In previous installments we have established that \u201ctaxes drive money.\u201d 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 \u201credeem\u201d oneself in payments to the government. Currency is like the \u201cGet Out of Jail Free\u201d card in the game of Monopoly.<\/p>\n
Taxes create a demand for \u201cthat which is necessary to pay taxes\u201d (and other obligations to the state), which allows the government to purchase resources to pursue the public purpose by spending the currency.<\/p>\n
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.<\/p>\n
To greatly simplify, money is a measuring unit, originally created by rulers to value the fees, fines, and taxes owed.<\/p>\n
By putting the subjects or citizens into debt, real resources could be moved to serve the public purpose. Taxes drive money.<\/p>\n
So, money was created to give government command over socially created resources.<\/p>\n
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\u2014something we\u2019ll discuss a bit more below.<\/p>\n
This is why money is linked to sovereign power\u2014the 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\u2014it destroys the balance of power needed to govern.<\/p>\n
We also know that money\u2019s 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, \u201cwiping the slate clean,\u201d and Year of Jubilee. In the Aramaic language spoken by Christ, the word for \u201cdebt\u201d is the same as the word for \u201csin.\u201d The \u201cLord\u2019s Prayer\u201d that is normally interpreted to read \u201cforgive us our trespasses\u201d could be just as well translated as \u201cour debts\u201d or \u201cour sins\u201d\u2014or as Margaret Atwood says, \u201cour sinful debts.\u201d<\/p>\n
Records of credits and debits were more akin to modern electronic entries\u2014etched in clay rather than on computer tapes\u2014than to what is erroneously called \u201ccommodity money\u201d such as stamped gold coins. And all known early money units had names derived from measures of the principal grain foodstuff\u2014how many bushels of barley equivalent were owed, owned, and paid.<\/p>\n
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 \u201ctoken,\u201d like the cloakroom \u201cticket\u201d that can be redeemed for one\u2019s coat at the end of the operatic performance.<\/p>\n
Indeed, the \u201cpawn\u201d in pawnshop comes from the word for \u201cpledge,\u201d as in the collateral left, with a token IOU provided by the shop that is later \u201credeemed\u201d for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves who pawn their stolen goods), while \u201cOld Nick\u201d refers to the devil (hence, the red suit and chimney soot\u2014and \u201cto nick\u201d means to steal) to whom we pawn our souls.<\/p>\n
The Tenth Commandment\u2019s prohibition on coveting thy neighbor\u2019s 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.<\/p>\n
Somehow, the admonition \u201cDon\u2019t covet thy neighbor\u2019s donkey\u201d just doesn\u2019t have the right ring to it today.<\/p>\n
We all know Shakespeare\u2019s admonition \u201cneither a borrower nor a lender be\u201d\u2014and religion typically views both the \u201cdevil\u201d creditor and the debtor who \u201csells his soul\u201d by pawning his wife and kids (and four footed friends)\u00a0 into debt bondage as sinful\u2014if not equally then at least simultaneously tainted, united in the awful bondage of debt.<\/p>\n
And, as we know, Lucifer records the debts\u2014of the souls he will collect. He\u2019ll 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.<\/p>\n
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\u2014the tax collector who calls at death.<\/p>\n
It is said that only death can \u201cwipe the slate clean\u201d as \u201cdeath pays all debts\u201d; however, once your soul is sold, there is no escape because hell is the roach motel\u2014you\u2019ve checked in and you will never get out. But Christ is the redeemer\u2014he\u2019s a sin eater, repaying your debts to let you sinners get to heaven.<\/p>\n
You can redeem your tax debts by delivering the sovereign\u2019s own IOUs in payment. Widespread\u00a0 debts to the sovereign ensure widespread acceptance of the sovereign\u2019s 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\u2019s IOUs knowing that others need them.<\/p>\n
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.<\/p>\n
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\u2014Peace Corps or VISTA.<\/p>\n
For many purposes, however, \u201cmonetization\u201d 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.<\/p>\n
(That leads to issues related to pricing power and hence inflation\u2014topics for another day. As monopoly issuer of the currency that is required to \u201cget out of jail free,\u201d 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\u2019s answer to hyperinflation hyperventilators.)<\/p>\n
From this vantage point, taxes do not \u201cpay for\u201d government spending. Indeed, no taxes can be collected until government has spent. Taxes create a demand for the government\u2019s spending and logically precede that spending.<\/p>\n
As we\u2019ve argued, it is neither correct nor politically sensible to link \u201cgive to the poor\u201d policy to \u201ctax the rich\u201d policy. The purpose of the tax is to free up resources to pursue the public purpose\u2014including anti-poverty programs.<\/p>\n
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\u2014now\u2014to cause even more unemployment.<\/p>\n
If Congress ever got hold of its senses (no, I\u2019m 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.<\/p>\n
We can examine how to deal with the happy problem of chock-full employment later\u2014we haven\u2019t seen it in the US since WWII and it isn\u2019t on any horizon at present.<\/p>\n
Taxes can serve other purposes, too, as I\u2019ve argued earlier in this series. We can use taxes to discourage \u201csins\u201d\u2014in which case the purpose of the tax is to eliminate \u201csin\u201d so the optimal sizing of the tax would eliminate sin and hence raise no revenue at all.<\/p>\n
Previously, I argued that we can view excessive riches as a sort of \u201csin\u201d that we want to tax away. Some commentators have argued that high tax rates on high incomes in the early postwar period \u201cworked\u201d 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.<\/p>\n
I have argued that \u201cpredistribution\u201d rather than \u201credistribution\u201d works better. Once you\u2019ve 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.<\/p>\n
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.<\/p>\n
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).\u00a0 However, he\u2019s 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\u2014all of which remove most\u00a0of the highest incomes in question at the source.<\/p>\n
I\u2019d add limits on executive pay packages at corporations.<\/p>\n
We\u2019ve 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.<\/p>\n
This series will continue with a look at which taxes make the most sense from a public policy perspective.<\/p>\n