Tax Myths

Myths about Taxation and the Reality

The reality:

• Currency issuers do not, and cannot logically, use tax return for their spending.
• Currency users like you and I do not use tax return for our spending either, because we have legal authority to impose taxes.
• Special currency users like provincial or municipal governments) do not need tax receipts for their funding either,
• but local currency-using governments that do not receive sufficient central government grant funds can be forced to impose taxes to get funds (numbers, scorepoints, in their bank accounts).

The myth is that governments need to get their own currency off tax-payers before they can spend it! Think about this for a minute and you’ll see why this myth is utter bonkers.

The reason local government should not be needing tax return is because they only need positive numbers in their bank accounts by law. The law can be changed to permit permanent overdrafts. If the overdraft is at a private commercial bank that would be silly, the local government councils should just have overdraft facilities at the central bank.

Laws concerning such monetary relations between local and central government are pure conventions, the law can be changed to meet the needs of the people.

Why can’t governments “logically” use tax receipts for spending?

By accounting logic no one can pay a dime in taxes until the government (or its licenced agents) first issue the currency.

Remember, state currency is defined as that which is accepted for payment of taxes, fees, fines and levies imposed by the state. State currency only comes from the government or its licenced banks, it cannot legally come from anywhere else. It is points on the central bank’s scoreboard (secured spreadsheets, or in the olde days ledger books kept under lock and key.)

Caveat: In recent years, and going back in history, you can find isolated cases where governments have accepted stupid things for redemption of taxes, like bitcoins or gold. Since bitcoins and gold are of no use to a government$^\ast$ this is insane policy, but it has happened. It has a deflationary bias when gold is accepted (because the supply of gold is finite.) Every economist alive recognizes nominal inflation (privileges wage earners, real producers) is better to have than deflation (privileges the wealthy hoarders, rentiers).

$^\ast$ Gold is useful for electrical engineering, so governments can make some use of gold. But there are satisfactory metal alternatives in electronics.

Why do governments tax us then?

The purpose of taxation is to drive demand for the otherwise worthless currency, not to get supply of scorepoints for the monopoly issuer of the scorepoints!

Consider playing a game of rugby, or a game of cards, the scorekeeper does not need to get scorepoints off the players. The same holds for a fat currency issuer. they are scorekeepers for the economy. The scorekeeping is real, not fictional, it is not “funny money”, there are severe penalties for violating the scoring system. Try creating our own NZD scorepoints!

The scoreboard at a Rugby game cannot run out of points to award. For the same reason the government cannot ever run out of money, such a notion is utterly inapplicable for a country like New Zealand, which runs an MMT system.

There are three other purposes for taxation. So four altogether as follows:

1. Tax liabilities (not tax receipts) drive demand for a fiat currency, without the tax liabilities no one would want to work to earn the currency.
2. Taxes on polluting production or harmful commerce help reduce those forms of production (the so-called Pigovian taxes).
3. Taxes can be used as redistributions, and to prevent egregious inherited class hierarchy. (Robin Hood taxation.)
4. Tax return withdraws aggregate demand, so helps cool off inflation.

None of the purposes are to “fund the government”. They are all about balancing the real economy.

“Funding the government” is an inapplicable notion. No currency issuing government needs to get money in order to spend it. Governments neither “have money” nor “do not have money”. What governments have is a simple public monopoly on tax credit issuance and redemption. They issue state currency by typing numbers into bank accounts.

Comment on 4. Demand withdrawal is not technically necessary to cool off inflation. If people who hoard currency do not spend it, just save it, then there is no pressure on prices. In reality people often do spend their savings, eventually, and this can have a small pressure on prices, an inflation bias. But it is never a problem except when supply of goods are scarce, as in war time or a pandemic. In this case progressive tax rates (via bracket creep) will automatically cool off inflation in an economic boom.

In a supply shock crisis the remedy for inflation is totally different, it is to increase government investment to fix supply. A gross way to do so would be to lower taxes. But direct functional targeted investments will fix the supply crises faster.

But in the former scenario the tax return is not in order for the government to get their own scorepoints, it is rather to withdraw scorepoints from the non-government sector which reduces claims on real goods produced by firms.

The one-liner reality is:

Taxation deletes currency from circulation. It does not supply the government with currency.

Why the fiscal constraints?

The myth here is that people think local governments cannot be trusted to spend wisely, hence need some sort of market discipline, which is imposed by private banks.

But this is ridiculous. Why are private banks any superior in knowing the needs of the local community?

The proper regulation upon local state and municipality spending is an account of _what resources the spending is procuring. If it is procuring yachts for wealthy people it is fraud. If it is procuring rent free housing for otherwise homeless people, or supplies for hospitals that are needed and which provide buffer stocks, not waste, then it is legitimate.

When it comes to government spending there is no budget constraint, the proper constraint is real resource availability and suitability of the spending for public purpose, not special private interests.

This principle is one component of functional finance or targetted spending.

