What Are Taxes For? Common Myths

[percysunshine]

This is part of a series, following on from the last installment that asked “Do We Need Taxes?”.

...Note that while many would see these taxes as a means to “pay for” government spending, Rumsl vehemently denies that view in the title to his other piece, “Taxes for Revenue are Obsolete”. Government does not need the gasoline tax to “pay for” highways. That tax is designed to make those who will use highways think twice about their support for building them. Government does not need the revenue from a cigarette tax, but rather wants to raise the cost to those who will commit the “sin” of smoking.



- See more at: EconoMonitor : Great Leap Forward » WHAT ARE TAXES FOR? THE MMT APPROACH

Rumsl was an idiot. Equating using highways to conduct productive work, with sitting on a couch smoking a cigarette, as being one and the same taxable economic activity is absurd.

Another journey into progressive moronism.

How about drinking a beer as a taxable economic activity?

When is drinking beer a productive activity?

 

[HelenaHandbag]

Indigestible text brick OP.

Taxes are to pay for the legitimate functions of government. Period. End of sentence.

When used for anything else, they become the playthings of collectivist social engineers and autocratic tyrants.

Given my encounters with the OP, he fancies himself a benevolent dictator.

I will take my chances with being free.

Operationally, under a fiat monetary system, they don't "pay" for government. They regulate aggregate demand and ensure all debts, prices and assets are denominated in US dollars.

Right. Like I said, the playthings of collectivist social engineers and autocratic tyrants.

We have finally agreed on something.

 

[Kimura]

Indigestible text brick OP.

Taxes are to pay for the legitimate functions of government. Period. End of sentence.

When used for anything else, they become the playthings of collectivist social engineers and autocratic tyrants.

Given my encounters with the OP, he fancies himself a benevolent dictator.

I will take my chances with being free.

Operationally, under a fiat monetary system, they don't "pay" for government. They regulate aggregate demand and ensure all debts, prices and assets are denominated in US dollars.

Right. Like I said, the playthings of collectivist social engineers and autocratic tyrants.

We have finally agreed on something.

So regulating aggregate demand and ensuring we have prices, debts and assets denominated in dollars is tyrannical and autocratic? Okie dokie.

 

[MaxGrit]

I read the first 1/3, then I realized the article as a pathetic attempt at making incredibly stupid pseudo-economics principles sound correct by obfuscating the stupid with technical concepts.

Article is stupid nonsense propaganda for progressive idiots.

 

[MaxGrit]

Which court backs you up?

The Constitution and logic back me up. All you've said is that government gets to decide what its legitimate functions are.

Wrong.

What's logical about using a business plan written 200+ years ago.

Hey Stupid, that question is stupid and you're stupid for asking such a stupid question.

 

[regent]

Indigestible text brick OP.

Taxes are to pay for the legitimate functions of government. Period. End of sentence.

When used for anything else, they become the playthings of collectivist social engineers and autocratic tyrants.

Given my encounters with the OP, he fancies himself a benevolent dictator.

I will take my chances with being free.

One of the first taxes the Washington administration passed was to help industry, and since that time taxes have been used for a number of purposes including the regulation of behavior, and even to reducing crime.

 

[Kimura]

I read the first 1/3, then I realized the article as a pathetic attempt at making incredibly stupid pseudo-economics principles sound correct by obfuscating the stupid with technical concepts.

Article is stupid nonsense propaganda for progressive idiots.

It's a pretty basic overview, there's nothing that technical about it. People have simply been bombarded with incorrect concepts about monetary operations. Most pundits and some economists frame the debate as if we're still on a convertible f/x.

A simple example would be a transit authority that issues token to ride its subway. You pay $$$$ then get the tokens to ride the train. The transit authority doesn't need to collect back its tokens to issue more tokens. The same holds true for the federal government as the monopoly issuer of the dollar. Households, firms and individuals have to collect $$$$ before they can spend; the government has to spend first then tax back what is already spent so to speak.

