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 an MMTer (Modern Monetary Theory 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…


In a post titled “Modern Monetary Theory (MMT) Critique”, Cullen Roche, founder of Orcam Financial Group, cites five MMT ‘flaws’, or in his words, the five ‘myths’ of MMT. As per John Biesterfeldt, creator of the popular Facebook website ‘Intro to MMT’, Cullen and others in his camp like economist Jan Hatzius of Goldman Sachs are smart guys and considered ‘MMT compliant’ (meaning they know what they are talking about and are seldom wrong). In his very first ‘myth’, Cullen takes aim at ‘taxpayers don’t fund anything’. By the third ‘myth’, Cullen makes this damning indictment: “(MMT) even goes so far as to create their own alternative reality wherein they consolidate the Fed into the Treasury to make their fantasy accounting world appear more accurate. They literally create a fictional world in order to make the flawed accounting look correct.” Cullen has a point there. MMTers that say ‘taxes don’t fund spending’ have simply waved bye bye to bookkeeping, to basic accounting reality. For example, when debating a so-called ‘Deficit Owl’, I was told, and I quote, “There’s no such actual tangible or concrete thing as surplus spending or deficit spending” unquote (why offline that person is now referred to as The Owl That Lost His Glasses). John Biesterfeldt, in response to another misguided statement that ‘US Treasury bond sales do not fund spending’, replied that “Treasury bond sales fill Treasury’s (General Funds) account at the Fed, and that (deficit) spending comes from that account”, the perfect answer, simply because it’s true. Tax revenues are also posted to this same General Funds Account, which is Treasury’s checking account at the central bank (which is just like your checking account at your bank that you use to fund your spending). Don’t take John’s word for it, go see for yourself, go to the website of the US Department of the Treasury, where it says that the “US Treasury oversees the disbursement of payments to the public,” meaning the Treasury is paying for the spending. Every year, on April 15th, when you pay your federal taxes due, you must make your check or money order payable to the ‘United States Treasury’, meaning your taxes fund that (surplus) spending. Sure, your taxes, your dollars, are ‘destroyed’, those dollars are debited, out from the banking system, and then ‘different’ dollars are issued (by the issuer of dollars) to pay for that spending, but that doesn’t mean your dollars were not credited to the Treasury, not credited towards surplus spending. At the very same time that your taxes are ‘destroyed’ on one ledger, your tax dollars also ‘destroy’, to the penny, an equal amount of federal gov’t deficit spending on another ledger. Your taxes reduce the amount of deficit spending. Without federal tax revenues, deficit spending would have been $3.8T in 2016, but deficit spending was only $0.5T in 2016 because taxes ‘destroyed’ the rest. The pure MMT thinking is that federal revenues like Treasury bond sales and taxes ARE NOT NEEDED to fund spending, not the nonsensical notion that they don’t at all. Some folks however, have co-opted MMT to advance their causes, to push a special interest, or to shill for a political movement. They aren’t promoting MMT, they’re only promoting themselves (under the guise of promoting MMT). Ober Meister (pure MMT), commenting on a Facebook thread, explains why the ‘taxes don’t fund spending’ crowd says it that way: “Most people don’t use accounting identities, mathematics or even logic while reasoning. They use praxeology (metaphorical thinking and moral ‘framing’ like Orwellian gimmickry) to argue economic policy, using morality and ethics to derive conclusions instead of mathematics.” In other words, when saying ‘taxes don’t fund spending’, these MMTers mean well, but they have no idea how ridiculous they sound…


All MMTers 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 some 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 some MMTers hide their ‘sectoral balances’ chart* and say that our deficits, that our federal taxes, didn’t fund those surpluses, didn’t fund those federal gov’t savings?

