Well that title is blunt, isn’t it? I like blunt. That’s why I chose it. As I always say, blunt cuts through bullshit. It’s my bet that it is sure to cause irritation for those persons who play immature games of semantics with the word ’fund’. Good.
Look, we all know what people mean when they say, ‘Federal taxes don’t fund federal spending’; they mean, ‘The federal government does not require an income, and so, it does not spend the proceeds from federal tax collections’. Some people simply wish to confuse others by playing a game of semantics over the word ‘fund’.
A couple of days ago, I made it clear that this long running game of semantics over the word ‘fund’ won’t debunk the operational realities of federal spending and taxation as outlined by MMT. Last night, I discussed the issue again in some detail. Once more, I’ll explain it because it seems that some people who are genuinely interested in understanding are having trouble digesting it. We have those who’ve been deliberately playing this petulant, idiotic game of semantics to thank for that. Well done. You’ve confused others and sown doubt in the hopes of thwarting the work of those who describe concepts in simple terms so that the general public could understand them.
Put simply, people who play this game have their own agenda to push. Some of these persons are completely unqualified with only an interest in economics, and they simply want to promote themselves, their blog, their livestream, their own contrived view of the macroeconomy, or perhaps a new, fantastic money-making ‘system’ that they wish to sell.
Back to the point at hand. I’ll explain the main purpose federal taxation once again and hopefully clear up the confusion that these persons have deliberately caused to advance their own interests.
The federal government was instituted by the people of the nation to sit in authority over the nation. Now, when we think of the federal government, we tend to think of the politicians we elect. Forget them. I am not discussing politicians. Politicians come and go – unfortunately, most don’t go fast enough – but the federal government remains.
When we speak of the federal government, we are speaking of the public institution itself, and like any other institution or entity, the federal government requires goods and services to operate as government. Again, national governments sit in authority over the entire nation, and therefore, they must endure. Since we know that the federal government requires paper, pens, computers, chairs, carpet, bullets, aircraft, tanks, buildings, etc., to operate as government, then the question becomes,
“What is the most efficient and certain way that the federal government can acquire all of the goods and services that it needs to act as government now, and in the future, without fear of one day being unable to do so, and without the possibility of an entity that is subject to its authority, or a foreign one, obstructing its ability to provision itself, thus usurping its authority?”
There are two ways: The uncivilised approach and the civilised approach.
The uncivilised approach is to take what the federal government needs to operate as government by force. In other words, to waltz into the private sector and force people at gunpoint to hand over their property, and also, to round up citizens, hauling them off against their will to perform work in service to the federal government.
The civilised answer, put simply, is to operate a monetary economy, creating a market of buyers and sellers, and then issue its own currency to buy what it needs. The federal government operates on the civilised approach.
Now then, in the uncivilised method, the mechanism used to guarantee that the federal government can obtain the goods and services necessary to function as government is obvious – brutal force. But, with the civilised method, we are left in a bit of a quandry. As Minsky said, anyone can create a monetary instrument. The trick is getting it accepted. So, how then can the federal government ensure that every citizen and business will accept the federal government’s currency as payment for the goods and services that it needs to function as government?
It will need some kind of mechanism to compel the nation into accepting its own currency because begging won’t do. After all, the federal government is the supreme authority and issuing its own currency to buy what it needs means that 1.) it can operate a nation in a civilised manner, and 2.) it can never run out of its own currency, guaranteeing that it can always obtain what it needs to function as government without any possibility of some entity that is subject to its authority, or even another nation, holding it hostage. The federal government is ready, willing, and able to spend dollars into existence to do this and it has an infinite spending capacity, so, what to do? Some measure of force will be required, obviously. But that force must be conditional to be in keeping with a more civilised approach: “If you don’t do this, then I will be forced to become a tad bit uncivilised.” As the supreme authority, it certainly has the power to confiscate property and to imprison citizens. Man, this is a tough question. What to do? Wait! I’ve got it!
U.S. Constitution, Article 1, Section 8:
“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises…”
Eureka! The federal government will impose a tax burden and let everyone know that if they do not pay the tax, then it will be forced to become rather uncivilised by seizing their property, or imprisoning them. And nobody wants that, right? Right. So, when the people ask the federal government:
“Say man, what will you accept as payment for this tax? Because I don’t wish to lose my property or wind up in the penitentiary.”, the federal government tells them:
“Simple. All you people have to do is to sell me your goods and services to get my dollars. And since I am the currency issuer, I get to decide the price that I will pay in dollars for those things that I need, I will spend US dollars into existence to pay for them, and you will have the dollars you need to pay the tax that I am imposing. Whatever is left over after you pay the tax, you can use for whatever you wish. You can then buy and sell with my dollars. Don’t worry: everyone else will accept dollars as payment because they need the dollars to pay my tax. Look, don’t freak out, ok? All that I really want to do here is to create a market of buyers and sellers of goods and services which operates on my currency called the US dollar. Imposing a federal tax is the civilised way to achieve this.”
