By J.D. ALT
The Republican tax reform will be criticized on many fronts. It is a battle of criticisms that will likely become as chaotic, ill-informed, and counter-productive as the tax reform process itself has been. This is because it will surely ignore the only strategic battle-front that ultimately matters: the basic premise of what taxes are for and why they’re necessary.
Before the Republican tax reformers even said a word, their arguments and proposals were packaged in the tired and tiresome macro-economic assumptions that misguidingly underpin our entire political discourse. Namely: (a) The federal government collects taxes in order to pay for federal spending; and (b) it cannot collect enough taxes to meet the spending needs of the budget it annually produces. To solve this conundrum some combination of reducing the budget and increasing taxes is therefore required. The magic Republican formula to simultaneously accomplish both of these goals is to dramatically reduce taxes on the wealthiest class of corporate operatives—which is made palatable to the voting masses by attaching to the corporate coat-tails some colorful snippets of tax-relief for lower and middle-class working families.
These mental gymnastics result in a strange form of double-speak: From one corner of the Republican mouth comes the logic that allowing the wealthy corporate operatives to keep more of their dollars will result in BUSINESS EXPANSION—creating new working-class jobs with taxable wages that will subsequently increase federal tax collections. Out of the other corner of the mouth comes the logic that because the necessary tax reductions will increase the budget deficit, it can only be fiscally responsible to subsequently reduce the budget itself which, alas, will require cuts to the nation’s retirement, food, and medical safety nets (since everything else in the budget is essential for national security, public safety, and the profitable functioning of the corporate economy.)
If these hyperbolic, self-enriching, and mean-spirited pronouncements cause you to want to rush out with your musket to one of the street barricades now manned by the Republican guard—stop! These are feigned battle-fronts where ultimately you cannot win for the simple reason that you will have bought into the false premise that underpins the whole battle scene the Republicans have laid out. (This is what Barack Obama proved when he agreed to parley over a “grand bargain” to cut the federal budget deficit.) This smoke-screen front is where the corporate operatives and their Republican guards want you to come to fight. Where they don’t want to do battle is on the field of macro-economic reality where their arguments cannot withstand the simplest of truths and facts. That’s the battlefield you want to rush to. But you don’t need a musket (hopefully). What you need to arm yourself with is just a few of those simple truths and facts. Here’s a start:
- The federal government issues and spends fiat-dollars first―then it collects some of those dollars back This is like Time: it can only go in one direction. Or football: a wide receiver cannot catch a pass until after the quarter back throws the ball. Republican tax reformers want you to believe the pass is caught first, and then it’s handed back to the quarterback to throw!
- The federal government has to collect tax dollars for two simple reasons:
- First a U.S. sovereign fiat-dollar (what the federal government issues and spends as “money”) is, in fact, a tax credit: its purpose is to make available to citizens the one and only thing they can use to pay their taxes It is called a “Federal Reserve Note.” It is called that because it is, legally, a “promissory note”―and what it “promises” is that the U.S. government will accept it back as a tax payment. That’s the only promise a “Federal Reserve Note” makes.
- For the fiat-money system to work, the federal government has to continuously drain dollars out of the economy because new fiat-dollars are continuously being created and spent into the economy. If dollars were not consistently drained out in taxes, we’d soon be swamped in so much money the price of everything would begin to spiral out of control.
- If the federal government collects back fewer dollars than it has issued and spent, we call that a “deficit” because it appears to our everyday thinking that—like an undisciplined household—the government has spent more than it earned. This seems reasonable until you confront the fact that the sovereign government doesn’t “earn” Federal Reserve Notes, it “issues” them. Each Note is the government’s promise to accept the Note back as a tax payment. When the tax payment is made, the promise is fulfilled and the Federal Reserve (promissory) Note is cancelled. The Note is not something the government has “earned.” When it needs to spend again, it simply issues another Federal Reserve Note.
- Tax-paying citizens want the federal government to collect back fewer Federal Reserve Notes than it has issued and spent! If it collects back more of the Notes than it has spent, we—the citizens—will have to dip into our savings (or even borrow) Federal Reserve Notes in order to pay our taxes.
