Q) Federal Taxes Don’t Fund Spending, right? A) Wrong.

 

Local gov’t taxes fund local gov’t spending.

 

State gov’t taxes fund state gov’t spending.

 

Federal gov’t taxes fund federal gov’t spending…however…* (see below)

 

The oft-abused phrase “Federal Taxes Do Not Fund Spending” is not entirely accurate. I don’t question anyone’s motive saying it, to be clear, I am 100% positive that each time it is said by a Modern Monetary Theory (MMT) enthusiast, no question it is to promote MMT. Federal gov’t DEFICIT spending (the spending that is not funded by taxes) was only 15% of total spending last year. Besides not being entirely accurate, saying ‘Federal taxes do not fund spending’ veers off course from that first of Seven Deadly Innocent Frauds, which states that it is incorrect to think that federal taxes “must raise funds through taxation”, and that it is incorrect to think that federal “gov’t spending is limited by its ability to tax” (7DIF pg 13). I interpret that not as saying that federal taxes do not fund spending, but only as saying that the federal gov’t, while it is taking in tax revenues, while it is indeed spending those funds, because it is the issuer of dollars, those revenues, those federal taxes are NOT NEEDED to fund spending anymore, a big difference. ’Federal taxes do not fund spending’ is a deadly innocent misinterpretation of this MMT pillar…

 

‘Federal taxes do not fund spending’ is also a misinterpretation of the accounting construct on the consolidated balance sheets of the federal gov’t. When taxes are paid, yes, those dollars are ‘destroyed’, it’s a simple bank entry, a bank debit, a ‘dollar drain’, debited from the taxpayer’s account, but that’s only half of it, only one side of the seesaw. Rather than thinking that ‘dollar drain’ is a simple change of numbers on a spreadsheet, you should be thinking where are those dollars draining to; and more importantly, other than a taxpayer’s bank account balance, that federal taxation just ‘destroyed’ net financial assets (dollars in the banking system). Thanks to the consolidated balance sheets of the federal gov’t however, that debit of taxes creates an equal and opposite entry, a ledger posting, a credit (funded by taxes), to the federal gov’t, which in turn is immediately debited back, to someone else, a.k.a. ‘surplus spending’, the spending funded by dollars that DO NOT add net financial assets (that is not a net increase in the amount of dollars in the banking system). So rather than only seeing taxes as a ‘destruction’ (debit) of dollars, better to also see it as an equal and opposite creation (credit) to the federal gov’t of previously-existing, or more significantly, as previously-Congressional-approved dollars being immediately ‘recycled’, and instantly making whole those net financial assets, those dollars in the banking system, that were just previously ‘destroyed’ by federal taxation…

 

MMTers love to say that the federal gov’t deficit equals our surplus, that federal gov’t deficit spending funds our savings, which is absolutely correct. Last year, FY16, (Oct 1, ‘15 – Sept 30,‘16), the US federal gov’t spent $3.854 trillion. Federal tax revenues (mostly federal income tax, social security & medicare) was $3.267 trillion, and the difference, $587 billion, was deficit spending, or funded by newly-created dollars. That federal gov’t deficit equals to the penny, our surplus, agreed; that federal gov’t deficit funded our savings, absolutely; and that federal gov’t deficit funds our spending on things like paying our federal taxes, most certainly, but why do MMTers have trouble saying that the other way around? In FY99, the US federal gov’t spent $1.704 trillion dollars and federal tax revenues were $1.827 trillion dollars, meaning that on top of federal taxes funding ALL federal spending in 1999, there was also a federal gov’t profit, a federal gov’t surplus, a federal gov’t ‘savings’ of $123B. So in that case, why do MMTers hide their sectoral balances chart and say that our deficit, that our tax spending, didn’t fund those surpluses, didn’t fund those federal gov’t savings? Same goes for the double-entry accounting system that MMTers love to routinely apply as well. All MMters correctly agree that for every debit posted on one ledger (federal gov’t deficit), by accounting identity, there is an absolute, equal and opposite, credit, somewhere else (non federal gov’t surplus). All MMTers would also agreed that federal taxes, that confiscation, that ‘destruction’ of dollars, are a ‘dollar drain’ of dollars out from the banking system. So after taxes ‘defund’ net financial assets, why do MMTers then hide their double-entry ledgers and say that those taxes don’t fund anything?

