

17 Responses to Taxes and the Public Purpose

  1. Somehow, the admonition “Don’t covet thy neighbor’s donkey” just doesn’t have the right ring to it today.

    Oh I don’t know. 🙂

  2. golfer1john

    “I’d add limits on executive pay packages at corporations.”

    Would you also limit them in other forms of business ownership, such as LLC or partnership? What would happen to the excess if the business were so successful that the income passed through to the executive owners exceeded the limit? Is this an inequality thing, applicable to all business, or a shareholder protection thing only for corporations? Or is it only publicly-traded corporations?

    What about a very highly paid individual, such as a rock star or athlete, who incorporates in order to protect his personal assets from liability related to his work? Is he to be required to pay his chauffeur and barber a percentage of his income, in order not to exceed the limit?

  3. Randy, It occurred to me that in previous centuries when taxes (tribute, etc.) were owed in commodities like barley or gold, that there were sources of “money” that were not in the hands of the sovereign (fields for harvest, mines). This raised the possibility that the sovereign had a dearth of “money” to cover its debts and went bankrupt. This is the situation which many now conflate with the current system of money, and have not yet made the leap that money is intrinsically in the sovereign’s power to create and destroy. Of course this is the kernel of truth that MMT has been trying to get into public consciousness… If I read the libertarians or older economists who grew up in a Gold Standard world, they all have this view of money that no longer is true. Then their arguments stand on a false premise and one can see that the mythologies that they peddle as the “story” of scarcity, exchange, money and capitalism are merely scaffolding for an ideology and apologia of current social class structure.

    • david: don’t think i follow this. I wouldn’t call commodities money. Yes, it is possible to tax “in kind”: you all owe me a bushel of wheat. I wouldn’t call that money. Money (probably) first developed for administrative purposes as Hudson said–to keep track internally, to measure the fines, tithes, tribute paid. It was a unit of account. I don’t see how a sovereign that has sovereign power can go bankrupt. Yes it might default on debts, refuse to accept its own IOUs, “cry down” the value of its IOUs, etc. But if it still has sovereign power I wouldn’t call that bankrupt in the sense we apply that to nonsovereign debtors.
      However agree with you about the errors of those who think we ever had a “gold standard”. We never had anything like what they imagine. Gold never was, never could be, money. I would say “money” always was “fiat” that is money-denominated IOUS, even where convertible on demand to gold.

      • Randy, OK, we have a problem in definition. A usual problem in any intellectual endeavor, and one that my post was trying to talk to. You say “You all owe me a bushel… but THAT ISN’T money.” We realize and agree that NOW we live in a world where money has become completely rid of any tie to any commodity, but such was not always the case!

        In fact money WAS the commodity: i.e. Gold. Sovereigns – i.e, princes and kings (I am thinking of the Dukes of Burgundy as I write this) actually owed money to bankers for their wars. They owed it in a commodity – gold – that they did not possess and couldn’t create, except through conquest and the seizing of booty. And so they went bankrupt and were ruined by their wars, ending owing all to the bankers and not having enough gold to pay them. (Err… sounds much like the middle class today…)

        I am reading some Von Mises and Moldbug for my edification (taken with a kilo of salt! … another commodity which has been “money”) I was led to this by a post which mentioned the petition to make Eric Schmidt of Google “CEO of America”. This is a weird current in contemporary conservative thought – they call themselves neo-reactionaries. And they seem to be in favor of a return to a Gold Standard – among much other Fascist nonsense. In fact today Mike Shedlock, who otherwise is not off his rocker as far as I can tell, made reference (to my shock) to the fact that returning to a gold standard would “solve” the debt and trade imbalances – though I – being but a bear of very little brain – could not for the life of me figure how a commodity that we mine at the rate of $2billion (current commodity pricing) a year out of the ground supports multi-trillion dollar balances in trade or GDP.

        Before money there were tallies. Those little clay tablets you mentioned. Then there was the “fetishization” of a particular commodity or group of commodities: gold, silver and copper. as proper for the payment of debts, across countries, over a long span of time, for international trade and local commerce.