 

[bripat9643]

I read the first 1/3, then I realized the article as a pathetic attempt at making incredibly stupid pseudo-economics principles sound correct by obfuscating the stupid with technical concepts.

Article is stupid nonsense propaganda for progressive idiots.

It's a pretty basic overview, there's nothing that technical about it. People have simply been bombarded with incorrect concepts about monetary operations. Most pundits and some economists frame the debate as if we're still on a convertible f/x.

A simple example would be a transit authority that issues token to ride its subway. You pay $$$$ then get the tokens to ride the train. The transit authority doesn't need to collect back its tokens to issue more tokens. The same holds true for the federal government as the monopoly issuer of the dollar. Households, firms and individuals have to collect $$$$ before they can spend; the government has to spend first then tax back what is already spent so to speak.

It only has to "tax back" what it spends because otherwise it would drive the value of the currency to zero. The bottom line is that the value of a dollar is determined by the number of dollars in circulation. By printing more, the government is doing the equivalent of counterfeiting and thereby robbing everyone of their savings.

 

[Kimura]

I read the first 1/3, then I realized the article as a pathetic attempt at making incredibly stupid pseudo-economics principles sound correct by obfuscating the stupid with technical concepts.

Article is stupid nonsense propaganda for progressive idiots.

It's a pretty basic overview, there's nothing that technical about it. People have simply been bombarded with incorrect concepts about monetary operations. Most pundits and some economists frame the debate as if we're still on a convertible f/x.

A simple example would be a transit authority that issues token to ride its subway. You pay $$$$ then get the tokens to ride the train. The transit authority doesn't need to collect back its tokens to issue more tokens. The same holds true for the federal government as the monopoly issuer of the dollar. Households, firms and individuals have to collect $$$$ before they can spend; the government has to spend first then tax back what is already spent so to speak.

It only has to "tax back" what it spends because otherwise it would drive the value of the currency to zero. The bottom line is that the value of a dollar is determined by the number of dollars in circulation. By printing more, the government is doing the equivalent of counterfeiting and thereby robbing everyone of their savings.

The term "printing money" is no longer applicable (we're no longer the gold standard and the monetary circuit doesn't operate like a recycling plant).

Taxes aren't the ONLY obligation that drive $$$$. If we go back in history, we find that other obligations drive $$$$, such as fees, fines, tithes, etc. There aren't many examples of $$$$ that doesn't have any obligations. Governments create a national unit of account, slap a tax on that unit, and then issue $$$$ in said unit. Modern $$$$ is nothing more than a tax credit. Think about it, taxes redeem $$$$. All issuers of these IOUS must redeem them.

You raised a valid point about inflation, but that would only occur if the economy is operating at or passed full capacity. One policy tool would be to raise taxes in such a such a scenario, but we're nowhere near such a scenario with all of our excess capacity.

 

[Kimura]

[MENTION=29100]bripat9643[/MENTION]

Can you please explain the difference between federal spending that is $$$$ printing and federal spending that isn’t $$$$ printing?

My experience and education, besides the $$$$ transactions, is that all federal spending is done by crediting member bank accounts over at the Federal Reserve. There is no other way for the federal government to spend. If you want to refer to this as $$$$ printing, that's fine, but please be aware that you’re not distinguishing from some other mechanism of spending. The spending is the $$$$ printing for all intents and purposes.

With all the aforementioned spending, the dollar still has value. In point of fact, the value of purchased dollars is GDP so to speak, and real GDP continues to increase. This means that dollars can purchase more and more real goods and services year after year.

At the end of the day, printing $$$$ isn't inflationary, spending is what can cause prices to increase. Taxation simply removes spending power. If Uncle Sam taxed away all your $$$$, what would happen to your spending power? If they stopped taxing so much of your $$$$, what would the result be?

Ultimately, for a certain size of government, there is a level of taxes which correspond to full employment, and that’s the level of taxation which enable us to pay taxes and net save. This level of taxation can be much less than the level of government spending, savings desires, etc. This is why things like a balanced budget are sort of ridiculous.