 

Let’s take a closer look at our federal government’s central bank, the Federal Reserve. The Fed is part of the federal gov’t, or as they define it, ‘independent within the federal government’. Even though it is part of the federal gov’t, the Fed however, is not capitalized by the federal gov’t. The way the Fed gets its equity capital is by private sector US banks being required to buy and hold non-voting shares in the Fed. Furthermore, some spending by the Fed (part of the federal gov’t) is not funded by the federal gov’t. Show me someone who thinks that we in the private sector do not fund federal gov’t spending at all, and I’ll show you someone who does not know (or does not like to mention the fact) that the Fed’s spending IS NOT funded through the congressional budgetary process. The Fed gets most of its revenues from the bonds it holds. Meaning the Fed pays for some its spending from the interest income of mortgage bonds held on the Fed’s balance sheet, like for example, at the time of this writing, the $2T of mortgage-backed securities (MBS) presently on the Fed’s balance sheet. So every time some folks in the private sector make a mortgage payment, a mortgage payment that includes interest expense servicing that mortgage, that interest, those hard-earned dollars, goes to where the mortgage is held, which today has a one in six chance of being at the Fed. The Fed pays for its own spending with that interest income from the private sector, plus any profits after funding the Fed’s expenses are handed over to the Treasury. Last year (2016) the Fed sent a record $97.7 billion in profits to the U.S. Treasury. In other words, payments from the private sector funded quite a lot of the Fed’s (the gov’t) profits, and that was AFTER payments from the private sector funded ALL of the Fed’s (the gov’t) spending in 2016. More reasons why anyone thinking, ‘We don’t fund gov’t spending’, is wrong. The correct thinking is that taxes are not funding spending ‘PER SE’ (Latin for “by itself”). Meaning that taxes are intrinsically part of funding but not essential to funding. More specifically, because revenues are obsolete as a federal gov’t financing operation, the federal gov’t, or any issuer of currency (monetary sovereign) no longer needs revenue to fund spending….

 

In a brilliant 1946 article “Taxes For Revenue Are Obsolete”, former Chairman of the Federal Reserve Bank of New York, Beardsley Ruml, wrote that the federal gov’t is “free of money worries and need no longer levy taxes for the purpose of providing itself with revenue”. On 04/17/10 Bill Mitchell billy-blogged about this and titled the post “Taxpayers Do Not Fund Anything”. I respectfully disagree. Of total federal gov’t spending ($3.854T in FY16) taxpayers funded 85% ($3.267T). The key words in that 1946 piece is ‘need no longer’. I interpret that as saying that since there is no constraint for any monetary sovereign spending beyond taxpayer revenues, and while those taxes are funding most spending, because it is the issuer of dollars, those federal gov’t tax dollars are not needed to fund spending…

 

In a 02/20/17 YouTube video, Mike Norman says ‘federal taxes do not fund spending’, using the Monopoly game analogy, saying that “it’s the same in real life.” His rationale is that the Player (household) taxes do not fund Bank (federal gov’t) spending because “basically you are just giving back money that was already distributed by the game.” True, Player taxes did not fund that original spend (the $1500 in Monopoly Money that the Bank gives the Players at the start of the game), but that was Bank deficit spending, those were newly-created dollars. Player tax didn’t fund the initial Bank deficit spending, however Player tax funds subsequent Bank surplus spending. For example, if a Player then rolls the dice and lands on ‘Chance’ and has to pay a $200 tax, that Player tax spending (debit entry on one spreadsheet) is an equal and opposite Bank savings (credit entry on another spreadsheet). That Player tax ‘dollar drain’ of $200, that ‘destruction’ of aggregate Player net financial assets, is only the half of it, it is also a simultaneous ‘creation’, an increase of $200 in Bank surplus. When the next Player lands on ‘GO: Collect $200’ the Bank does not need to deficit spend, the Bank immediately recycles that surplus and spends the $200 (federal gov’t surplus spending). Bank surplus spending is funded with existing-dollars received as revenues from Players, meaning the Bank is not using newly-created dollars (that needs Congressional approval). This Bank ‘dollar add’ then makes whole the previous reduction of net financial assets. Player taxes fund Bank surplus spending but the more important point is that Player taxes are actually not needed to fund spending at all. The Bank (issuer of Monopoly money) can never go broke. The game never ends because the Bank runs out of Monopoly money (fiat dollars). The game always ends because Players run out of money. As per Monopoly rules, “…if the Bank runs out of money it may issue as much more as may be needed by merely writing on any ordinary paper.” Meaning that the Bank, once it has run out of tax revenues that fund Bank surplus spending, the Bank can deficit spend (authorized to use newly-created Monopoly money) without constraint (without debt). The game ends when all but one of the Players runs out of money, which is inevitable because the Players (users of Monopoly money) do have a constraint when they deficit spend. Players, unlike the issuer of Monopoly money, have a corresponding debt attached to any deficit spending. Counter-intuitive to mainstream thought, it is Monopoly Player deficit spending, not Monopoly Bank deficit spending, that is actually unsustainable and ‘it’s the same in real life’…

