spending<\/em> directed to those who \u201chave too little\u201d is what gives the poor access to resources (they can use their demand deposit credits to buy food, clothing, shelter, and so on).<\/p>\nThese are functionally two entirely separate activities. Government can spend to help the poor without taxing the rich or anyone else. And anyone who can understand balance sheets knows that there is no longer any balance sheet operation in which government \u201cspends\u201d its tax revenues.<\/p>\n
Henwood seems to imagine that the rich roll their wheelbarrows full of coins up to the Treasury Department\u2019s steps, where armored trucks load the cash up and take it out to make payments to the poor.<\/p>\n
Doesn\u2019t work that way. Tax payments debit the accounts of taxpayers. If you\u2019ve 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 \u201cdebits the account\u201d of Boston. Where does the run taken away go?<\/p>\n
That\u2019s a question for the physicist, not the economist. Where do the taxes payments go? Nowhere\u2014a bank account is debited.\u00a0 I think it has something to do with electrical charges changing from negative to positive, although some commentators told me it is all photons now. All I know is that taxes do not and cannot \u201cpay for\u201d spending.<\/p>\n
All of this was recognized by Beardsley Ruml, a New Dealer who chaired the Federal Reserve Bank in the 1940s; he was also the \u201cfather\u201d of income tax withholding and wrote two important papers on the role of taxes (\u201cTaxes for Revenue are Obsolete\u201d in 1946, and \u201cTax Policies for Prosperity\u201d in 1964). Let\u2019s first examine his cogent argument that sovereign government does not need taxes for revenue, and turn to his views on the role of taxes.<\/p>\n
In his 1964 article, he emphasizes that \u201cWe must recognize that the objective of national fiscal policy is above all to maintain a sound currency and efficient financial institutions; but consistent with the basic purpose, fiscal policy should and can contribute a great deal toward obtaining a high level of productive employment and prosperity.\u201d (1964 pp. 266-67) This view is similar to that propounded in by MMT.<\/p>\n
He goes on to say that the US government gained the ability to pursue these goals after WWII due to two developments. The first was the creation of \u201ca modern central bank\u201d and the second was the sovereign issue of a currency that \u201cis not convertible into gold or into some other commodity.\u201d With those two conditions, \u201c[i]t follows that our federal government has final freedom from the money market in meeting its financial requirements. … National states no longer need taxes to get the wherewithal to meet their expenses.\u201d (ibid pp. 267-8)<\/p>\n
Why, then, does the national government need taxes? He counts four reasons:<\/p>\n
(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)<\/p>\n
The first of these is related to the inflation issue we discussed above. The second purpose is to use taxes to change the distribution of income and wealth. For example, a progressive tax system would reduce income and wealth at the top, while imposing minimal taxes on the poor.<\/p>\n
The third purpose is to discourage bad behavior: pollution of air and water, use of tobacco and alcohol, or to make imports more expensive through tariffs (essentially a tax to raise import costs and thereby encourage purchase of domestic output). These are often called \u201csin\u201d taxes\u2014whose purpose is to raise the cost of the \u201csins\u201d of smoking, gambling, purchasing luxury goods, and so on.<\/p>\n
The fourth is to allocate the costs of specific public programs to the beneficiaries. For example, it is common to tax gasoline so that those who use the nation\u2019s highways will pay for their use (tolls on throughways are another way to do this).<\/p>\n
Note that while many would see these taxes as a means to \u201cpay for\u201d government spending, Ruml vehemently denies that view in the title to his other piece, \u201cTaxes for Revenue are Obsolete\u201d. Government does not need the gasoline tax to \u201cpay for\u201d 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 \u201csin\u201d of smoking.<\/p>\n
Many would say that it is only fair that those who smoke will \u201cpay for\u201d the costs their smoking imposes on society (in terms of hospitalizations for lung cancer, for example). From Ruml\u2019s perspective this is not far from the truth\u2014the hope is that the high cost of tobacco will convince more people never to smoke, which thereby reduces the cost to society.<\/p>\n
However, the point is not the revenue to be generated\u2014government can always \u201cfind the money\u201d to pay for hospital construction. Rather, it is to reduce the \u201cwaste\u201d of real resources that must be devoted to caring for those who smoke. The ideal cigarette tax would be one that eliminated smoking\u2014not one that maximized revenue to government. He said \u201cThe public purpose which is served [by the tax] should never be obscured in a tax program under the mask of raising revenue.\u201d (1964 p. 268)<\/p>\n
We can then use this notion of the public purpose to evaluate which taxes make sense. I won\u2019t go through that today, but let me say that Ruml used the corporate income tax as an example of a particularly bad tax. He\u2019s right. My professor Hyman Minsky always argued for abolishing that tax\u2014and I wouldn\u2019t be surprised if he got the idea from Ruml.<\/p>\n
Of course, which tax do \u201cliberals\u201d love? Corporate income tax. They all want to increase it to \u201cpay for\u201d all the goodies they want to shower on the poor. In other words, they compound their confusion\u2014not only do they insist on being wrong about the purpose of taxes, but they also embrace one of the worst ones! Maybe a good topic for another blog?<\/p>\n
Ruml concluded both of his articles by arguing that once we understand what taxes are for<\/em>, then we can go about ensuring that the overall tax revenue is at the right level. \u201cBriefly the idea behind our tax policy should be this: that our taxes should be high enough to protect the stability of our currency, and no higher\u2026. Now it follows from this principle that our tax rates can and should be lowered to the point where the federal budget will be balanced at what we would consider a satisfactory level of high employment.\u201d (1964 p. 269)<\/p>\nThis principle is also one adopted in MMT, but with one caveat. Ruml was addressing the situation in which the external sector balance could be ignored (which was not unreasonable in the early postwar period). In today\u2019s world, in which some countries have very high current account surpluses and others have high current account deficits, the principle must be modified.<\/p>\n
We would restate it as follows: tax rates should be set so that the government\u2019s budgetary outcome (whether in deficit, balanced, or in surplus) is consistent with full employment. A country like the US (with a current account deficit at full employment) will probably have a budget deficit at full employment (equal to the sum of the current account deficit and the domestic private sector surplus). A country like Japan (with a current account surplus at full employment) will have a relatively smaller budget deficit at full employment (equal to the domestic private sector surplus less the current account surplus).<\/p>\n
(This is part of a series, following on from the last installment<\/a> that asked \u201cDo We Need Taxes?\u201d)<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"Previously we have argued that \u201ctaxes drive money\u201d in the sense that imposition of a tax that is payable in the national government\u2019s own currency will create demand for that currency. Sovereign government does not really need revenue in its own currency in order to spend. This sounds shocking because we are so accustomed to […]<\/p>\n","protected":false},"author":208,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[112],"tags":[888,151,1135,413,887,142],"class_list":["post-10648","post","type-post","status-publish","format-standard","hentry","category-modern-monetary-theory","tag-beardsley-ruml","tag-mmt","tag-modern-monetary-theory","tag-money","tag-redistribution","tag-taxes"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10648","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/users\/208"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/comments?post=10648"}],"version-history":[{"count":7,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10648\/revisions"}],"predecessor-version":[{"id":10656,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10648\/revisions\/10656"}],"wp:attachment":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/media?parent=10648"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/categories?post=10648"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/tags?post=10648"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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