 

[oldfart]

It only has to "tax back" what it spends because otherwise it would drive the value of the currency to zero. The bottom line is that the value of a dollar is determined by the number of dollars in circulation. By printing more, the government is doing the equivalent of counterfeiting and thereby robbing everyone of their savings.

You raised a valid point about inflation, but that would only occur if the economy is operating at or passed full capacity. One policy tool would be to raise taxes in such a such a scenario, but we're nowhere near such a scenario with all of our excess capacity.

Currency markets have both a demand and supply side. While a central bank might control the monetary base, the translation of that into money supply is a function of the banking system. Given current excess reserves, the supply of money is largely determined by the financial sector appetite for loaning money out. With no real growth for most of the economy, banks find it hard to loan money on the terms they consider good, primarily debt overhang in many businesses (weak balance sheets) and low consumer demand.

The demand for money (liquidity preference) is a function of nominal interest rates on near-cash investment equivalents (virtually zero), the needs of commerce (flat), and the need to finance investment and foreign trade.

Central banks at the zero lower bound in a low-inflation environment have very little leverage. They can't do much good or much bad. Without fiscal stimulus this is the recipe for secular stagnation, or the Japanization of America.

 

[HelenaHandbag]

I read the first 1/3, then I realized the article as a pathetic attempt at making incredibly stupid pseudo-economics principles sound correct by obfuscating the stupid with technical concepts.

Article is stupid nonsense propaganda for progressive idiots.

He excels at that.

Fancies himself a benevolent Soviet economic central planner.

 

[Norman]

The starting post again exposes the problems with MMT. First you make up a definition for "money", which is fine. Then you make up a concept "aggregate demand", again this is fine. But then after this, you claim that ALL OTHER definitions and concepts are wrong, while also deeming that your MODEL is the reality. MMTers claim that saying "taxes fund government" is wrong, rather than a different concept of the same thing. This has gone on for so long that by now MMTers are in my opinion just trolls and arguing with them is almost without exception like arguing with repeated record.

One fact that is MMTers get wrong is that US government must spend before there can be money. They somehow forget that this is true only in a very specific concept that they have created, which does NOT EXIST! The federal reserve has NO PROBLEM creating money without the government spending a dime. Their model does not describe the reality.

Then you get presented with statements like these, which contain no facts, just interpretations.

Operationally, under a fiat monetary system, they don't "pay" for government. They regulate aggregate demand and ensure all debts, prices and assets are denominated in US dollars.

Operationally taxes are PAID TO government. Conceptually saying taxes regulate aggregate demand is fine. But saying that taxes fund government is JUST AS fine. It's like arguing whether it's correct that C+I+G=Y, rather than C+I=Y-G.


Of course, the obsession with net savings is the funniest semantic problem of all. Some MMTers seem to think that the private sector can not save without a government. They don't themselves often understand that net savings is the same as government deficit, which has nothing to do with private saving. The MMT language is extremely misleading to someone who does not understand the concepts, and that someone includes many MMTers. It's much simpler to say "Government deficit" and "Taxes fund government" and be understood than say "Net savings" and "Taxes regulate aggregate demand" and be understood.

MMT seems to me to be just the same old keynesian economics with a twist, but this time it's in French.


/RANT, and Kimura I really hope you take a look at the Pragcap document "debunking" MMT that I posted earlier.

 

[whitehall]

We pay taxes to support the shocking number of two million seven hundred thousand civilian federal employees.

 

[Kimura]

The starting post again exposes the problems with MMT. First you make up a definition for "money", which is fine. Then you make up a concept "aggregate demand", again this is fine. But then after this, you claim that ALL OTHER definitions and concepts are wrong, while also deeming that your MODEL is the reality. MMTers claim that saying "taxes fund government" is wrong, rather than a different concept of the same thing. This has gone on for so long that by now MMTers are in my opinion just trolls and arguing with them is almost without exception like arguing with repeated record.

