The silliest substantiation for ‘taxes don’t fund spending’ ever


If you hear an MMTer (proponent of Modern Monetary Theory) say ‘taxes don’t fund spending’, assume either the speaker is simplistic, or the speaker thinks the audience being spoken to is simplistic.


How do we know that what Professor L. Randall Wray says in that 2017 Real Progressives broadcast (‘How Does The Federal Government Actually Spend’) is being ‘simplistic’? Here you go, right from the horse’s mouth, the very first line in the video: “It’s complicated, but it can be simplified”…”and so I’m going to simplify it but the way I’m simplifying it is not at all misleading.”…”What I’m saying is a simplification but it is not dishonest at all”…”it’s not misleading you.” (When someone says something like ‘no bullshit’, 3x in a row, right before saying something, take a wild guess what’s coming next).


“If you go back to the colonies, every time, say the Colony of Virginia, they would pass a law authorizing the colonial gov’t to print money (paper Treasury notes), they also would pass a law to impose taxes…and the tax they imposed was equal to, would generate the amount of revenue, equal to the amount of (paper Treasury) notes they were going to issue”…”Do you know what they did with the paper notes they got back in tax collection?”…”They burned them.”…”That makes it very clear how it worked.”…”Did the Colony of Virginia need the tax revenue to make their payments?”…”Clearly not.” Bullshit…What happened in Virginia was ‘clearly’ the exact opposite of that. In 1755, not only did taxes have to fund spending in Virginia, they had to start funding spending in England for the Seven Years War (a lot more spending). British pound sterling, personal bills of exchange, promissory notes, Spanish silver coins, other gold coin specie, and even tobacco, beaver skins or wampum, were all accepted for payment in the colonies, were all considered ‘real money’, ‘hard money’, or ‘commodity money’ (what all combined then we today call ‘legal tender’). So what would happen if money in the colonies was put on a boat and sent to England to fund spending in Europe instead of funding spending in the colonies? Any ‘drain’ like that can create destructive deflationary forces. The solution would be to introduce another form of legal tender money of an equal amount of these lost tax revenues to reflate the money supply. Which is exactly what other colonies had done while paying military expenses for England’s other military expeditions before, and is exactly what Virginia did for this one in 1755.


“They needed the taxes to get the money back to burn it, to remove the notes from circulation, to prevent inflation, it was not to allow them to spend the revenue, they didn’t spend it, they burned it”…”Taxes clearly didn’t fund spending in Virginia in 1755.” Bullshit…Taxes paid in paper Treasury notes were burned ‘so those taxes couldn’t have funded spending’, sure, but that’s not the whole story. The rest of the story is that during The Seven Years War, some Virginia taxes paid in hard money funded local commonwealth spending and some taxes paid in hard money was sent to England to fund international military spending. If taxes were paid in hard money (if some of that tax money was leaving Virginia), then to counter deflationary forces, Virginia would issue new paper notes. If taxes were paid in paper Treasury notes, no new notes were needed to be issued and spent into their economy—because no additional notes were needed to re-supply any hard money lost. Here’s how this worked: By issuing paper Treasury notes, that ‘add’ replaced the ‘drain’ of hard money from Virginia (the *literal* voyage of hard money out from Virginia’s economy)—with the goal of keeping the local money supply unchanged to prevent deflation. When any Virginia tax was paid in hard money like tobacco or gold coin—which was 20% of taxes paid during the Seven Years War—most of that money would be sent to England to fund spending. So to resupply that lost money, new paper notes would be printed and entered into the economy to maintain the stability of prices. If any Virginia tax was paid with the paper Treasury notes—which was 80% of taxes paid during the Seven Years War—no new notes were printed and when the war was over, since those notes served their purpose, at collection they were burned. So what was really happening here, the actual teachable moment, was that this was the prototype of 20th century Fed ‘open market operations’ that maintains price stability. Depending on whether the Virginian taxpayer made a payment in hard currency or not, the issuing and burning, the adding and draining, the easing and tightening of colonial Treasury notes—of money—to maintain price stability in 1755, was the precursor to the Fed buying and selling modern day Treasury notes from the secondary bond market for a similar reason.


“It was NOT to allow them to spend the revenue, because they never spent the tax revenue”…”They burned all the tax revenue.” Bullshit…Professor Wray leaves out an inconvenient fact that doesn’t fit the ‘taxes don’t fund spending’ narrative, which is that they ONLY burned the paper Treasury notes, and NOT the tax payments made in British pound notes or tobacco bales that was also collected. They didn’t burn the personal bills of exchange or promissory notes that was also used to pay Virginia taxes, nor did they ‘destroy’ the Spanish silver coins plus other gold coin specie, those hard money payments of TAXES, WHICH FUNDED SPENDING in both Virginia and England starting in 1755.


“The Fed was created in 1913, we were an unusual country, we didn’t have a central bank, we got by without one.” Bullshit……We weren’t ‘getting by without one’. Our country was suffering numerous banking panics and prolonged economic depressions without one. The Fed was the fourth attempt at a central bank that finally stuck. Sure, there was not a central bank in 1913, but what about those three other central banks we had earlier, the precursors of the Federal Reserve System, that because of populist opposition, did not have their charters renewed? Alexander Hamilton, our first Treasury Secretary, oversaw the chartering in 1791 of the First Bank of the United States, our second attempt at a central bank, which assumed all the Revolutionary War debt, and started collecting excise TAXES, WHICH FUNDED SPENDING.