* [G – T] (federal gov’t) = [S – I] + [M – X] (non federal gov’t) 

At the beginning of the fiscal period, before any federal spending (G) or federal taxes (T) or imports (M) or exports (X):

[Gov’t spending – Taxes] = 0

[(S)avings – (I)nvestment] + [iMports – eXports] = 0

(federal gov’t) 0 = 0 (non federal gov’t)

Then we have total federal gov’t spending of $100 (100%) before including any federal gov’t revenues (based on actual 2016 figures):

G – T = 100 – 0

S – I  +  M – X = 100

(federal gov’t deficit spending) 100 = 100 (non federal gov’t surplus Savings or Investment)…

Next we factor in total federal gov’t revenues of 85 (85%) with that total spending (based on actual 2016 amounts):

G – T = 100-85

S – I  +  M – X = 15

(federal gov’t deficit spending) 15 = 15 (non federal gov’t surplus Savings or Investment)…

Here’s the exact same thing again, except this time we show the total federal gov’t revenues first:

G – T = 0-85

S – I  +  M – X  =  (-)85

(federal gov’t surplus) 85 = 85 (non federal gov’t deficit spending or ‘dissavings’). In other words, a non federal gov’t ‘defunding’, an actual clawback, of net financial assets)…

As usual (as per the accounting construct of the Consolidated Balance Sheets of the US federal gov’t), any federal gov’t surpluses no matter the source (on-budget or off-budget), are immediately ‘spent’ on-budget (credited towards day-to-day operations):

G – T = 85 – 0

S – I  +  M – X  =  85

The running balances are (federal gov’t balanced budget) 0 = 0 (non federal gov’t Savings or Investment). In other words, there was a non federal gov’t ‘refunding’ of net financial assets, that makes whole the previous claw-back, which reverts the running balances back to the same amount at the start of the fiscal period…


Finally, additional federal gov’t spending of $15 (15%), the remainder of total annual federal gov’t spending (based on actual 2016 figures):

G – T = 15 – 0

S – I  +  M – X  =  15

(federal gov’t deficit spending) 15 = 15 (non federal gov’t surplus Savings or Investment). In other words, a non federal gov’t ‘funding’, an actual addition of net financial assets of 15% of total federal gov’t spending in 2016…

NOTE: Depending on the difference of iMports minus eXports (the US trade balance), the addition of net financial assets gets whacked up within the non federal gov’t (between the non federal gov’t / domestic and the non federal gov’t / international). Of the $552B in total federal gov’t deficit spending in 2016, the non federal gov’t / domestic (a.k.a. the US private sector) got $49B and the non federal gov’t / international got $503B…

    Same goes for the double-entry, ledger-book accounting system that all MMTers stand firmly behind. All MMTers agree that for every federal gov’t deficit, there is, by accounting identity, to the penny, a non federal gov’t surplus. This is absolutely correct. However, when talking about federal taxation, that DEBIT entry posted against the non federal gov’t, some MMTers then ignore the double-entry reality, saying that those dollars were ‘destroyed’, period. These MMTers don’t see federal taxation as a swap (a simple redistribution of purchasing power from the rich to the not-so-rich). They are only looking at the reserve ledger, they only see that dollar ‘drain’ after taxes are paid, but they don’t see that simultaneous, equal and opposite CREDIT entry posted to another federal gov’t ledger, which in turn is immediately debited and credited back to another non federal gov’t ledger (added right back into net financial assets, via surplus spending). As long as the federal gov’t is running annual budget deficits (as long as there is deficit spending once taxes have stopped funding surplus spending), federal taxes, at the end of the day, go right back from whence they came.


