There is no “tax and spend.”

Not long ago I read William Greider’s Secrets of the Temple: How the Federal Reserve Runs the Count­ry (1989). I had read it in the early 1990s, but really didn’t fully understand the story’s implications at that time. Hard to say why I missed some really solid connections to the power of money, the power of the Federal Reserve, and the half-truths and outright lies that many of us have lived with for generations.  We’ve all heard it from politicians and talking heads on the TV. “Well, how are we going to pay for that?”  “You’ll have to raise taxes.” After a second thought, here’s my take on it.

The big lie: “The purpose of taxes is to raise funds for government spending.”  Because we live in a “sovereign country” with a fiat money system our government does all its spending through the creation of new money. Taxes are not spent, but rather, are used to remove – more like “erase” using key stokes – some of the money that has already been spent.

The other big lie:  “We need to balance the federal budget and pay off the national debt.”  How many times have you heard that one?  As the sole issuer of the nation’s money, sovereign governments aren’t constrained like states, businesses or households at all.  However, most people believe sovereign governments have to tax in order to spend.  I suppose this is partly because state, county and city governments or those nations which have given up their sovereignty by using another currency do need to balance their budget each year. Governments that can’t create fiat money are forced to operate like a household or business, spending only as much as their tax receipts plus any approved borrowing.  But this just isn’t the case for the national government.

From these basic, big lies, come a litany of connected lies that most people fall for, hook, line and sinker.  Here are few of my favorite, common perennial myths:

What happens when the sole issuer of the nation’s money does “balance their budget?”  What this means is that the government would tax (retire) all the money it issued into the economy each year – take every dollar issued out of circulation.

This would be the height of irresponsibility.

I realize that acting responsibly isn’t high on the agenda these days, but let’s pretend for a minute that someone in Washington, D.C. really does care.  A responsible government tries to stabilize the economy to achieve and maintain full employment. The purpose and intent of issuing money should be used for public purposes – for the national public good, for the health and well-being of its people, for the environment, and for a sustainable economy.

The power vested in the government to issue money is not about taking it away from businesses or working families. Issuing government money comes first.  That money is spent into the economy.  A “deficit” is new money that has been spent into the economy and has not yet been taxed back out to compensate for our natural inclination to save some of our hard-earned money.

Part of our confusion also comes from the fact that for a long period of history national currency systems had fixed exchange rates and promises to convert their currency to gold on demand. Until 1971 the U.S. dollar was convertible to gold.  That’s long been over, but we can’t seem to get over it.  We act like our national money is still constrained by amount of gold stored in Fort Knox. Now we are free to issue our own currency for our national interests and for our people.

Sovereign dollars are the government’s IOU which we can return to the government in payment for our taxes. When taxes are paid, the IOU is taken off the books. If the government needs to spend, it creates new money.  Taxes serve no funding purpose for sovereign governments.

It is true for all sovereign nations that issue currency and have a floating exchange rate, that government spending must precede taxation, not the other way around.  We need to obtain government-issued currency first before we can return it to the government in payment for any taxes owed.  There’s no need to raise taxes every time we want to fund a new government program or project.  There is no need to cut one government program in order to “free up” money for another one, or a new one.  Congress’s “pay-go” constraint on spending is actually creating unnecessary unemployment and recessionary pressure on the economy.

Do not misunderstand, taxes are important.  Through paying taxes money is universally accepted throughout the nation.  We all need that money to pay our taxes. Taxes create adequate demand for the government-issued money. Without taxation no one would accept the government “fiat” money in payment for anything.

Taxes also help to regulate the economy so it can create full employment and as a tool to keep inflation at bay.  Taxation can be increased (removing money from the economy) when too much government money has been added relative to the productive capacity of the economy. Taxation can be reduced when there’s not enough money in the economy to buy all the productive output of the nation or when the private sector increases savings (which means weaker buying of goods and services), which creates unemployment.

Taxation can also be used to direct resources for the good of the people or for the environment that are otherwise being poorly distributed by the “natural forces” of so-called capitalism.

One moment in Greider’s book stood out to me. It’s pre-election1984, The Reagan miracle is rolling along, when the Fed reverses course, begins “tightening,” effectively killing Pres. Reagan’s “boom” after just 18 months.

