The Foundational Problem of the Left – The Taxation of the Rich Prior to Spending

In furtherance of my series on what’s wrong with the left, today I wish to discuss national taxation and how it relates to the left’s strategy. The fundamental problem is the errant notion that capital is somehow greater than its sovereign, the currency-issuing national government. The left sees the world through the eyes of Eugene Debs and so, sees a world not of free-floating, inconvertible fiat monetary regimes, but of fixed exchange systems, such as the gold standard. Grounding its strategy commensurate with this viewpoint both demonstrates the folly of progressives and dictates their failure. For Debs, the strategy made sense. The left had to fight on two fronts. Firstly, against capital itself going head to head with it for better pay and working conditions and secondly, politically for power in government to codify labour’s demands as law and to shift fiscal policy towards full employment and the public purpose. The left’s strategy was fine tuned to the reality that government’s fiscal space was constrained under a gold standard.

The Gold Standard World of Debs

The gold standard is a defunct monetary system. During its time, the value of a national government’s currency was regulated in terms of a specific amount of gold, requiring the national government to agree to convert its currency to gold on demand. The money supply could not be expanded in a stable manner unless more gold was found and brought in, whether by new discovery or by trade, thus the government’s fiscal space was constrained.

Much of the problem with the gold standard centred around international trade and domestic unemployment and downturns. Because gold was the method to settle international trade payments, the nation with a trade deficit would be shipping gold to the nation it was importing from, thus reducing the supply of its own money in the process, which introduced a recessionary bias for the nation carrying a trade deficit. Since any adjustments to a trade imbalance were slow in coming, the domestic economies of deficit nations were forced to make adjustments and so, had to deal with extended unemployment and recession. To reduce unemployment, the national government carrying a trade deficit could not expand the supply of money and therefore, could only tax to fund spending or borrow. The national government could print money, but not without drastic consequences; one of those consequences being to the gold reserves that it had to defend. At any point in time, anyone holding the government’s currency could demand gold in exchange.

So, in Eugene Debs’ day, if previously, the government’s fiscal stance had been directed towards the demands and needs of capital, then undoing it within the framework of a fixed exchange regime would be a difficult procedure. Since capital had become the greater beneficiary of government deficits, then one necessary procedure would have to be the taxation of capital, sufficiently high enough, in order to reduce its accumulated net financial assets and then use what was collected from taxation to fund employment initiatives and public purpose spending without threatening the gold supply. The coming of the IMF and the Bretton-Woods system in 1946 didn’t help matters.

The Bretton-Woods Fixed Exchange System

The Bretton-Woods system operated slightly different to the gold standard. The US government would convert US dollars into gold at a fixed rate of $35 per ounce. The gold was the price anchor. So other nations within the Bretton-Woods system, could obtain needed US dollars by selling gold to the US government in exchange for US dollars at a fixed exchange rate. They would amass US dollar reserves and if they ran a trade deficit, they would exchange their currency for dollars and then back again, thus reducing the trade deficit and providing a stimulus for the domestic economy. The problem was that all nations involved had to maintain the exchange parity with the dollar through monetary policy, therefore, fiscal policy (the ability to expand budget deficits) was, yet again, voluntarily constrained. Should the exchange rate be threatened (too much domestic currency in foreign exchange markets), the central bank had to “mop up” or buy up its own currency using US dollars. In doing so, the money supply would fall and unemployment would rise, sending the economy into a downturn.

So, the problems with Bretton-Woods became clear to all involved. Weaker nations that ran trade deficits were again perpetually at a disadvantage, forced to throw their economies into recession and sustained unemployment to maintain the exchange rate. However, US president Nixon ended Bretton-Woods in 1971.

The Advent of Free-Floating, Inconvertible Fiat Currency

Richard Nixon’s act to end Bretton-Woods had serious implications for how the monetary systems of the US and other nations operated. Firstly, ending Bretton-Woods left the currencies of other nations to float on an exchange, their exchange rate in relation to other currencies now determined by market forces. Second, currencies were now inconvertible, meaning that a sovereign currency-issuing government no longer stood ready to convert their currency into anything but their own currency. As an example, if you took $100 Australian dollars to the Treasury, you would not get gold, silver nor anything else but Australian dollars in return. You could only expect any combination of cash or coin equal to one hundred Australian dollars. Third, the ending of both the gold standard and Bretton-Woods expanded the government’s fiscal space allowing it to expand its deficits towards full employment and the public well-being without the need to tax beforehand. Taxation for the purpose of revenue thus became obsolete. Since currency is merely a number and numbers are infinite, the end of the gold standard and Bretton-Woods meant that now, the supply of currency available to the sovereign currency-issuing government was always equal to infinity. In other words, the currencies of the US, UK, Canada, Japan, Australia and indeed, most nations outside of the EMU are now fiat. None of these nations tax to fund spending. Here then lies the fundamental problem with progressives and their strategy: taxation for revenue is obsolete, they refuse to accept it and thus, continue to look through a stained glass window believing that they can see clearly what lies on the other side. They see the world today as it was in by gone eras. They see through the long dead eyes of people such as Debs and so, cling to strategies that have gone well past their sell-by date; strategies based upon an outdated monetary system and progressives do so to their utter failure. Thus, we can answer why the wheels of progressives continue to spin, going nowhere – taxation.