 

While a Ph.D. candidate in 1998, Stephanie Bell wrote a paper entitled ‘Do Taxes and Bonds Finance Gov’t Spending?’ In this paper, she describes federal financing on the reserve accounting level (the banks and the Treasury department), not on the policy level (everybody else included with the other accounts that make up all the consolidated balance sheets of the federal gov’t). As per Stephanie Bell (now Dr. Stephanie Kelton) “Modern (federal) governments finance all of their spending through the direct creation of new High Powered Money (HPM).” This is true, however, what she’s missing there is whether that HPM funding federal gov’t spending is or isn’t a net addition of financial assets, a net increase of dollars into the banking system. Regardless, once again, the actual point she is driving home here is that MMT pillar, that taxes ARE NOT NEEDED to fund spending and that taxes “mask a more pragmatic operation.” Stephanie Bell correctly concludes in her paper that policymakers need to stop seeing “taxation and bond sales as financing operations”, but today Stephanie Kelton like to say ‘taxes don’t fund spending’, which slightly veers off course from that. Even worse, this ‘taxes don’t fund spending’ line confuses some MMTers even more who believe that ‘taxes and spending are totally separate operations’, yet another MMT misinterpretation, this time of Stephanie Kelton herself. In her paper, Stephanie Bell makes no such claim, in fact the opposite, she wrote about “the coordination of taxation and bond sales”, and far from being separate functions, she adds, “Treasury CHOOSES (emphasis by Stephanie Bell) to coordinate its operations, transferring funds from T&L accounts (Treasury accounts created at commercial banks to accept electronic tax payments), draining reserves AS IT SPENDS (emphasis by Stephanie Bell) from its account at the Fed.” She concludes that “This interdependence is not de facto evidence of a ‘financing’ role of taxes and bonds.” In other words, taxes and bonds sales (revenues) are obsolete, that they actually are not needed to finance spending. That doesn’t mean they don’t. It means that taxes and bond sales (revenues) are presently financing surplus & deficit spending but they don’t have to, period. If Stephanie Kelton or any MMTer today says ‘taxes don’t fund spending, they are jumping ahead. If you say ‘taxes don’t fund anything’ before MMT has taken hold, before MMT has brought forth that modern monetary way of thinking, before that sorely-needed comprehensive reform to policymaker understanding of how the system really works, until then, until the mainstream no longer sees those Treasury bonds as ‘debt’, you still need to include those crucial words, ‘taxes ARE NOT NEEDED to fund spending’. Otherwise, anyone outside the MMT circle will not understand what you mean by ‘taxes don’t fund spending’ or ‘taxes and spending are totally different functions’. When federal tax revenues end (when taxes are no longer funding surplus spending), that is the changeover from surplus spending to deficit spending. From spending that doesn’t need congressional approval (spending that doesn’t raise the ‘debt ceiling’), to spending that does. Most people understand that. If you say ‘taxes don’t fund spending’, most people will assume you don’t understand that, and they won’t pay much attention to whatever else you have to say. For example, in 2016, when Dr. Stephanie Kelton, chief economist for the Democrats on the Senate Budget Committee in Washington, said ‘taxes don’t fund spending” to presidential candidate Sen. Bernie Sanders, he was like ‘WTF?’ That’s why we did not hear anything about MMT from Bernie in 2016. That’s why it was not Bernie but his opponent that actually got the closest to starting an MMT discussion with the now-famous words “First of all, you never have to default because you print the money, I hate to tell you, OK?” And that’s why Bernie, to this day, the politician with the MMT economist, still thinks that ”the federal gov’t must first raise tax revenue to pay for policy.” Don’t get me wrong, Dr. Stephanie Kelton is one of the great ones. I think that if there is ever an MMT Mount Rushmore National Memorial, Dr. Stephanie Kelton should be chiseled in right next to Warren Mosler, who I consider the greatest economic mind walking the planet right now. That said however, even the great ones do swing and miss sometimes, and I believe ‘taxes don’t fund spending’ is a miss. Surplus spending does not need congressional approval because taxpayers are funding surplus spending. The surplus spending distinction is that it has a deflationary bias (emphasis on ‘bias’ – this is not a rule – just one of many moving pieces in the economy that may or may not result in actual deflation), which is why fiscal policymakers of any federal gov’t (any issuers of currency) should not run surpluses (the ‘Clinton’ surplus triggered the ‘Bush’ recession and all six depressions were preceded by sustained federal gov’t surpluses). Federal taxes, that ‘dollar drain’ of dollars from the banking system, that ‘destruction’ (‘defunding’ of net financial assets), functions in tandem with spending, and this function is what determines the end of the line for surplus spending which makes whole the previous destruction (‘refunding’ of net financial assets). That is the point where the deflationary bias of surplus spending ends and the deficit spending (‘funding’ of net financial assets) begins. That is the line where the surplus spending stops being ‘funded’ / ‘recycled’ / ‘used’ / ‘offset’ / ‘reinvested’ / ‘credited’, whatever word makes you comfortable, with already-existing dollars, dollars funded by taxpayers, dollars that do not need congressional approval because they already were approved before. That is the changeover to deficit spending funded by ‘borrowed’ dollars (an outdated facade from the bygone gold-standard era), but the big difference is, unlike taxes that fund surplus spending, where taxpayers receive nothing in return for paying taxes, buyers of federal ‘debt’ get something for their dollars (a US Treasury bond), so this part of the ‘financing’ process is a swap of assets in the banking system. Meaning that instead of ‘refunding’ a ‘dollar drain’ of dollars out from the banking system, those federal gov’t deficit spending dollars result in a ‘dollar add’ into the banking system, an increase in net financial assets. Another distinction, the net addition of ‘newly-created’ dollars funding deficit spending, unlike the ‘already-existing’, ‘already-Congressional-approved’ dollars funding surplus spending, has an inflationary bias. Again only a ‘bias’ because, as we saw, in the eight years after the credit crisis, even though the ‘debt’ was doubled (a lot of federal gov’t deficit spending), there wasn’t much inflation, because the inflationary bias of those deficit-spending dollars vaporized on impact. MMTer Chris McArdle puts it well: “Federal taxes, as a matter of policy, not operations, can be properly understood to be funding spending when, as a matter of policy, they have been connected.” He adds, “That’s not a prescription, it is a description, and it is not at odds with the operational fundamentals, it illuminates how things actually function (or, at least, attempts to).”

 