“The civic mythology of representative democracy was also exquisitely mocked by these events.  In the middle of a presidential election season the President was impotent.  It was not his decision and he could not stop the Federal Reserve from making it.  The elected representatives in Congress were not even consulted.  Neither branch could object in candid terms without accentuating its own weakness.  The American public could hardly protest either, for the public did not know that the unelected government in Washington had decided to end the boom.”  (p. 620)

It’s time to end the incessant nonsense and bickering in Washington about “taxpayer funded” programs and a “balanced budget.”   Become well informed on how money works.  Then tell your congressman that taxes don’t fund anything.  If we force government to take back (tax) all the money it creates (spends) we will be killing any hope of saving, and we’re decreasing economic productivity, which creates unnecessary unemployment.  If your congressman know this already, and still feel the need to collectively punish the people they represent because of some ideological belief, well, we do indeed need a new system that prevents this kind of dead wood from being reelected.

Have a happy national tax day, everyone.

25 thoughts on “There is no “tax and spend.””

    1. I’ll fix it – I thought you did it for effect. It’s not a bad idea, visually – [you inadvertently put in an “H1”, or Heading 1 off the top menu.]

      And thanks for the great piece, some real “Econ101” for a change. A couple of things came to mind reading it –

      One, the national debt is comprised of IOUs for fiat money, so it could be wiped out with a pen stroke. But they will never do that.

      Two, the income tax, and I’ve been in that profession for a long time, is carefully crafted to harm working people. Typically it is taking 30% right of the top for people who cannot afford to give up 30% of their earnings. Couple that with excessive health insurance premiums, now required by law, and student loan debt, inescapable, and you have the three primary means of keeping people enslaved. And they know this.

      Essentially, it appears, income tax collections are going to pay interest on the debt, in other words, a gigantic siphoning off of wealth.

      Like

      Reply

      1. While you pay high health insurance premiums, you also have the destruction of health due to food. While you pay student loans you also have an artificial way of increasing education costs (so many non-academic administrative employees). While you pay taxes, you also have artificial economic recessions. Of course there are many more smaller things that they use to enslave the population little by little.

        Like

        Reply

  2. I don’t see an exception for “pay(ing) interest on the debt…” Government can, and will, spend the money it needs to spend. There is no constraint on spending. Another key stroke (book entry) from one account to another will take care of any interest due.

    Like

    Reply

  4. I think the entire economy is in a sense a hoax. I think concepts we are supposed to take as articles of faith- like “supply and demand” are illusion. I think everything on the national level when it comes to budgets and debts and taxes is fake. I think the entire financial industry is chicanery operating from entirely false paradigms. I used to that at least business news could be trusted! Surely the numbers can’t lie! Well that illusion has fallen from eyes.

    Liked by 1 person

    Reply

  5. The cyberattack on MM websites has lasted more than 72hrs… that should tell you really powerful people was(is) behind it. You need plentiful computing resources to execute something like that.

    Like

    Reply

      1. I’m 99% sure he should be fine. It is just a cyberattack, a very heavy one but that’s all. Me too, feel kind of bad to pick up the phone only when something bad happens.

        Like

        Reply

          1. I still can’t access MM website. This could all be an intel ruse to make him look like a victim. As much as I like MM, I can’t help but be totally distrustful in this day and age. Afterall, Allan Weisbecker (the potential MM conference attendee that MM rejected) thinks MM is from Tavistock. For what it’s worth.

            I read a graphic today on Free Thought Project and I don’t know how true it is but it sure captured my imagination:

            “Up until 1913 Americans kept all of their earnings. Despite this, America still had schools, roads, colleges, railroads, subways and an army and navy…Tell me again why people need to be extorted”

            Like

            Reply

            1. That’s not really true. Before 1913, Americans did pay taxes and fees to the public sector to fund its operations, although much of it was imposed by state and local municipalities, with the exception of the federal excise tax. Otherwise, how else did those “schools, roads, colleges, ….” get the funding needed to keep them running? In states like New York and California, they had income taxes, not to mention sales taxes.

              Also, Americans DID pay federal income taxes before 1913. It was first implemented in the early-1860s by Abraham Lincoln to provide additional funding for the Civil War, which in turn made the War Barons fabulously wealthy (it was also around this time that he established the IRS). However, the tax was ruled unconstitutional by the Supreme Court in 1894, and for almost twenty years U.S. residents haven’t paid it.

              The only difference between now and then is that in the 1900s, the public sector didn’t have as many responsibilities to cater to the population as it does now, so therefore its taxing and spending power was much smaller than what it is today. And I find it convenient that the federal income tax was reinstituted shortly before WWI, which was a huge boom for the war economy. The U.S. would later join the war effort, injecting billions of dollars from federal coffers into the pockets of arms dealers during that time, looting the Treasury in the process.

              Like

              Reply

          1. marguerite: you are beyond help then. if thinking so about MM floats your boat that’s your call. The best antidote for you would be to read MM papers thoughtfully. He’s the real deal… not the only one though. This blog adds their 2 cents too. That is what I think until facts change. If facts change, I change my mind… what would you do?