Aggregate demand isn't a made up concept, that's the first problem. What other concepts and definitions did I claim are wrong? I'm simply pointing out there a significant differences between a fixed and floating f/x, and that there are significant differences in terms of monetary operations, constraints, interest rates, etc. I've never denied there were legal restraints and statutes under the current arrangement

One fact that is MMTers get wrong is that US government must spend before there can be money. They somehow forget that this is true only in a very specific concept that they have created, which does NOT EXIST! The federal reserve has NO PROBLEM creating money without the government spending a dime. Their model does not describe the reality.

Operationally taxes are PAID TO government. Conceptually saying taxes regulate aggregate demand is fine. But saying that taxes fund government is JUST AS fine. It's like arguing whether it's correct that C+I+G=Y, rather than C+I=Y-G.

Taxes inherently destroy the $$$$ the federal government creates when it spends. These dollars don't really go anywhere, they're simply debited from private bank accounts. When we pay taxes, $$$$ is debited , and the rest is a formality. The federal government can't spend another dollar after we've been debited one dollar. This is simply the way banking and central banks function.

There is no operational mechanisms by which the federal government utilizes tax receipts or borrows to spend. There is no economic theory where the spending of the federal government must match its tax receipts. The deficit is the manifestation of the difference between taxation and spending over a given time period.

If we delve into actual central bank mechanics, then I'm 100% correct, btw. I said that spending precedes borrowing and tax payments; that the government is borrowing and taxing back what is already spent. If we include my statement to include actual loans from the FED, for example, then I'm correct. Any taxes paid or bond settlements paid to Treasury can only occur through reserve accounts. The initial source of balances in reserve accounts are from previous deficits, which consist of FED loans or credits to reserve accounts. These loans from the FED occur by the purchase of private securities, loans and repos. Previous government spending is obviously a prerequisite to settle bonds and to render tax payments.


etely settled or taxes payments rendered, previous government spending had to occur.

Of course, the obsession with net savings is the funniest semantic problem of all. Some MMTers seem to think that the private sector can not save without a government. They don't themselves often understand that net savings is the same as government deficit, which has nothing to do with private saving.

You've clearly never read the literature. Please name me one MMT economist that has said such a thing? They've created basic SFC models for the layperson which makes sense if you want people to understand stock-flow consistent models.

The MMT language is extremely misleading to someone who does not understand the concepts, and that someone includes many MMTers. It's much simpler to say "Government deficit" and "Taxes fund government" and be understood than say "Net savings" and "Taxes regulate aggregate demand" and be understood.

That's true which I why I try to keep it simple. I do think some of the bloggers get really tautological. I think the folks over the Levy Institute or UKMC would be more up your alley.

MMT seems to me to be just the same old keynesian economics with a twist, but this time it's in French.

Some people say it's Keynesian or Post-Keynesian. Personally, I view MMT in the post-Keynesian school. I came to MMT as a grad student through Hyman Minsky and Wynne Godley

/RANT, and Kimura I really hope you take a look at the Pragcap document "debunking" MMT that I posted earlier.

Collen Rouche distanced himself and retracted his misunderstanding about MMT. Most of his confusion stemmed from a misunderstanding about vertical and horizontal money. I do read Prag Cap, it's a good site with some great content. I would respond to Cullen's MMR posts all the time, to the point where I was probably annoying him and his peeps.

 

[Norman]

Taxes inherently destroy the $$$$ the federal government creates when it spends.

It is not important what happens to those green pieces of paper or cash deposits in reality for the point I am making. See; either you view this as money circulating and central bank expanding/contracting the money supply. OR you view the spending as money creation and taxes as money destruction. They describe the same concept with different variables. The real operations involved do not matter one bit.

There is no operational mechanisms by which the federal government utilizes tax receipts or borrows to spend. There is no economic theory where the spending of the federal government must match its tax receipts. The deficit is the manifestation of the difference between taxation and spending over a given time period.