The ‘taxes don’t fund spending’ line is a complete distraction from a larger issue, which is whether or not any net financial assets (federal gov’t deficit spending ‘dollar-adds’) going into the banking system are reaching the non federal gov’t / domestic, a.k.a. private sector. In 16 of the past 20 years, those dollars did not. In most of the recent years, the US private sector was forced to deplete savings +/or deficit spend while the non federal gov’t / international sector saved. In an October 2015 Seminar Series at the International and Comparative Law Center (ICLC), titled ‘Modern Money Theory: Intellectual Origins and Policy Implications’, Professor L. Randall Wray states that “Logically, the gov’t spends so you can pay taxes.” He adds that “the spending has to come first…what that means is taxes actually don’t ‘finance’ gov’t spending.” He is talking about DEFICIT spending, yes, taxes don’t fund DEFICIT spending, but what about subsequent SURPLUS spending (excuse me professor, why is it called SURPLUS spending)? With all due respect to Professor Wray, he too belongs on that MMT Mount Rushmore, but here he also veers off course from that MMT pillar that taxes actually ARE NOT NEEDED to ‘finance’ gov’t spending. Instead he groups both deficit and surplus spending as being the same, he says that ‘taxes aren’t funding spending’ and that’s where Randy Wray, another great one, also swings & misses because there are those major distinctions between federal gov’t surplus spending and federal gov’t deficit spending. Instead of confusing his listeners by saying “You can’t pay your dollar tax unless the gov’t provided some dollars” (excuse me professor, what if I borrowed the dollars from a bank to pay the tax?), perhaps Professor Wray, regarding gov’t spending, should say this: Just because the federal gov’t is deficit spending, just because federal gov’t deficit spending is supplying newly-created dollars entering into the banking system that increases non federal gov’t net financial assets (federal gov’t deficit = non federal gov’t surplus), that still doesn’t necessarily mean we in the US private sector are good to go, because the non federal gov’t is divided into two sectors, the Non federal gov’t / domestic and the Non federal gov’t / international. If in any given year the US trade deficit is as much as, or even larger than, the US budget deficit, that means all those newly-created federal gov’t deficit spending dollars that year, that ‘dollar add’, skipped right over the US private sector and went straight into the US bank accounts of overseas interests. Those dollars were promptly converted to foreign currency to pay overseas workers, factories, shipping, plus any other expenses and profits generated from that product sold in America (Note: US dollars never ‘leave’ the US banking system, however, the damage is already done because the entire production of said goods took place overseas, instead of here in the US, causing what is known as a US aggregate ‘demand leakage’). Those ‘dollar adds’ all going to the non federal gov’t / international sector, that’s the same difference, that’s just as bad, for the non federal gov’t / domestic (US private sector) as if the federal gov’t ran a surplus, meaning no newly-created federal gov’t deficit spending dollars, no ‘dollar-adds’ for the US private sector in that case either. This is EXACTLY what happened for thirteen straight years in a row from 1996 (cough *nafta* cough) to 2008. Let’s check out exactly how those dollars from the federal gov’t to the non federal gov’t for the first of those thirteen years got divvied up. In 1996 the US budget deficit (total federal gov’t deficit spending funded by newly-created dollars which were a net increase of dollars entering into the banking system) was $107B. Meaning there was a $107B addition of net financial assets, a ‘dollar add’ to the non federal gov’t (the domestic US private sector and the international sector combined). So far so good for both non federal gov’t sectors in 1996, but the US trade deficit in 1996 was $170B. The US trade deficit in 1996 was larger than the US budget deficit in 1996. Meaning that the domestic US private sector paid $170B for imported goods that they bought from the international sector over and above the amount they were paid for goods that they sold to the international sector. That means that every penny of that $107B ‘dollar add’ from the federal gov’t all went to the non federal gov’t / international sector, and that news got worse for the US private sector in 1996. The difference (170 – 107 = 63), was a transfer of dollars, a ‘dollar drain’, that also went to pay the remaining balance, of $63B, for those imports, in 1996, from the non federal gov’t / domestic (US private sector) to the non federal gov’t / international (overseas sector). In other words, because the non federal gov’t / domestic (US private sector) had a ‘dollar drain’ of $63B in 1996, the effect on the US private sector was the same as if the US federal gov’t had run a $63B surplus in 1996. After 1996 comes the fatal blow to the non federal gov’t / domestic (US private sector). Those US private sector ‘dollar drains’, those US private sector deficits, continued (they were sustained), for thirteen straight more years. When looking at these sustained US private sector deficit figures below, these final fiscal year results, keep in mind that all six depressions in US history were preceded by sustained federal gov’t surpluses (same as saying that all six depressions in US history were preceded by sustained US private sector deficits):

$107B ‘dollar add’ from the federal gov’t in 1996:

$170B surplus to the non federal gov’t / International

(-$63B) deficit from the non federal gov’t / Domestic

_____________

$22B ‘dollar add’ from the federal gov’t in 1997:

$181B surplus to the non federal gov’t / International

(-$159B) deficit from the non federal gov’t / Domestic

_____________

(-$70B) ‘dollar drain’ to the federal gov’t in 1998:

$230B surplus to the non federal gov’t / International

(-$300B) deficit from the non federal gov’t / Domestic

______________

(-$126B) ‘dollar drain’ to the federal gov’t in 1999:

$329B surplus to the non federal gov’t / International

(-$455B) deficit from the non federal gov’t / Domestic

______________

(-$235B) ‘dollar drain’ to the federal gov’t in 2000:

$439B surplus to the non federal gov’t / International

(-$674B) deficit from the non federal gov’t / Domestic

_______________

(-$128B) ‘dollar drain’ to the federal gov’t in 2001:

$539B surplus to the non federal gov’t / International

(-$411B) deficit from the non federal gov’t / Domestic

______________

$157B ‘dollar add’ from the federal gov’t in 2002:

$532B surplus to non federal gov’t / International

(-$375B) deficit from the non federal gov’t / Domestic

______________

$378B ‘dollar add’ from the federal gov’t in 2003:

$532B surplus to non federal gov’t / International

(-$154B) deficit from the non federal gov’t / Domestic

______________

$412B ‘dollar add’ from the federal gov’t in 2004:

+$655B surplus to non federal gov’t / International

(-$243B) deficit from the non federal gov’t / Domestic

______________

$318B ‘dollar add’ from the federal gov’t in 2005:

$772B surplus to non federal gov’t / International

(-$454B) deficit from the non federal gov’t / Domestic

______________

$248B ‘dollar add’ from the federal gov’t in 2006:

$647B surplus to non federal gov’t / International

(-$399B) deficit from the non federal gov’t / Domestic

_______________

 

$161B ‘dollar add’ from the federal gov’t in 2007:

+$931B surplus to the non federal gov’t / International

(-$770B) deficit from the non federal gov’t / Domestic

_______________

 

$458B ‘dollar add’ from the federal gov’t in 2008:

+$817B surplus to the non federal gov’t / International

(-$359B) deficit from the non federal gov’t / Domestic

 

(H/T Chris Brown ‘Sectoral Balances info-graph of US Private Sector Dollar Drains & Dollar Adds Since 1992′)

We all remember what happened in 2008. Policymakers quickly ended those significant amounts of sustained non federal gov’t / domestic (US private sector) deficits, and ended the Great Recession with even more significant amounts of sustained US federal gov’t deficits (sustained US private sector surpluses), the same that was done to halt the previous six depressions:

$1.413T ‘dollar add’ from the federal gov’t in 2009:

$544B surplus to the non federal gov’t / International

$869B surplus to non federal gov’t / Domestic

_____________

$1.294T ‘dollar add’ from the federal gov’t in 2010:

$636B surplus to the non federal gov’t / International

$658B surplus to non federal gov’t / Domestic

______________

$1.300T ‘dollar add’ from the federal gov’t in 2011:

$726B surplus to the non federal gov’t / International

$574B surplus to the non federal gov’t / Domestic

_______________

$1.087T ‘dollar add’ from the federal gov’t in 2012:

$730B surplus to the non federal gov’t / International

$357B surplus to the non federal gov’t / Domestic

     The real point, the ‘logical’ point, professor, isn’t whether or not private sector taxes are financing federal gov’t spending; it’s whether or not federal gov’t spending is financing the private sector…Class dismissed.

 