            Like

            Reply

  6. Nice piece Steve! Don’t forget the use by the Fed to inject “liquidity” into the U.S. economy through quantitative easing. I think the fed increased the monetary supply by around $2 trillion by buying debt from banks, mortgage-backed securities and t-bills. The theory being that the banks would put all this money into loans and stimulate the economy.

    Unfortunately a majority of the infusion was used for banks to invest in capital improvements or bubble up the stock market. So all that QE money really wasn’t spent into the economy as much as it was used to boost the bottom line of banks and pad the wallets of CEOs and execs through exorbitant salaries and bonuses.

    And when the stock market tanks, and banks loose all their equity when the next commercial real estate bubble bursts, well, too-big-to-fail takes on a whole ‘mother meaning. Particularly when all that QE balance either gets propped up through regular gov funding channels, or the fed loses it all through bankruptcy (except what the execs manage to skim.)

    Like

    Reply

  7. Thanks. QE is a variant, but similar, move that the Fed made in 1984. Since then, whenever faced with a tough choice, Fed decisions have consistently favored those with accumulated capital in the financial sector over the majority of Americans, who rely on “the real economy.”

    Like

    Reply

    1. For me not as a whole, but the idea of tax as “purchasing power removal” for certain classes is new to me, but very reasonable.
      I had been listening to doom-predicting financial analysts for a long time, until reality – non-occurence of the predicted financial collapse(s) – woke me up finally. This idea makes sense of the permanent “deficit spending” and apparent “stupidity” of central bank representatives (FED and others).

      Like

      Reply

  9. I actually thought this article was satire at first. The writer is clearly confused, lacking even a basic understanding of economics and what constitutes money.

    Balancing the federal budget does not mean all the money would be retired. You are looking at the situation from a Marxist viewpoint. You seem to believe all “money” comes from government and therefore it needs to spend more than it takes in or creates, otherwise the money disappears. Under our current system, the government does NOT issue money, so you are way off on this. Currency is issued by the private Federal Reserve. So please, let’s hear how taxing 100 and spending 100 would retire all the money in circulation…???

    When the government runs a deficit, it borrows by issuing bonds, which may then be purchased by the Fed which creates the currency/credit out of nothing. If you understood how things actually work, you would know that the Fed can also create reserves and purchase commercial credit and mortgages, not just Treasury bonds. Yet you’re telling us that if the federal government has a balanced budget, all the money in circulation would be retired? That is complete nonsense as the Fed could create $10 trillion tomorrow and purchase commercial credit, so how would that “money” be retired if the govt had a balanced budget?

    Also, you are totally confused on social security and all the unfunded liabilities. No, we cannot afford them. There is no “fund” at all. This is just a plain old Ponzi scheme in which taxes of today are immediately paid to social security and Medicare recipients. Even if the Fed created new “money” to fund these obligations into eternity, it can’t just print the $ and hand it out. It has to be borrowed into existence through further debt issuance, which only exacerbates the problem. Besides, do you really think creating new currency in vast quantities and using it to cover obligations is a legitimate way of honoring said obligations? In 10 years, if a SS recipient can only buy a pack of gum with their check, would you still say there’s no problem because the obligations are technically being paid?

    Like

    Reply

      1. Interesting booklet. I read about 25%, but I will finish it later. I believe it is better to include relevant external sources at the end of your post. Don’t wait for people to ask questions in the comments. Maybe some people don’t look at the comments carefully, so they can miss relevant links or sources.

        Like

        Reply

        1. Good idea. I didn’t have this source when I wrote the piece. I think the video I watched/listened to — two guys on u-tube — on the subject mentioned Mosler in a list among others coming at this from a similar perspective. Apparently, he began this and others have added to the mix.

          Like

          Reply

  10. I believe in the future they will use gold in relation to the SDR/XDR. They will pretend to bring about a more fair global economic system. Since XDR will become more important, the dollar will become one of the many currencies. So now the Fed raises the interest rate, and maybe the government will start to reduce the deficit. Maybe they will collect more import taxes. Also if the dollar loses the petro dollar status, they may use a crisis in Saudi Arabia to reduce the oil production in that country (China will probably buy a lot of oil from USA). We may finally have a Fed audit, and Trump will trump the Fed. Trump is a 4D chess master strategist (he has strategy inside strategy inside strategy, inception style). Look man, he is the real deal http://thehill.com/policy/finance/312662-audit-the-fed-bill-gets-new-push .
    Why should we pay money to see movies when we have staged world events?

    Like

    Reply

Leave a comment