So what? The equation that government revenue equals taxes + borrowing + money printing still holds. You can categorize it differently if you want, but this is not wrong, just different way to think about it. What is important that FED purchases are not counted as borrowing.

If we delve into actual central bank mechanics, then I'm 100% correct, btw. I said that spending precedes borrowing and tax payments; that the government is borrowing and taxing back what is already spent. If we include my statement to include actual loans from the FED, for example, then I'm correct. Any taxes paid or bond settlements paid to Treasury can only occur through reserve accounts. The initial source of balances in reserve accounts are from previous deficits, which consist of FED loans or credits to reserve accounts. These loans from the FED occur by the purchase of private securities, loans and repos. Previous government spending is obviously a prerequisite to settle bonds and to render tax payments.

So now you are defining FED monetary operations as government spending? Again this becomes very confusing, because you sure can not apply this spending as "G" in the aggregate demand equation. More semantic confusion.

You've clearly never read the literature. Please me one MMT economist that has said such a thing? They've created basic SFC models for the layperson which makes sense if you want people to understand stock-flow consistent models.

I constantly read (amateur?) MMTers saying things like "Deficit does not matter". But this kind of goes both ways. It seems that a lot of MMTers think ALL debt is debt to central bank, while conventional economists seem to think none of it is. Rolling over the debt owed to central bank is no problem as that debt does not indeed matter and should not be counted. Only the creation of such debt matters. However, rolling over outside debt does matter, because on the maturity the government needs to create a new bond, sell it to the central bank and deposit the cash to the buyer => more assets => more AD, more inflation that needs taxation to control, in Keynsian/MMT terms... Or rack on more external debt...

/RANT, and Kimura I really hope you take a look at the Pragcap document "debunking" MMT that I posted earlier.

Collen Rouche distanced himself and retracted his misunderstanding about MMT. Most of his confusion stemmed from a misunderstanding about vertical and horizontal money. I do read Prag Cap, it's a good site with some great content. I would respond to Cullen's MMR posts all the time, to the point where I was probably annoying him and his peeps.

I found many faults with the document as well, it's certainly not the finest piece of literature ever produced. But some of the inaccuracies that it debunks I have heard so often, that I don't think it's a coincidence. But I leave it at that as I haven't read the literature and possibly won't. Might look at what Cullen has to offer at some point, however.

 

[Kimura]

[MENTION=25159]Norman[/MENTION]

There's roughly seven transactions involved in deficit spending:

1. The FED engages in repurchase operations with the primary dealers to make sure there’s enough reserves for settling Treasury auctions (a series of debits of reserve balances and credits to Treasury accounts. On these specific days, larger reserves are required and the FED accommodates such a demand).

2. Treasury auctions are settled and securities are swapped out for reserve balances (again another series of debits and credits). The auctions can only settle with reserve balances utilizing the FED’s Fedwire clearing/settlement system.

3. The Treasury increases its balances from credits to its account from tax/loans accounts and bond settlements. Reserve accounts of the banks holding tax accounts and loan accounts are credited.

4. The FED’s repurchase is then reversed; the primary dealers buy Treasuries back from the FED.

5. Rinse and repeat step 1.

6. Before any type of spending, Treasury calls in any and all balances from banks that have tax/loan accounts.

7. The Treasury deficit spends by debiting its FED accounts, which in turn results in a credit to reserve accounts of member banks, thus increasing the total net wealth of the private sector.

 

[Kimura]

So now you are defining FED monetary operations as government spending? Again this becomes very confusing, because you sure can not apply this spending as "G" in the aggregate demand equation. More semantic confusion.

I'm saying that government spending is printing $$$$. It's inherently $$$$ creation. I was trying to point out to another poster that the term "printing money" is a misnomer under the current monetary system. It's my personal pet peeve.