- The currency-issuing sovereign government doesn’t need our tax dollars to buy public goods and services for the simple reason that it has already bought them—which is why we, the citizens, have the Federal Reserve Notes in the first place to pay our taxes with. The federal government buys public goods and services first, then it collects back some of the Notes it paid to citizens to provide those goods and services.
These basic macro-economic facts ought to be defining the real questions in our tax-reform debate: What are the collective goods and services American families and American commerce are most in need of? How many Federal Reserve Notes will the sovereign government need to issue to pay American citizens and businesses to create and provide those collective goods and services? Given that level of federal spending, how many Federal Reserve Notes will need to be drained to maintain price stability? What is the fairest, most effective way to drain those Federal Reserve Notes out of the system? Where do excess Notes—the ones that aren’t being used to feed, clothe, and house families, that aren’t being used to invest in productive and useful products and services, that are being used instead to simply make bets in a speculative gambling casino—where do those excess Federal Reserve Notes tend to accumulate? These are the questions, I think, that should be establishing the real battleground of America’s tax-reform debate.
But-but but doesn’t the money have to pass through the caring hands of the Koch bros before the schools can be built?
Dear Dr. Alt: During discussion with my Republican friends (who are not rich) about massive tax cuts for the wealthy, their argument is “they deserve to keep what is theirs,” not that it will enhance investment or create jobs. It is kind of a libertarian argument. Of course we can carry the logic to the point where ALL wealth and capital is controlled by a few hundred people. Then the rest of us would be nothing more than surfs in a feudal economic system.
their position is such because they don’t really consider themselves “working class”–rather, temporarily embarrassed millionaires…
I wonder how much such “libertarians” have considered questions as the following with regard to the wealthy:
o Is it true that the wealth is “theirs” alone? Did they in fact create it independent of the gifts society and history have provided them? Without a thousand preceding elements–from language to their parents to double-entry bookkeeping to the concept of a corporation to physics to public roads … to the invention of computers and programming languages and the internet–how far would they have gotten?
o Is it possible our hyper-individualist mental model of how the world works puts blinders on us?
A couple of references: _Unjust Deserts_, by Aperovitz and Daly, and this https://www.youtube.com/watch?v=GjdolhzdU7Q .
Mr Wilkins, I think the situation you put forward is wonderful – just the type of thinking that needs to be confronted and defeated. The Wealthy and the Powerful put blinders on people, degrade the capacity to think critically and truthfully – “Learned incapacity, learned incompetence.” The deceit and fraud within the statement “they deserve to keep what is theirs” comes from the frame, the unspoken context which is projected in that statement. There are at least two frauds: that the tax system is unfairly burdensome to the w & p(w & p pay most of the taxes) and they justly deserve(worked for) all the things they have. That’s when you hit back with “I don’t think it’s fair that the w & p are taxed at a lower rate than everyone else. “Just look Trump admits there are many years he didn’t pay any income tax at all and Mit paid at 14.7% in the cherry-picked years. I don’t think it’s fair to tax the w & p lower than other people just because they have more money.” Economic Truth and Economic Justice – that’s the ground that belongs to us. Citizens for Tax Justice has a good chart of all the taxes paid. Turns out everyone pays pretty much according to their share of national income – we don’t have a progressive tax system. I don’t think CTJ includes inheritance – much of the income for wp is hidden within the growth of an estate. Nowadays corporations have many of the rights of humans(Citizens United) – why shouldn’t they be taxed at the same rate as humans? The w & p are always undermining the position of working americans by destroying unions, promoting legal and illegal immigration, outsourcing jobs, a continuous flow of part and half truths propaganda. No, they’re not punished, they’r treated better than. Why should income from capital gains and dividends be taxed lower than work – don’t tax somebody more just cause he works for his money. No, the government isn’t a bad thing, it’s a good thing, it’s the community coming together to promote the welfare of everyone. To tax the w & p lower than others results in a transfer of wealth from those others to the wealthy and powerful.
