Taxes and the Public Purpose

In previous installments we have established that “taxes drive money.” What we mean by that is that sovereign government chooses a money of account (Dollar in the USA), imposes obligations in that unit (taxes, fees, fines, tithes, tolls, or tribute), and issues the currency that can be used to “redeem” oneself in payments to the government. Currency is like the “Get Out of Jail Free” card in the game of Monopoly.

Taxes create a demand for “that which is necessary to pay taxes” (and other obligations to the state), which allows the government to purchase resources to pursue the public purpose by spending the currency.

Warren Mosler puts it this way: the purpose of the tax is to create unemployment. That might sound a bit strange, but if we define unemployment as a situation in which job seekers want to work for money wages, then government can hire them by offering its currency. The tax frees resources from private use so that government can employ them in public use.

To greatly simplify, money is a measuring unit, originally created by rulers to value the fees, fines, and taxes owed.

By putting the subjects or citizens into debt, real resources could be moved to serve the public purpose. Taxes drive money.

So, money was created to give government command over socially created resources.

As Warren puts it, taxes function first to create sellers of real goods and services, and have further consequences as well, including what falls under “social engineering,” which are political decisions—something we’ll discuss a bit more below.

This is why money is linked to sovereign power—the power to command resources. That power is rarely absolute. It is contested, with other sovereigns but often more important is the contest with domestic creditors. Too much debt to private creditors reduces sovereign power—it destroys the balance of power needed to govern.

We also know that money’s earliest origins are closely linked to debts and recordkeeping, and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean,” and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin.” The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins”—or as Margaret Atwood says, “our sinful debts.”

Records of credits and debits were more akin to modern electronic entries—etched in clay rather than on computer tapes—than to what is erroneously called “commodity money” such as stamped gold coins. And all known early money units had names derived from measures of the principal grain foodstuff—how many bushels of barley equivalent were owed, owned, and paid.

All of this is more consistent with the view of money as a unit of account, a representation of social value, and an IOU rather than as a commodity. Or, as we Chartalists say, money is a “token,” like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.

Indeed, the “pawn” in pawnshop comes from the word for “pledge,” as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves who pawn their stolen goods), while “Old Nick” refers to the devil (hence, the red suit and chimney soot—and “to nick” means to steal) to whom we pawn our souls.

The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) originally had nothing to do with sex and adultery but rather with receiving them as pawns for debt.

Somehow, the admonition “Don’t covet thy neighbor’s donkey” just doesn’t have the right ring to it today.

We all know Shakespeare’s admonition “neither a borrower nor a lender be”—and religion typically views both the “devil” creditor and the debtor who “sells his soul” by pawning his wife and kids (and four footed friends)  into debt bondage as sinful—if not equally then at least simultaneously tainted, united in the awful bondage of debt.

And, as we know, Lucifer records the debts—of the souls he will collect. He’ll sell you a good time now, but your soul lies in the balance. You buy now, you pay forever. Sort of like Student Loans in America.

For most of humanity today the original sin/debt is to the tax collector, because as they say, the only things in life you cannot escape are death and taxes. Old Nick has a lock on both of those—the tax collector who calls at death.

It is said that only death can “wipe the slate clean” as “death pays all debts”; however, once your soul is sold, there is no escape because hell is the roach motel—you’ve checked in and you will never get out. But Christ is the redeemer—he’s a sin eater, repaying your debts to let you sinners get to heaven.

You can redeem your tax debts by delivering the sovereign’s own IOUs in payment. Widespread  debts to the sovereign ensure widespread acceptance of the sovereign’s own IOUs. This means that many will work for the sovereign, or work to produce what the sovereign wants to buy. Even those without tax debts will work for the sovereign’s IOUs knowing that others need them.

This is now the most common way that sovereign government moves resources to the public sector: In recent centuries through taxes, although as we go back in time, other liabilities such as fines, fees, tithes, and tribute were more important.

Of course, there are other ways to move resources to the public sector. On one end of the spectrum of alternatives we have the military draft or eminent domain. On the other we have volunteerism—Peace Corps or VISTA.

For many purposes, however, “monetization” has proven to be more effective for a variety of reasons that need not detain us now. Monetization proceeds in two steps: the first is to impose a monetary tax and the second is to put a monetary price on the resources government wants.

(That leads to issues related to pricing power and hence inflation—topics for another day. As monopoly issuer of the currency that is required to “get out of jail free,” sovereign government potentially has a great deal of power to set prices that it pays, far more than it normally exercises. Not saying that it necessarily should exercise those powers, however, this is part of MMT’s answer to hyperinflation hyperventilators.)

From this vantage point, taxes do not “pay for” government spending. Indeed, no taxes can be collected until government has spent. Taxes create a demand for the government’s spending and logically precede that spending.

As we’ve argued, it is neither correct nor politically sensible to link “give to the poor” policy to “tax the rich” policy. The purpose of the tax is to free up resources to pursue the public purpose—including anti-poverty programs.

But our tax system is already doing a HECKUVA JOB creating unemployed resources. We can spend on the poor (and on a full range of other public policies) and thereby mobilize those unemployed resources. We do not need more taxes—now—to cause even more unemployment.

If Congress ever got hold of its senses (no, I’m not holding my breath), it would increase spending (or reduce taxes) to employ idle resources. At some point (probably later rather than sooner) we could come up against resource constraints. At that point we might need to curtail spending and/or raise taxes.

We can examine how to deal with the happy problem of chock-full employment later—we haven’t seen it in the US since WWII and it isn’t on any horizon at present.

Taxes can serve other purposes, too, as I’ve argued earlier in this series. We can use taxes to discourage “sins”—in which case the purpose of the tax is to eliminate “sin” so the optimal sizing of the tax would eliminate sin and hence raise no revenue at all.

Previously, I argued that we can view excessive riches as a sort of “sin” that we want to tax away. Some commentators have argued that high tax rates on high incomes in the early postwar period “worked” by discouraging corporations from paying high incomes to top executives. Exactly! That is how sin taxes are supposed to work. The goal is not to raise revenue but to reduce sin.

I have argued that “predistribution” rather than “redistribution” works better. Once you’ve let the rich become super rich, they have the incentive and the power to defeat the effort to tax them. In my view, those horses have already got out of the barn.

Warren Mosler puts it this way: it is better to tackle inequality at the source. You tackle inequality at the bottom by providing jobs. MMT supports the job guarantee.

You tackle it at the top by constraining the rewards. Warren agrees that high tax rates on the rich is a legitimate political decision, and falls under what he calls social engineering (not to raise revenue but to change behavior).  However, he’s proposed what might be more effective measures, such as eliminating treasury securities (that provide interest income to rentiers), banning stock ownership by pension funds backed by the federal government (PBGC), and regulations to constrain and narrow permitted banking activities—all of which remove most of the highest incomes in question at the source.

I’d add limits on executive pay packages at corporations.

We’ve already hinted that a broad-based tax makes sense if the goal is to move resources to the public sector. However, we need to also look at issues of fairness and incentives.

This series will continue with a look at which taxes make the most sense from a public policy perspective.

(cross-posted from New Economic Perspectives)