My biggest problem with ‘taxes do not fund spending’ is the tone of it. Saying that dollars today are just like points on a scoreboard is an excellent analogy, but don’t take the analogies too literally. Saying that your taxes do not fund spending is like saying to the football player that his touchdown didn’t put the seven points up. If some MMT academic pointing to his blackboard tries to tell that running back that he doesn’t understand how it works, that the points on the scoreboard change ‘via crediting accounts’ and that ‘they don’t come from anywhere’, that sweating, bleeding and exhausted player who knows exactly who funded those seven points is not going to agree. This schoolroom notion that federal gov’t spending is just dollars being ‘keyboarded in’, that it’s only just ‘1s and 0s’, and nothing more, oversimplifies what is happening in the real world. Federal spending isn’t a helicopter drop, those dollars aren’t keyboarded in to just anyone. Anyone getting federal gov’t spending dollars performed a service, provided some goods, they ‘provisioned’ the federal gov’t, which carries forward, in a non-stop trade-off of labor for dollars. Regarding those tickets collected in the analogy, before being ‘ripped up’, ‘destroyed’, ‘discarded’, those tickets were counted, those tickets indirectly funded the stadium. Any non federal gov’t debit entry (taxes) triggers an automatic, equal and opposite federal gov’t credit entry (fund) which is immediately debited out (surplus spending). But again, the more important point is that unlike over at ‘Local Gov’t Stadium’ and at ‘State Gov’t Stadium’ where those tickets are needed to fund their spending, at ‘Federal Gov’t Stadium’, those tickets are not. To be clear, ‘Federal Gov’t Stadium’ is still getting funded like the other stadiums, but unlike the other stadiums, as a monetary sovereign, it doesn’t actually need that funding for spending, or more specifically, its spending is no longer by constrained by ticket sales. That’s why there are so many more arguments with the accountants about expenses at ‘Federal Gov’t Stadium’…

 

J.D. Alt, author of ‘The Millennials’ Money’, has a video that perfectly visualizes how our monetary system works with both his ‘old diagram’ (the narrative using gold standard mentality) and his ‘new diagram’ (the reality using the MMT description). The video is perfect…because….J.D. doesn’t veer away from that MMT pillar that says taxes are NOT NEEDED to fund spending. Instead of innocently misinterpreting that MMT pillar with ‘taxes don’t fund spending’, J.D. says it correctly. In his video he says “The federal gov’t DOESN’T NEED the cancelled iou in order to issue and spend new fiat dollars” and “The sovereign federal gov’t HAS NO NEED to harvest what it can create on its own anytime it needs to.” Furthermore, J.D. Alt offers suggestions for new mainstream thinking. For example, he suggests that we all start saying “Net Spending Achievement” instead of federal gov’t deficit spending, and call the national debt “The National Savings.” I give J.D. Alt a lot of credit for understanding that this is a giant leap in new thinking for most people, and he is very careful to include those words ‘not needed’ in his statements…because…as he also says in that video, “We need to make sure we use the right terminology.”

 

Federal taxes fund surplus spending and US Treasury bond sales fund deficit spending, BUT THAT IS ALL A CHARADE, an idiosyncratic relic of a bygone era. The MMT ‘enlightenment’ is that rather than believing the mainstream NARRATIVE that revenues are collected to fund federal spending, revenues ARE NOT NEEDED to fund federal gov’t spending anymore. If you are a professor or a lecturer (in a classroom) preaching to the MMT choir, then fine, go ahead, say ‘taxes don’t fund spending’, because fellow MMTers know what you ‘mean’, but if you are outside that MMT circle (in reality) and say that to a layperson who you are trying to enlighten, you will simply lose them fast. If you say it correctly, if you say ‘taxes are not needed to fund spending’, you will pique your listener’s intellectual curiosity and they will hopefully follow up with a question like, if revenues (federal gov’t taxes and federal gov’t bond sales) are not needed to fund spending, then what are they needed for? My suggestion how to answer that: Federal revenues are needed as a federal gov’t fiscal and monetary policy function, not a federal gov’t financing function, meaning that the purpose of federal gov’t taxes and federal gov’t bond sales today, under the guise of ‘financing’ the economy are actually regulating the economy. Revenues today are only needed to finance users of currency, like households and businesses, in their quest to balance budgets; however, in the post gold standard, modern monetary system, revenues to any monetary sovereign, perform more important functions for the issuer of currency, to balance their economies. US Treasury securities sales (short-term bills, medium-term notes, long-term bonds) provide users of US dollars a safe, risk-free place to park their dollars, to fulfill their savings desires. Treasury securities are actively traded in a liquid global bond market which serves as a safe harbor for dollars taking a flight to quality away from risky assets, into risk-free assets, like Treasury bonds, during worldwide market turbulence (which further solidifies the US dollar’s stature as a world-class reserve currency). Treasury securities are tools used in monetary policy to set the price, or interest rate of dollars; and in fiscal policy to increase aggregate demand to stimulate the economy with more deficit spending (Treasury bond issuance acts as a dollar drain that neutralizes the inflationary bias of that net financial add, that increase to the money supply, of that deficit spending). Rather than financing the federal gov’t, federal revenues today are mostly needed for two things. In his prophetic 1946 article, NY fed chair Ruml writes that federal taxes are obsolete when it comes to financing the federal gov’t because for any monetary sovereign using a pure, fiat currency, federal taxes are only really needed to control inflation and serve public purpose. MMTers expand on this, that federal taxes are also needed to create the initial velocity and continuous demand for the currency by requiring that federal tax must be paid in the currency issued by the federal gov’t. Furthermore, federal taxes are also needed to balance the economy by redistributing wealth to widen prosperity. Finally, federal taxes are also needed to ‘create’ unemployment. The federal gov’t does this in the exact same way that a parent starts making their child pay for stuff they want. In order for the now ‘unemployed’ child to make those payments, the child must start doing chores and earn an allowance. The parent is doing this to force the child to help provision the household. Afterwards, when the child, spending the earned allowance, pays the household, in exchange for wanted privileges, the child is technically funding the household, but financing the household is not the real function of collecting the child’s allowance, the child’s allowance is not needed to fund the household’s spending…