        What intrigues me is what happens NOW and in the future. As we see peak oil, peak credit, bubblicious markets, generalized global kleptocracy – what happens to money? When the good faith and credit of the US Treasury is not worth the paper (bits) it’s printed on – what do we devolve to? Precious metals? Certainly not Bitcoins and anything that depends on technological support of a late stage carbon economy. What is the future of money? Any thoughts?

        • There’s a difference between a fixed rate gold standard with paper money, gold coinage whose face value includes seigniorage, and a bullion system, all with somewhat different policy space.

          Obviously, gold backed notes convertible at a fixed rate are “money,” and it is “fiat” in that the face value is established by fiat. Less obviously, gold coinage with seigniorage is also fiat money having established face value, although the token does have commodity value equal assayable value of the metal contained, which may vary due to wear, clipping, etc.

          Some gold bugs believe that only bullion is “real money,” everything else being “funny money” whose face value is not intrinsic (real or actual) value. But bullion is a commodity, and exchange using bullion is barter. Bullion has no face (nominal) value. Bullion only becomes “money” when minted into coin with face value.

        • David: I wouldn’t say gold or salt was money. Yes we can operate with a gold standard in which we fix the price of gold. We denominate gold in money units–say 1 oz = $35. And if you bring the sovereign $35 of his own IOUs he promises to give you 1 oz. You can do this with salt or tobacco or whatever you want to price-fix. If you and I agree to use tobacco in exchange, at the official price fix, we are not using money in the exchange. We are denominating trade in the dollar but you agree to take tobacco at the fix price. Read Innes who is very good on all this. The tally stick is different; it is a recording of the money IOU. Gold or tobacco is not. The tally is equivalent to your acct at the bank. It is closer to what you mean when you say “money”. I call it a “record of the money denominated debt” or for shorthand I have called it the “money thing”. Not “money” itself.

  4. As Michael Hudson has reiterated, one element in creating a society without privilege and asymmetric power based on wealth is to tax away economic rent — land rent, monopoly/oligopoly rent, monopsony rent, financial rent — rather than productive contribution. Economic rent is usually a function of economic power, often resulting from political power, or luck like windfall profit, being born with a silver spoon in one’s mouth, etc.

    See also J. M. Keynes, General Theory, Chapter 24. Concluding Notes on the Social Philosophy towards which the General Theory might Lead

  5. John Steinsvold

    An Alternative to Capitalism (since we cannot legislate morality)

    Several decades ago, Margaret Thatcher claimed: “There is no alternative”. She was referring to capitalism. Today, this negative attitude still persists. I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to my essay titled: “Home of the Brave?” which was published in the OPEDNEWS:

    John Steinsvold

    “We have met the enemy and he is us.”
    Pogo quotation by Walt Kelly.

    • golfer1john

      It works in a family, or a convent, not sure it would work so well in groups of unrelated, perhaps even hostile, people.

      But, I always wanted to be a pro golfer. It would be nice to just play golf for a living, the people could come out and watch me play (for free), and I’d get all new clubs and golf balls for free, and all the free stuff I need at the store. I wouldn’t need any perks.

      Of course, if there’s an “economic body” that would tell people that they had to do something useful, and what that useful thing is, and how much of it they had to do, in order to get the free stuff, that’s a system that’s already been tried and found unsatisfactory for those not on the “body”. I suppose the economic body would determine exactly what people “need”, too. And how to ration the stuff when the needs exceed what is available.

      It sounds good, though. Maybe everyone who wants to volunteer to try it can be relocated to someplace nice and left alone for a few years, so we can see how it works out before we jump in with both feet?

      • John Steinsvold

        Yes, the administration of a way of life without money is a huge problem. As proposed in my essay, a web of “economic bodies” would be created; one for the federal, one for each state and one for each local level. These economic bodies will coordinate the economic traffic in our nation. They will interact with each other as much as modern technology will allow. A balance of supply and demand will be achieved taking every conceivable factor into consideration including the conservation of our resources and the protection of our environment as well as the needs of the people and their craving for luxuries.

        In short, these economic bodies will be coordinating what is now our free enterprise system to fulfill the economic needs of our nation.