John, it’s disheartening. At a time when the level of inequality is so great, that so many hearts go out the the wealthy and powerful. Direct your friends to the site of Jared Bernstein. He has a graph “The gap between productivity and typical worker’s compensation has increased dramatically since 1973,” November 22 2017. Productivity up 142 %, wages up 15 %. Tell him to label that space between the two “the wealthy and the powerful hate to share.” They take the income from everyone else cause they can.
Great article. I’m going to share it hoping people will read and understand it. I’ve had no success in getting people to understand a fiat system. They can’t get away from the household funding argument.
Excellent post, J D. The question is, who will leading this little rag-tag band of rebels to the correct battle field? Even Bernie Sanders couldn’t find the front with the best group of economic advisers I have ever seen assembled. It is one thing to have all the maps and weapons to win the war, but someone has to issue the marching orders and see that the troops are correctly placed. Where is our Eisenhower?
My only comment is that the brainless dimwits in Congress are applying the tax cut to the WRONG group. The corporations and the 1% don’t spend, the 99% do because they have to. If Congress had set the federal income tax rate to zero, it would have boosted the income of working Americans by $30 BILLION DOLLARS A WEEK. And even with that kind of boost in aggregate demand, hyperinflation is a long way off over the horizon imho. There is always the option of cranking up the income tax rate again at a later stage anyway.
Thank you for another valuable post.
On caveat: “Tax relief” is a right-wing frame (check out George Lakoff on the net or see his _Don’t Think of an Elephant!_). Progressives should avoid the term like the plague. (Lakoff notes that even negating a frame reinforces it.)
Saved so I can quote from it later – I really love the image of the wide receiver catching the ball first so he can throw it back to the quarterback! One of the best and clearest descriptions of modern macro finance (my apologies, Ellis!)
Susan, Ellis doesn’t mind. i’m sure of it!!
I find your contention that a nation creates a money system for the purpose of paying taxes quite amazing, to say the least. The purpose for having a money system really has nothing to do with taxes. The sole purpose for having a money system is simply because it is about the most practical and convenient way to facilitate the day to day trading that is part and parcel of virtually every community throughout history. It beats the otherwise cumbersome system of barter trade and provides a virtually unlimited amount of flexibility for the traders. There are two fundamental properties that a useful money system must have. First, whatever tokens are decided to be used for money, those tokens must be universally accepted within the designated community. The second fundamental is that the tokens must come with some sort of guarantee that they are not false tokens. Logically, the only entity in the designated community that is in a position to guarantee those two fundamentals is the “Government” because, the Government has the authority to say what will be legal tender, and to punish anyone guilty of counterfeiting the tokens.
The assertion that the Government is the only entity creating the money supply totally ignores the vast amount of money created by the private banking fraternity through the fractional reserve system. In virtually every country around the world, the Government only creates the hard currency in the form of notes and coins, in a range of 3% to 10%. The remaining 90%+ is currently created as digital “money” by the private banks and circulated as interest bearing debt. If every Government of any independent nation had any sense, and if they were to use their true and proper status as monetary sovereign nations, they would simply arrange to sell credit access to the private banks and eliminate having to raise any taxes at all. The real usefulness of an honest and private banking fraternity is in distributing the money supply in a due diligent and more effective way than any Government. Provided the Government controlled the issue of credit in relation to the nation’s population, and ensured a relative balance between the nation’s productive capacity and its consumption capacity, inflation would not be a problem. There would be no need for the Government to act as a lender of last resort, as every Bank would be responsible for the way they use their purchased credit. Any gambling by the Bank, or its customers, would be the bank’s responsibility. As Warren Mosler has explained, a monetary sovereign Government doesn’t have to raise any taxes at all. Setting up a tax system is certainly not the reason for creating a legitimate money supply.
Graham. I follow the first paragraph but not the second. The first place I get lost is “arrange to sell credit access to the private banks.” With whose money would they make this purchase?