 

A recent comment by Brandon Verdier put it succinctly, “…the presence of federal tax is what allows us to spend more without experiencing more inflation than we are comfortable with.” Geoff Coventry also recently put it very nicely, “…the primary purpose of federal taxation is to maintain stable demand for government currency and offset the economic effects of its issuance.” In my opinion that’s a much better tact to take rather than saying to someone that their federal taxes don’t fund spending. My fellow MMTers, I know you won’t agree with this post (in my last That Isn’t Entirely Accurate posting only one brave soul, Jim Morley did), but when doing the good deed of spreading the MMT gospel, may I suggest losing the ‘taxes don’t fund spending’ catchphrase. If you tell people outside MMT circles that their federal taxes, their hard-earned cash, confiscated from their earning, that they are painfully watching come out of their paychecks, over three trillion dollars last year, and then you say ‘they don’t fund spending’, you won’t change minds…

 

Finally, in addition to stop saying ‘taxes don’t fund spending’ (and start saying ‘taxes ARE NOT NEEDED to fund surplus spending and ‘borrowed’ money IS NOT NEEDED to fund deficit spending’), I suggest MMTers also stop getting hung up on that ‘the deficit spending is the beginning, it has to come first, BEFORE taxes are paid’ thing. The way I see it, step one is, taxes defunds net financial assets; then step two, surplus spending refunds that decrease of dollars in the banking system; and step three, deficit spending funds increases of net financial assets. If you want to say number three comes first, FINE, go ahead, but it really doesn’t matter, because once you step back from the picture, you will see that all three are part of huge cycle, an ebb and flow, a perpetual motion, a man-made economic ecology, inside our very own US dollar dominion. There is no ‘beginning’ or ‘end’ on this like on any other circle.

 

In closing, I submit to the court, the enclosed video, as Evidence A, @ 5:52 the question is posed from Steven D. Grumbine, Real Progressives webcast host to his guest, Warren Mosler: “Federal taxes do not fund spending, right?” and the answer is, “…I don’t actually say it that way… You don’t need to say it that way…To use an ambiguous word like fund…because to fund something means different things to different people”. Bingo. That answer was not “Yes, that’s right, that’s correct, and whoever disagrees or posts otherwise doesn’t understand MMT”, that answer was Q) Federal taxes do not fund spending, right? A) Wrong. Interpret that as him wavering on ‘federal taxes do not fund spending’. Keep saying it if you want but keep in mind, he doesn’t say it that way, because it’s missing the point, it’s ambiguous and it’s not entirely accurate.

 

About a month later, during another webcast, Steven asked Iain Dooley, Economics Adviser, of the Australian Workers Party:

Q) “Taxes don’t fund spending right?”

A) “ I think that’s the most contentious statement that MMT makes.”

I rest my case.

 

Local gov’t taxes are needed to fund spending…State gov’t taxes are needed to fund spending…however…* Federal gov’t taxes ARE NOT NEEDED to fund spending.

 

 

eddie d

eddiedelz@gmail.com

 

 

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