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’. That said, there are some characteristics of the Fed that lead many folks to believe (incorrectly) that the Fed is ‘private’. For example, even though it is part of the federal gov’t, the Fed 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 at the Fed, like for example, at the time of this writing, the $2T of mortgage-backed securities (MBS) that the Fed purchased during the Large Scale Asset Program (LSAP) and presently held on the Fed’s balance sheet. So to this day 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 right now 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. In other words, payments from the private sector *literally* funded gov’t (Fed) spending in 2016. Furthermore, any profits after funding the Fed’s expenses are handed over to the Treasury. Last year the Fed sent a record $97.7 billion in profits to the U.S. Treasury. Same as you paying federal taxes, when the Fed paid that amount, it was debited (‘destroyed’) on one side of the federal gov’t accounting seesaw, that amount was then promptly credited on the other side of the federal gov’t accounting seesaw, and immediately debited (using newly-created dollars) right back to the private sector for on-budget expenditure (federal gov’t surplus spending). In other words, exactly the same as when you pay federal taxes, these Fed payments sent to the US Treasury (the same place you make out your check to whenever paying US federal taxes) were ‘destroyed’, but that’s just half of the story. These revenues are simultaneously reducing the deficit spending portion of total federal gov’t spending. Q) What funded this reduction in deficit spending? A) Revenues. Semantics aside, the MMT pillar is that revenues ARE NOT NEEDED to reduce deficit spending, that revenues, like taxes ARE NOT NEEDED to fund spending (not ‘taxes don’t fund spending’). Anyone like one of these ‘No Such Thing As Surplus Or Deficit Owls’ thinking ‘Federal revenues don’t fund federal gov’t spending’, simply has it wrong. The correct thinking is that we, our revenues, don’t fund federal gov’t spending PER SE (Latin for “by itself”). Meaning that even though federal gov’t revenues are intrinsically part of funding federal gov’t spending, they ARE NOT ESSENTIAL to funding federal gov’t spending.


