Behind the Money Curtain: A Left Take on Taxes, Spending and Modern Monetary Theory
Date Written: 22/01/2018
Year Published: 2018
Resource Type: Article
Cx Number: CX21948
Taxes do not fund government spending.That's a core insight of Modern Monetary Theory (MMT) whose radical implications have not been understood very well by the left. Indeed, it's not well understood at all, and most people who have heard or read it somewhere breeze right past it, and fall back to the taxes-for-spending paradigm that is the sticky common wisdom of the left and right.
As a matter of economic logic, taxes do not precede and provide the money for, government spending; government spending precedes and provides the money that is later collected in taxes. It's not "tax and spend"; its "spend and (then) tax." That's the sequence. Every dollar paid in taxes is a dollar that was created by government authority.There is no place else it could have come from.
With a fiat currency, spending and taxing are economically separate, parallel activities. The government does not need taxes to spend; it needs a decision. Not taxes, but the political will of the government, is the source of government spending. The government can create money for any program it has the political will to fund, whether healthcare or nuclear weapons, prior to and apart from, collecting any taxes. Of course, it makes all the difference where the spending goes. who decides that, and by what mechanism. And that depends on the character of the "government," the extent to which it is the instrument of a democratically-empowered citizenry or off the ruling class oligarchy. Those are exactly the questions MMT brings to the fore.
So, if taxes are not a revenue source on which government spending depends, what are they for?
Taxes are that portion of the money the government has spent into the economy, and upon which the economy depends, which the government withdraws for reasons that have nothing to do with needing to collect money to spend. Economically, they are for controlling inflation, and socio-politically, they are for promoting valued public policies -- the first of which, for the left, is to prevent gross inequality.