        Today, we live in a materialistic society. Material wealth is a status symbol. Currently in the USA, wealth directly symbolizes competence, power, and intelligence. In a way of life without money, we will all be economically equal (or nearly so; at least poverty will be eliminated). You will not be able to tell a CEO from a janitor by the clothes they wear or by the cars they drive or by the homes they live in. The aristocracy in a way of life without money will be those who contribute the most to society in the way of achievement, leadership & ideas. They will be held in our esteem.

        John Steinsvold

        “The free market is indeed free. Its free of responsibility and accountability. Owners are free to ignore the future, free to act in ways that generate short term gains for themselves and push long term costs onto other people, the environment and the future.”
        ~ Lloyd Ireland

  6. Pingback: Randy Wray: Taxes and the Public Purpose | naked capitalism

  7. People seem to be confusing cause and effect, purpose and application, when they claim the purpose for creating money is to pay taxes. To my way of thinking, paying taxes is simply an application of the way money can be used. The purpose of having a money system is because it is the most convenient medium of exchange. Bankers have used this fact for centuries, long before the Government, supposedly, took over the monopoly for creating the “money supply”.
    Obviously, there is a problem with all the different bank notes created by the private banks, as the reliability of each bank, and thereby their “note issue,” can vary, depending on the bank’s performance and reputation. As President Lincoln pointed out in 1861, “The government should create, issue and circulate all the currency and …….by the adoption of these principles, the long-felt want for a uniform medium will be satisfied.
    Thus, what the Government does by creating a uniform “money supply” is to fulfil its responsibility to provide a guaranteed monetary unit that can be accepted throughout the nation as the universal medium of exchange. By demanding that all taxes should be paid in this monetary unit is really just a flow on of the way the unit is used. I certainly don’t believe it is the fundamental purpose for creating a money supply in the first place.
    In fact, there are other exchange mediums in existence in many countries that have nothing to do with taxes. Argentina has what it calls an RGT unit, other countries call theirs, LETS – Local Energy Transfer System – it is a well known system that has been in place around the world at least since the 1930’s, possibly earlier. Both systems work the same way, people exchange goods and services using a barter system that revolves around a locally created medium of exchange. The LETS units don’t involve interest payments, they aren’t considered a commodity, and there is no “foreign exchange market” to allow them to be manipulated for the sake of making a profit. They are a medium of exchange and there is no point in accumulating LETS units other than to use them for an exchange.
    In fact, they serve the only real and fundamental purpose for having a monetary system in the first place.

  8. To explain my use of “supposedly” in the previous post, it is patently clear that the Banks are still the primary source for creating the larger proportion of the “money supply” used by the nation, as the Government still allows them to create interest bearing debt via the fractional reserve banking system. The “money” actually created by the Government through their spending is a much smaller proportion of the total “money supply” used by any nation. It is therefore, incorrect to say that the “money supply” is created by Government spending and ignoring the huge amount created by the banks. And incidentally, that bank “money” is created entirely for the purpose of “spending” and has no direct relationship to paying taxes.

    • John, I recall another guy who tried to sell those ideas. They are good but very hard to get rolling! BTW he was executed around 33 AD plus or minus because he got enough rolling to scare the overloads of that era.

  9. “You tackle inequality at the bottom…” – L.R. Wray

    I absolutely agree, which is why I support a federal law that would require the states to pay at least $600 per week to Unemployment Insurance recipients. People should not be thrown out on the street because Wall Street blew up the global economy.

  10. Govt taxing and spending moves money around in the economy but neither adds to nor subtracts from the money supply because the book is balanced by the selling of treasuries. Banks can temporarily increase money in the economy but long term they can only remove money from the economy, neglecting their cost of operations. Every loan made by a bank will extract the interest on that loan eventually from the economy. Banks can, for a limited time, maintain a fixed money supply but to do this they must continuously make loans equal to repayments made to them plus the interest they collected. This results in an exponential increase in loans which is unsustainable. The math is easy. Given the parameters of the system the time to the chaos point where repayments equal all money in the economy can be calculated. But the money supply does increase and the Fed announces an acceptable inflation rate, nominally of 3% per year. The Fed also declares the necessity for a national debt for them to operate and that debt is necessary because the Fed can buy that debt held by private investors, via open market operations, thereby inserting money into the economy that was not there before. This process also supplies money into the economy to pay banks interest on the loans they make, establishing a behind the scenes conduit from the Fed to the coffers of banks.