The paradigm difference between the gold standard era and the post-gold standard era is that federal gov’t revenues became obsolete as a federal gov’t financing operation. The federal gov’t, or any issuer of a non-convertible, free-floating (pure fiat) currency 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’. Interpret that as saying that while those taxes are indeed funding surplus spending, because the federal gov’t is now the issuer of fiat dollars, in the post-gold standard, modern monetary system, there is no longer any constraint for any monetary sovereign spending beyond taxpayer revenues, since those federal gov’t tax dollars or any federal gov’t revenues whatsoever actually NEED NO LONGER fund federal gov’t 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).” That’s wrong. (As per Beckoning Frontiers, written by Marriner Eccles, Chair of the Federal Reserve from 1934 – 1948, who coined the term ‘High Powered Money’, prior to The 1951 Fed-Treasury Accord, the Treasury, who then also didn’t fully understand the difference between ‘HPM’ and ‘newly-created dollars’, sold its bonds either to non-bank investors paid for with existing dollars that decreased net financial assets from the banking system or directly to the Fed, paid for with newly-created dollars that added net financial assets to the banking system). Modern federal governments finance all of their spending through the direct creation of new money (because taxes ‘destroy’ dollars), but all of these newly-created dollars funding total federal gov’t spending are not HPM. What she’s missing there is whether the newly-created dollars funding federal gov’t spending IS a net increase of dollars in the banking system (is HPM), or IS NOT an addition of net financial assets (not HPM). Regardless, to be fair, 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’. 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 in the ledger book where the surplus spending stops being offset (stops being funded), by tax 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 unlike surplus spending, those newly-created federal gov’t dollars that fund deficit spending PLUS the simultaneous addition of newly-created Treasury bonds 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 don’t 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. Dr. Kelton, yes, ok, the tickets (taxes) are ‘destroyed’ at the turnstile (the reserve ledger) but that doesn’t mean THEY AREN’T COUNTED. The stadium (federal gov’t) is ‘destroying’ (debiting) the taxes, but of course that 70,000 seat stadium is counting (crediting) them, counting the people (dollars), making sure they don’t let in too many (inflation). How does an MMTer say ‘taxes are only to control inflation’ but then also says taxes aren’t counted (aren’t funding surplus spending) with a straight face? Saying that taxes are simply ‘destroyed’ and do not fund spending is like saying that the gas (taxes) you put in your car doesn’t make the car go, only the wheels make the car go, and the gas doesn’t ‘fund’ acceleration because the gas is ‘destroyed’ in the engine. Saying that your taxes do not fund spending because they are ‘only points on a scoreboard’ is like saying to the football player that his touchdown didn’t put the seven points up. If some MMT academic pointing to her 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 (someone who is interested in learning about MMT) who knows exactly who funded those seven points is not going to agree at all (setting back the MMT cause). This schoolroom notion that federal gov’t spending is just dollars being ‘keyboarded in’, that it’s only just a ‘1’ and a ‘0’, and nothing more, oversimplifies what is happening in the real world. In a June 2017 Real Progressives broadcast, Warren Mosler said “if you were to pay your taxes with a bunch of old twenty dollar bills, the gov’t would take your money, give you a receipt, say ‘Thank You’ very much FOR FUNDING the last airstrike in Syria or whatever THEY DID WITH THE MONEY, and that money goes out the back door, into a shredder.” Mosler’s point there was not ‘taxes don’t fund spending’, it was that the users of dollars (you and I) are different from the issuer of dollars (the federal gov’t). When you or I receive dollars (a $20 bill), we USE those same dollars (that same $20 bill) for spending, whereas the federal gov’t does not, because the federal gov’t ISSUES new dollars for spending. Total federal gov’t spending in 2016 was $3.854T. Taxes ‘destroyed’ dollars in the banking system and new dollars were issued to fund all that total spending, but not all that total spending of $3.854T was deficit spending. Not all that total spending was a net addition of dollars in the banking system. In 2016 only $0.587T was deficit spending. What reduced the amount of total federal gov’t spending, funded by newly-created dollars, from $3.854T in 2016 to only $0.587T of deficit spending? The answer, surplus spending, funded by taxes, is obvious to most, including Mr. Mosler (except the MMT ‘academics’ that say ‘taxes don’t fund spending’). Taxes ‘destroy’ dollars, yes, so all federal spending is newly-created dollars, sure, but what these academics don’t see is a very important distinction, which is that ALL federal spending IS NOT adding net financial assets (IS NOT increasing dollars in the banking system). Only deficit spending (15% of total spending in 2016) adds net financial assets (actual “HPM”), and the newly-created dollars of surplus spending DOES NOT. Surplus spending doesn’t add net financial assets because surplus spending is funded by taxes (makes whole a previous ‘destruction’ of net financial assets). Only deficit spending adds net financial assets. Every fiscal year, the amount of federal gov’t deficit spending is reduced, is offset, is funded by taxes. Another important distinction, unlike deficit spending, surplus spending (85% of total spending in 2016) DOES NOT need Congressional approval, because it is funded by taxes. Furthermore, all federal spending isn’t the same, like 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, circular, trade-off, inside a man-made ecology of labor for dollars. Regarding those tickets collected in the analogy, before being ‘destroyed’ (on one side of the seesaw), those tickets were counted, and those tickets offset deficit spending by funding the stadium’s surplus spending (the other side of the seesaw). Any non federal gov’t debit entry (payment of taxes) triggers an automatic, equal and opposite, federal gov’t credit entry (receipt of funding), and like any revenue, is immediately debited out (surplus spending) against on-budget federal spending. The same goes for federal revenues from Treasury bond sales as well. Semantics aside, the more important point is that unlike over at ‘Local Gov’t Stadium’ and unlike over at ‘State Gov’t Stadium’ where those tickets (taxes and bond sales) are needed to fund their spending, at ‘Federal Gov’t Stadium’, those tickets ARE NOT NEEDED to fund spending (that’s not saying they don’t at all). To be clear, ‘Federal Gov’t Stadium’ is still getting funded like the other stadiums, but unlike the other stadiums, as a monetary sovereign, ‘Federal Gov’t Stadium’ 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.”


The MMT ‘enlightenment’ is that total federal gov’t spending (both surplus and deficit spending combined), is ‘cash-financed’, while using a narrative, a charade, a bygone idiosyncratic formality, that federal spending is ‘tax-financed’ and ‘bond-financed’. That’s not saying that those revenues ARE NOT funding federal gov’t spending, that’s saying that 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? That’s a much better way to start the MMT conversation.


The answer to ‘then what are revenues needed for?’ is 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, are actually maintaining price levels and regulating the economy, behind a facade of ‘financing’ the economy. Revenues 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. Fellow MMTers, 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’, also I suggest some MMTers 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, just 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




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