“The Fed was created to be the Treasury’s bank, so instead of the Treasury just printing up notes in order to spend, and then receive them back and burn them, what the Treasury will do is have the Fed make their payments for them, so the Fed, since 1913 makes all the Treasury payments”…”If you’re a contractor selling something to the gov’t, the Treasury, they tell the Fed ‘please make a payment to this guy’s bank account’, the Fed credits you, the Fed credits your bank’s reserves, that’s how the Treasury spends”…”Now when you on April 15th pay your taxes, you write a check to the Treasury, the Treasury then tells the Fed to ‘please debit this guy’s bank account’, the Fed debits you, the Fed debits your bank’s reserves”…”So the Treasury spends by the Fed crediting bank reserves and the Treasury receives tax payments by debiting bank reserves, it’s functionally equivalent to burning the paper notes, so nothing I just told you is misleading.” Bullshit…When you pay your taxes to the Treasury, before your tax dollars are ‘burned’ from your commercial bank, the Treasury tells the Fed to credit, to FUND, the Treasury reserves account at the Fed in the exact amount, to the penny, of your tax payment. It is a misrepresentation at best, or you sound like a fool at worst, telling people that their federal tax dollars just go *poof* and don’t trigger credits to other accounts. The MMT pillar is that since the federal gov’t is no longer spending gold backed dollars, and now spending fiat dollars, those taxes ARE NOT NEEDED to fund spending—not that they don’t at all. The paradigm difference is that in the post-gold standard, modern monetary system, for any issuer of fiat dollars, revenues as a financing operation takes the backseat.


The last line in the video: “That was beautifully simple…”

AGREED…It was beautifully SIMPLISTIC.


Thanks for reading,

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P.S. Another inconvenient fact that doesn’t fit the ‘Virginia burned the taxes so clearly taxes didn’t fund spending’ narrative is that the Commonwealth of Virginia in 1755 was a USER OF CURRENCY (just like the State of Virginia today)—so any MMTer that likes to regurgitate the dopey ‘taxes don’t fund spending’ catchphrase, may want to at least rethink saying that they burned the taxes in Virginia to substantiate it. Don’t get me wrong, Professor L. Randall Wray is one of the great ones; however, even the great ones do swing and miss sometimes, and saying ‘taxes don’t fund spending’ is a miss. Please know that I understand when any MMTer says it, that they mean well. There is no doubt in my mind that all MMTers understand that description of “the workings of the monetary system, what’s gone wrong and how gold standard rhetoric has been carried over to a nonconvertible currency with a floating exchange rate and is undermining national prosperity” (Mosler 7DIF). Warren Mosler, the father of MMT, has explained many times before why saying ‘taxes do not fund spending’, is wrong because the MMT pillar is ‘taxes ARE NOT NEEDED to fund spending’ (not that they don’t). Warren Mosler doesn’t say ‘taxes don’t fund spending’ because in his words, “it’s ambiguous.” In other words, saying ‘taxes don’t fund spending’ shows a lack of banking experience and a confusion with simple financial concepts like ‘funding’ (which gets ironically weird if MMTers say ‘taxes don’t fund spending’ while lecturing other people on banking and finance). Saying ‘taxes don’t fund spending’ also shows a lack of understanding that even though we left the gold standard, and we are now a monetary sovereign, some remnants, several old processes, many accounting constructs, US appropriation laws, of the past monetary system, ARE STILL IN PLACE, and we need to recognize these complexities. If we want to make the MMT case to experts in the field (the folks we need to change these pesky accounting rules and US laws), oversimplifications are not good enough for them. Whatever politics someone has, whatever spending on public purpose anyone wants, for the common good, for the country, is fine by me. I’m just trying to help the MMT cause by pointing out how ridiculous any MMTer sounds when saying ‘taxes don’t fund spending’, no matter how simplistic the choir (and how silly that choir looks when not challenging anyone sounding ridiculous).



“The federal gov’t spends money into existence … and deletes money out of existence when it taxes … the taxes don’t pay for anything, they are literally deleted. When you go to a baseball game … and a guy smacks a homer and they put a ‘1’, one run, on the scoreboard … but then on the replay they realize that the ball was foul, it was a foul ball, they take the ‘1’ off the scoreboard. Where did that ‘1’ go? Where did it come from? Did they have to tax somebody to get that run? Or did they just keystroke that run on the board? That’s how banking works.”—Steve Grumbine, Real Progressives, 01/04/19, reciting Professor L. Randall Wray’s baseball scoreboard analogy

No, that’s not how banking works.

That’s how folks (who take the ‘scoreboard’ analogy too literally) pushing political ‘prescription’ MMT (under the guise of being about banking) works.

The person that hit that homer, that blood, that sweat, those tears that went into the effort (the production) to knock that ball out of the park, is what ‘funds’ that ‘1’ on the scoreboard.

If the ball was ruled foul, then that ‘1 Run’ (that ‘asset’) is ‘debited’ (‘drains’) from the ‘Run’ ledger, and then that ‘1’ is ‘credited’ (‘drains’) to the ‘Balls & Strikes’ ledger—that ‘1 Run’ becomes a ‘1 Strike’ instead.

The ‘1’ went from one part of the scoreboard to another—that ‘1’ didn’t leave the scoreboard.

That ‘1’ didn’t leave the banking system.

That’s how banking works.