I constantly read (amateur?) MMTers saying things like "Deficit does not matter". But this kind of goes both ways. It seems that a lot of MMTers think ALL debt is debt to central bank, while conventional economists seem to think none of it is. Rolling over the debt owed to central bank is no problem as that debt does not indeed matter and should not be counted. Only the creation of such debt matters. However, rolling over outside debt does matter, because on the maturity the government needs to create a new bond, sell it to the central bank and deposit the cash to the buyer => more assets => more AD, more inflation that needs taxation to control, in Keynsian/MMT terms... Or rack on more external debt...

I've never come across any MMT economist that said deficits don't matter. They do matter, not just in the way people think, as you've pointed out, so we do agree.

I found many faults with the document as well, it's certainly not the finest piece of literature ever produced. But some of the inaccuracies that it debunks I have heard so often, that I don't think it's a coincidence. But I leave it at that as I haven't read the literature and possibly won't. Might look at what Cullen has to offer at some point, however.

You may want to check out some of the work by some MMT economists:

Professor Randall Wray (UMKC), Professor Stephanie Kelton (UMKC), Professor William Mitchell (Charles Darwin University, Australia), Professor Steve Keen (Australia), Professor Pavlina R. Tcherneva (Bard College, Levy Institute).

Most of the misunderstandings emanate from douchy bloggers.

 

[Norman]

So now you are defining FED monetary operations as government spending? Again this becomes very confusing, because you sure can not apply this spending as "G" in the aggregate demand equation. More semantic confusion.

I'm saying that government spending is printing $$$$. It's inherently $$$$ creation. I was trying to point out to another poster that the term "printing money" is a misnomer under the current monetary system. It's my personal pet peeve.

Well, printing money may not be operationally happening in the monetary system, but as a concept it's valid as I pointed earlier. Also, it's possibly good time to point out that printing money actually does happen operationally as well, otherwise where did all that cash come? Yes, yes... I understand what you are saying though...

But here is a question, if you refer to "money creation" or whatever term you desire to use as government spending. What if the fed borrows 5.000$ to Joe the plumber and he creates 5.000$ worth of inventories with it. The investment rose by 5000 correct? And any government spending whatsoever didn't happen as far as the Y= C+I+G equation is concerned, correct? So you have two different definitions for government spending, right?

By the way, when Joe pays the loan back, do you refer to that as taxation?

Just asking, I do believe that the FED loans should actually somehow be reflected in the official government spending numbers, as should other government agencies liabilities, because they are a part of the governmental spending without question.

I've never come across any MMT economist that said deficits don't matter. They do matter, not just in the way people think, as you've pointed out, so we do agree.

The key word here is "Economist". I can tell that I have read many blogs and articles detailing that sort of stuff. Just typing the phrase to google should reveal some of them, although it has gotten better, I give you that. Strawman=Krugman is apparently one of the debunkers of this claim...

You may want to check out some of the work by some MMT economists:

Professor Randall Wray (UMKC), Professor Stephanie Kelton (UMKC), Professor William Mitchell (Charles Darwin University, Australia), Professor Steve Keen (Australia), Professor Pavlina R. Tcherneva (Bard College, Levy Institute).

Most of the misunderstandings emanate from douchy bloggers.

Thanks, I hope I have the time to dwell into something in the future. Mostly the things about monetary operations...

 

[whitehall]

It's a catch-22 situation. The federal government creates a bureaucracy that gets bigger and bigger even if there are other federal bureaucracies that are created to complete the same mission. The (hidden) unstated purpose of a government bureaucracy is to get bigger and get more funding. Social bureaucracies exist far beyond their original intent because politicians do not have the political courage to eliminate them. LBJ's failed "great society" was a monstrosity that tore Black families apart but it still creaks along today hurting more people than it helps. The two million seven hundred thousand federal workers are mostly drones who accomplish nothing for an eight hour day but surf porn on taxpayer funded computers. The competing "intelligence" agencies with secret budgets can't find a Russian terrorist in Boston and haven't got anything right since WW2 but politicians don't have the political courage to trim their budget.