A government, or demos really, that wants a thriving private sector, making sneakers, computers, smartphones, fast-food, games, art, or whatever, should be careful to not spend on purchasing the energy, hiring already employed workers, and buying up basic inputs that these private firms need. If government competes with the private sector the government will always win (if it wants to) since it is the issuer of the currency, it can pay any price. The demos had then better not vote for governments that suck up all the resources and starve the private sector. Generally the citizens do not vote for spend-thrift governments, so there is historically no known danger of governments spending wildly. It just never happens.

Corruption of government institutions happens (as does corruption in private industry), but that’s different to transparent votes in Parliaments for spending that voters can, or should, know about.

Functional finance is opposed to neoliberal ideas such as laissez faire policies. MMT recognizes that the public purpose cannot be protected through laissez faire policies, and that some component of government spending needs to be targeted. Government should be picking some winners and losers, not all of them, not even most, but just what is needed to fulfill the broadly democratically defined public purpose.

Why the heck should government be picking winners and losers?

Most of the time government should not be picking winners and loser, as I already stated. But when the broad public purpose is threatened then government intervention is justified. The government does not get to define the public purpose in a semblance of a democracy, that is up to the demos.

Why should the demos then sometimes be using government to pick winners and losers? For a couple of reasons.

1. As the representatives of “the people” governments have a responsibility to ensure something nebulous called “the public good.” They cannot do so with a laissez faire hands-off approach that lets powerful market players dominate the world of finance.
2. Private markets are not efficient, do not allocate resources fairly (they allocate according to who has the most money), and privilege people with power over workers who have to work to live.
3. In particular the labour market is not a fair game, a government is therefore necessary to protect labour. Workers have to work to eat, employers do not (do not have to work too much).

Comment 3. This means governments that protect interests of capital over labour are not legitimate governments. This is, of course, my opinion, it is not core MMT. Such opinions are part of Ōhanga Pai or Spiritual Economics, which goes beyond core MMT.

There is nothing wrong in protecting vital industries too. Both labour and industry can be protected. The problem occurs when wages for labour are exploitative, and when business profits are hoarded by bosses and not shared equitably with workers. Only a government has the authority, legal power and enforcement agencies to protect the interests of labour. Trade unions used to have some power, but (a) never sufficient power, and (b) trade unions were never representative of all workers, so were not ever truly egalitarian.

Ōhanga Pai is not opposed to trade unions, but we recognize that individual trade associations and unions end up pitting workers against workers, and so are not ideal. Workers collectively need one union to represent all workers, that would be more ideal. Taking a limit, this One Unified Union of workers really is the government. No country yet has reached this ideal limit.

Who decides what is in the public interest?

The demos. That’s who. Not “the market.” That’s the only answer we’ve got that is remotely sensible from thousands of years of representative government. Or, if you like to say it this way, the demos really is a market, the egalitarian market of the voice of the people. One person, one vote. (Corporations are not persons.)

Governments can always spend as much currency as they like, it is their currency and it gets withdrawn later in tax returns or private savings. The issue is not how much currency is spent, but rather;

1. is the spending fraudulent or legitimate?
2. Are real resources available? — if not, the government should not spend on those resources, since that just puts pressure on prices.
3. If government absolutely has to spend on scarce resources for public good, it must free up those resources by either taxing or fining private users of those real resources. This is a political decision and political constraint, not a financial constraint. Currency issuers have no financial constraints that are not self-imposed.

The tricky thing here is that the reality about what should be the proper regulations on government spending are not recognized by politicians, the public or mainstream neoclassical economists, so the proper reality is not heeded. We instead get a terrible mix in reality: a confusion about what is possible, and what actually gets accomplished.

Due to unnecessary budget constraints (aka. austerity) government leaders are not doing what is possible to help their people. They are doing instead a bare minimum, which causes social unrest, and it is all needless. It is a tragedy of epic proportions. Austerity about issuing currency is needless austerity.

When real resource limits are being approached then rationing and some other forms of conservation are necessary, but until such limits are reached there is no need for currency issuing austerity.

In particular, human labour, all available willing workers, can always be fully employed, if not by the private sector, then in public sector programs to help out with local community needs. This is the concept of a two-fold increase in human prosperity:

1. Expanded public sector hiring, for public purpose (no bullsh*t jobs), and
2. a Job Guarantee wage floor — which protects workers in the otherwise unfair labour market game, and simultaneously stabilizes the price level.

The Job Guarantee policy is necessary if there are involuntary unemployed workers who are willing to work but who refuse to work for the government. The government does not dictate what a JG worker chooses to do, but does pay their wage. In reciprocity, the government only says what a JG worker cannot do (light fires, bomb bridges, build “bridges to nowhere”, steal from old grannies, and whatnot).

((By “build bridges to nowhere” I mean of course anything wasteful of otherwise communal resources.))

Caveats

But doesn’t issuing currency cause inflation? How can governments desiring price stability therefore have no budget constraint? Short answer is no: Issuing currency does not cause inflation. Long answer is for another chapter.