The Purpose of Taxation Within a Fiat Currency Regime

Taxation today serves many important functions, none of which is to provide revenue for the national government to spend. Of the several purposes of taxation, three main reasons today why a national government taxes are that it:

1. Creates a demand for the national government’s currency
2. Reduces spending power
3. Alters behaviour

Demand for Currency

The sovereign currency-issuing government, through its authority, lays a tax payable only in its currency of issue and in doing so, creates a demand for its currency. The market then agrees to sell its production to the government at a price determined to be satisfactory by the government denominated in and in exchange for the government’s currency, ultimately to satisfy the tax obligation imposed. This activity establishes the national government as the price setter and the regulatory authority. The national government having created the market through its currency-issuing power has the authority to regulate the market which now uses the government’s currency. In short, we use the government’s currency, because it is the only thing that can satisfy our tax liability to the government.

Spending Power

Taxation is the destruction of currency. When the sovereign currency-issuing government taxes, it is withdrawing its currency from the non-government sector. In doing so, the amount of currency available for consumers and other private entities to spend is then reduced. Here then, we gain some insight into a major purpose of taxation today: to attenuate inflationary pressures. Secondly, it also becomes clear that taxation can be used to reduce the spending power of the rich whilst at the same time increasing the spending power of the lower income brackets. The government can use taxation to affect better equity in distribution, but it cannot in any case take from the rich and give what it took to the poor. It simply cannot play the role of Robin Hood in any traditional sense. If government taxes the rich, it must also either increase spending or reduce taxation levels on everyone else. At no time was Robin Hood endowed with an infinite supply of currency, for if he were, what then would the purpose be to take from the rich, except to destroy what he took to affect better equity? Robin Hood, instead, would first spend towards the public purpose, eliminating poverty, then tax the rich to destroy their hoarded currency if necessary.

Behaviour Modification

Taxation has the effect of moving society towards or away from activities. For instance, if a nation is small with narrow roadways and wishes to limit the number of automobiles to avoid congestion, it can lay a tax, sufficiently high, on car ownership. The result then is citizens foregoing the immense cost of car ownership and searching for an alternative method of transportation. Another example is the cigarette tax. By laying a high tax on cigarettes, the idea is to reduce smoking, not to fund healthcare.

What Then is to be Done by Progressives?

Progressives should view taxation, not as a necessary revenue source prior to funding their initiatives, but as something to be done after their initiatives are achieved. On this correct view, progressives should seek to do great things right now; do all that they wish to be done using the power of the currency-issuing government and then afterwards, when poverty and unemployment are dealt with, tax the rich if necessary. Thus, the correct strategy for progressives everywhere is not to rely on the rich to do great things, but to make the rich irrelevant. They only need rely on the national government to direct its fiscal policy towards a state of indefinite full employment and the public purpose (infrastructure modernisation and repair, universal healthcare, free education, social security, etc.); a much easier task to achieve today than what Eugene Debs faced during the gold standard.

Make no mistake, progressives still face a political fight with capital. But because of the monetary system we have today, that fight is for the control of government alone. The left can leave the days of union battles in the stockyards behind. Today, the currency-issuing national government is the sovereign to which capital is subject. Government makes the rules and holds all of the cards. No longer can capital bring these governments to their knees. Today, capital must acquiesce whether it wants to or not. It must bow to the sovereign or risk being sent packing from the economy. Capital holds no ace in the deck, save for its ability to purchase politicians. The fact that politicians are bought by capital for the purposes of shifting fiscal policy towards its demands does not imply that capital holds ultimate power over the government. Capital having natural power over government is illusory. It is a house of cards that will fall quickly if only progressives first understand today’s monetary system then educate the public as to the reality: we do not need the taxes of the 1% before we can do great things. All of us suffer needlessly and it is time to end the madness once and for all.

There is a vacancy in government for progressives to fill if they can only shake the gold standard socialism of Debs. Bury the past and move forward. Make the 1% irrelevant in the public’s mind.
Progressives make the 1% irrelevant by using the currency-issuing power of the national government to create a situation of indefinite sustained full employment through a Job Guarantee, buying up all unwanted labour and ending involuntary unemployment with price stability and initiating and/or fully funding public programmes such as universal healthcare, free education and social security.

In short, the correct strategy for the left today is to do great things now and worry about taxing the rich later. If progressives create and maintain a situation of full employment, full stomachs and price stability, end poverty and ensure the public purpose first, then in the mind of the public, the 1% become exactly what they really are – irrelevant.