I think the MM people exaggerate when they say “govt doesn’t have to raise taxes to spend.” I say, Yes they do. They have to tax after they spend. I think some Libertarian Thinking has invaded your head. “Any gambling… would be the banks” responsibility – that just ain’t so anywhere in world. When the wealthy and powerful collapse the banking system, govts around the world(the community) steps in to stop the harm their reckless behavior has brought about.
Look. A sovereign power wouldn’t be a sovereign power without the ability to IMPOSE OBLIGATION upon its citizens. The imposition of obligation(tax) is the way govt acquires the resources(human effort) to effect itself. The monopoly position in the way govt effects its power is just a reflection and conformity with that power. It makes total sense that a power would take total power of the manner in which it exert its power.
Thank you Yok for your comments, very pertinent and important. It is my view that soverignty belongs to the people, not the “Government” in exactly the same way that political power eminates from the people. The reasoning for this goes back to fundamentals. When a group of people join together in a society, it is the people who must come up with an agreed set of rules for how each person relates to the others. Basically, that set of rules is the Constitution, and a Constitution is, by rights, the property of the people, not the Government, not the lawyers, not the Judges and certainly not the politicians. However, the people have to decide what they are going to do when some of the people do not follow the rules. How are they going to handle that? Essentially, when they set up a mechanism to address that issue what they are doing is creating a form of Government. Consequently, it becomes obvious that a nation’s Constitution and a nation’s Government are the creation, and property of the people, not the other way around, as is the current case in virtually every nation in today’s world.
So, that brings us to the only real reason for any nation to have a money system. A money system is, as I have said, the most convenient and pracitcal system for establishing a universally accepted and guaranteed medium of exchange. That’s all money is really useful for – if it can’t be exchanged for something that is needed, or wanted, it is basically useless. Creating a money system is a responsibility of a proper Government, as it very much an essential service for the benefit of the public.
Now, to answer your very pertinent question – how do banks get the money to buy credit access? To answer that we have to face the reality of today’s world. There are fundamentally two types of banks in operation – the commercial retail banks and the investment type banks. The fundamental function of the retail banks is to distribute the money supply for the benefit of the nation and the people. The primary motivation of the investment banks is to make a profit, come what may, and as has been proven, to hell with the consequenses.
The idea of selling access to credit would only apply to the commercial retail banks. the Investment banks would have to stand on their own two feet and take responsibility of their investment policies. The retail banks are established in various regions and tend to focus on servicing specific areas of the society e.g. city and urban based for housing and commercial activities, others for rural development and some for State infrastructure needs, just to offer a few examples. Those banks are capitalised and registered as they stand, and therefore, their current activities would serve as a base for the amount of credit they currently need, and any projected growth. When the Government offers approved credit access to these banks it would be, as is the standard current practice, transferring digital “money’ via a few keystrokes on a computer keyboard. The banks would no longer be allowed to create their own credit and they would have to pay for the access from the profit they make in recycling the new credit. Competition would control the amount of interest the banks could charge for recycling their credit allocation, and if their loans are conditioned by due diligent analysis, the shareholder would need to make sure the management limits the risk. The major benefit of a system for the Government sellin access if the Government’s ability to equate the money supply to the population levels and a relative balance between the productive capacity of the nation to the consumption capacity. That is the critiacl issue that is basically ignored by most economists today.
This is exactly right. Unfortunately, the narrative most people relate to is households, not currency creators. I’ve told people these facts, had them even nod their heads in agreement….then two weeks later make a remark that tells me they have not understood what I said. This has happened often enough that, like Stephanie Kelton, I’ve concluded that the Kochs have won. Their narrative of austerity has captured the public imagination so completely that voters act as though they’re in a trance. Unfortunately, bumping into the furniture is the safest thing trance walkers can do. Plunging off of a cliff is just as likely.
another great piece, J.D. you have an uncanny way of explaining things so the layman can understand. not that many will accept it, as they hold so dear the lies they have been fed for decades–lies taken as gospel from the very same ones they call liars about everything else…
How does your last paragraph convert to the less tech American public? How can the issue be consolidated into a direct question we can ask of our Senators and representatives? I would like to have an answer so that I can participate in the discussion.
Great comment, Allyson! Too true!