So, some people begin selling their goods to the federal government to obtain the dollars necessary to lift the tax burden. The government then decides how much it is willing to pay for those goods in its own currency, and then spends the dollars into existence to buy them. Some people sell their labour to the federal government, the federal government decides the wage it is willing to pay these workers in its own currency, and then spends the dollars into existence to pay the wages of these workers. Now people have possession of dollars and they use some of them to pay the tax. They either save or spend the what they have left over. Businesses hire workers, and so, they pay wages in dollars and then private sector workers can also pay the tax in case the federal government places a tax burden on them too. Before you know it, an entire market and nation is operating based upon the federal government’s US dollar. The US dollar becomes the most widely-accepted monetary instrument in the United States and the federal government has a guaranteed method to supply itself with the goods and services that it needs to operate as government, now and in the future, without fear of ever financially being unable to do so. In other words:
The federal government can buy anything that is for sale priced in US dollars without fear of going broke. And all of this is possible because the federal government imposes a burden called ‘federal taxation’ on the nation which carries a severe, certain punishment if you fail to comply, and so, a wide-spread desire to avoid the punishment drives the demand for the federal government’s own currency: The US dollar. Hence, as MMT says, the US dollar is a tax credit.
Another way of looking at it which might help some of you to understand, is to view the US dollar as you would a movie ticket. A cinema produces movie tickets, and factually, it can produce an infinite number of tickets if it chooses to regardless of the number of seats available. Now, from your perspective the cinema produces tickets so that you can watch a film. And it does. But it also produces tickets so that it can accept them back. That might sound bizarre, but as bizarre as it sounds, it is still true.
The cinema issues a ticket and promises you that it will accept the ticket back if you have one, thus allowing you to watch the film. If you have no ticket, you don’t get to watch the show. When you hand the ticket to the cinema, the cinema destroys the ticket. Don’t deny it, you’ve seen them do it. They just throw your ticket away. The ticket isn’t the point; the movie is. Federal taxation and the US dollar function the same way. The federal government first issues US dollars, spending them into existence to buy stuff, and then promises all persons who become a target of federal taxation that it will accept the dollars back, allowing them to avoid the confiscation of their property or imprisonment. The federal government then destroys the dollars collected, because the point isn’t the dollars themselves. The point from your view is to avoid punishment, and from the federal government’s view, the point is to cause you to use dollars. Those who do not have any dollars when the federal tax man cometh are sort of screwed.
Anyone who has experienced the unrelenting pressure of the IRS coming down on them and what the IRS can eventually do to them, should be able to understand this simple premise. The only way to get the IRS off of your back is to obtain the dollars necessary to pay the tax. The IRS simply will not give up. US dollars are the only way to make the IRS leave you alone. This is the reason why everyone in the US demands US dollars and it is why you use them to buy everything that you need and want. Even if you personally have no federal tax to pay, somebody else does and they need the dollars you have because they really do not wish to deal with the IRS. Therefore, they will accept the dollars you have for food, clothes, cars, TV, toothpaste and anything else that you can think of.
So, to sum up, federal taxation is the clever mechanism that allows the government to cause everyone to accept the federal government’s own currency so that it can spend that currency into existence to buy stuff that it needs. The order of operations is very simple:
1.) The federal government places a burden on people by declaring that these people must pay federal tax. In other words, the federal government targets some people and businesses for harassment simply because it has the constitutional authority to do so. At this point, no federal taxes are yet paid. There exists only a demand from the federal government for compliance.
2.) These people and businesses who are targeted for harassment by the federal government have no way to avoid the harassment other than to give the federal government what it demands (US dollars) to make the harassment stop.
3.) Federal spending now begins and it does so prior to the federal government receiving tax payments from citizens. The federal government spends dollars into existence to buy goods and services that it needs to function as government. The people and businesses who are targeted for harassment can now give some of those dollars back to the federal government because the federal government promises to accept them back in exchange for letting these people and businesses off the hook.
4.) The people and businesses return some US dollars to the federal government to settle the federal tax burden, and, as promised, the federal government lets them off the hook. The federal government destroys the dollars collected. The dollars left over in the economy are then saved or spent on goods and services.
5.) The process repeats itself each and every fiscal year.
The main purpose, then, of federal taxation is all about creating and maintaining a demand for US dollars, and as long as the federal government can enforce tax collections, people in the US will demand US dollars.
What you hopefully understand now is that federal spending comes before federal tax collections. True, the federal government’s act of declaring that some people and businesses owe tax might come first, but federal spending must come before the federal government can collect because people need the dollars to pay the tax. Declaring a federal tax is not the same thing as collecting from those who owe it. Owing federal tax and paying federal tax are two separate things. First you must owe federal taxes, then afterwards, you must pay what you owe. The owing of federal tax is the burden; paying the federal tax is the lifting of the burden. So, please be aware that when it comes to federal taxes, people who play these childish games of semantics concerning the word ‘fund’ deliberately do so for their own interests, not yours and certainly not for the interests of the nation. They want you to believe that MMT is wrong, or that they are the ‘real MMTers’ and that MMT has been corrupted by fake ‘MMTers’, that there are real operational constraints to federal spending, and that federal taxes do fund federal spending. Total nonsense, the lot of it, because as we can clearly understand now:
Federal taxpayers do not fund the federal government; the federal government funds federal taxpayers.