Tax is not the revenue of government:
Function of Tax in the perspective of Modern Money Theory (MMT)
This blog is based on the idea of the book, Chapter 5:
Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, L. Randall Wray (2015)
According to the MMT, the social demand for a currency issued by a sovereign country is driven by the tax obligation imposed by sovereign government. Notice that here I said “a” currency, which implies some kinds of “legal tender”, such as US dollar, China yuan, Japan yen, but not referring to the general IOU token used in economy.
To be specific, people use government-issued IOU token (sovereign currency) because government promised to redeem it, but nowadays there are no gold standard, then what exactly you could redeem from government? The answer is tax, also could be fees, fines, tithes. This is different from what I learned from my bachelor's study, which stated that AA accepts a money token (such as US dollar) because he knows BB will accept it, and BB accepts it because she knows CC will accept it…., infinite regression (don’t forget that AA also knows that BB knows that AA knows BB will take it). Which one makes more sense? I prefer the former one. Because for the second one, any other kinds of token could play the same role, even using real commodities like crops in ancient China (in ancient China even officers’ wage were paid in crops). However, with the tax obligation, people have no choice but government IOU to pay for their tax.
In conclusion, tax and other kinds of obligated payment to government, are the foundation of the circulation of sovereign currency. And this leads us to the second point: Where tax goes, and how tax is spent?
In modern banking and Treasury system, most money transactions are done by computer, and the vast volume of money is just numbers stored in some computer components, and the transactions are just done by keystrokes. Thus, when people pay tax, their deposit account in some banks are debited, and the Treasury’s account is credited. But balance sheet operation never limits the spending of a sovereign government. Theoretically, government could issue as much currency as it wants. The essence of government’s action is about using resources in society for some public purpose, at least mostly for public. In ancient world, government did this by directly collecting crops or silvers, but in modern monetized world, government did this by keystrokes on computers.
Thus, the tax paid to government could be seen as just disappeared, although some number appears on Treasury’s account, as a record for IOU redemption and finished civilian obligation. Because the spending of government budget is not physically limited by the number in Treasury’s account, and most of major economy entities have deficit spending, we can conclude that the tax collected by government is not strongly constraining its spending.
If you’ve ever gone to a ballgame you know that when the scorekeeper awards a run to Boston, he does not take it away from New York. Rather, he keystrokes runs to Boston. If after review of the video, the umpire has made an error, he “debits the account” of Boston. Where does the run taken away go? It is just debited and disappears. Where do the tax payments go? Nowhere – a bank account is debited. Taxes do not and cannot “pay for” spending. Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, L. Randall Wray (2015)
Many are just obsessed with the memory of the gold standard era, they think the king or emperor still could only spend what he or she collected from the people, and then they have a budget, and deficits are bad. However, with sovereign currency, in fact, the spending of government is not limited, the quoted “budget constrain” only appears when taking other goals into consideration, such as employment, inflation, and economic growth.
Based on this, the logic is reversed, now the demand of money is driven by tax, and where private sector could obtain money? Government spending! Government purchasing is at the supply side of money, and because of taxation, people would like to accept it. In this MMT perspective, tax and spending by the government give itself a tool to influence value, and conduct policy.
Then, what should be the functions of tax? Beardsley Ruml, a New Dealer who chaired the New York Federal Reserve Bank in the 1940s, said the functions of tax are that:
(1) as an instrument of fiscal policy to help stabilize the purchasing power of the dollar; (2) to express public policy in the distribution of wealth and of income as in the case of the progressive income and estate taxes; (3) to express public policy in subsidizing or in penalizing various industries and economic groups; and (4) to isolate and assess directly the costs of certain national benefits, such as highways and social security. ( ibid. p. 268)
The first point is that tax could absorb money in market circulation, and government spending could supply money, therefore, tax and spending could be tools for stabilizing prices.
The second, tax could control the distribution of income, American CEOs in 2012 earned an average of $12.2 million, 354 times the average worker’s $34,645; the ratios for other wealthy nations range from 36 in Austria, 67 in Japan, and 84 in the UK, to 147 in Germany and 206 in Canada. By imposing progressive income tax on the for example top ten percent, and giving working-class people the lowest tax rate, could limit the power of a small group of people, because in capitalism, power is mostly conducted by money. This is not redistribution, not “tax the rich”, but democracy.
The third point, tax could be “sin” tax, taxing on smoking, polluting, alcohol consuming or non-green lifestyle. The logic is not someone pays for his or her actions, but their actions are not encouraged by government or society.
The last one, tax could be used as a measure of how much benefit is generated by a public service.
In the perspective of MMT, tax drives money, and tax income is not the constraint of government spending, it is a tool rather than a goal, and by such tool, we can make our society better. There are more discerptions and arguments about this in L. Randall Wray’s book.
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