MMT: Taxes do not fund spending

by
No taxpayers money

Spend, invest and tax

“There is no such thing as public money; there is only taxpayers’ money.”
— Margaret Thatcher (Speech to Conservative Party Conference, 14 Oct 1983)

Thatcher’s statement is nonsense!

Taxes can not fund government spending:

Tax due: −$1,000
Tax paid: +$1,000
Balance
(Tax available for
government spending)		 $0.00

When you pay your income tax, your tax obligation is extinguished, and the money paid is deleted and ceases to exist. There is no longer any money left to fund anything.

The kitchen sink analogy

Government spending and taxation works like your kitchen sink.

  1. Government spending fills our pockets with money! (Randall, see references below)
  2. Government spending in excess of taxes increases our savings.

Governments collect taxes. When you make a tax payment to the Government, your tax obligation is extinguished, the money you paid ceases to exist, and it can not then be used to fund other provisions. You may wish to re-read that sentence again.

That also makes logical sense. Governments must first spend money into existence, investing in all of us, and allowing the economy to function; taxes provide a means to remove the money that was originally issued by the Government.

A thought experiment allows us to see that this is correct: Imagine a country with no money, and a Government that introduces a new currency tomorrow. Today, as there is no money in the economy, taxes can not be collected as no-one has any money. Only after a government has issued money and invested it into the economy, can taxes be collected.

This is exactly how a game of Monopoly is played: the banker first gives money to each player, only after which can the game be played, properties can be bought and sold, and rent and taxes be paid. The taxes do not fund the bank, as the bank has all the money it wants. This is stated in the rules of the  game:

“The Bank never “goes broke.” If the Bank runs out of money, the Banker may issue as much more as needed by writing on any ordinary paper.”

monopoly rules

Implications

Since governments do not rely on taxes for subsequent spending, governments never have to ask “where will we find the money” or “how will we fund our spending”. The government is not like a household, and does not have to budget like one. Yes, that may seem counter-intuitive. Yes, there may be political reasons why a government chooses to portray “tax and spending” in the way that it does; for example, a government may want to reduce spending to less than it can.

So political decisions determine how much money the government wants to spend, the money is always available. So a government can, for example, guarantee full employment, and invest in rebuilding the country.

Consequently, there is no government debt, and taxes do not fund spending: because spending does not need to be “paid for”.

So what are taxes for?

  1. Taxes create a demand for the currency (making willing sellers of goods and services for money.)(Randall, see references below)
  2. Taxes help keep the currency strong.
  3. Taxes can help fight sin and reward charity.
  4. Taxes help manage inflation (taking money out of the economy)

Who says that taxes do not fund spending?

Henry Ford and Thomas Edison, who in the 1920s joined forces to explain how the government could pay for a hydroelectrical plant:

The Government needs $40,000,000. That is 2,000,000 twenty-dollar bills. Let the Government issue those bills and with them pay every expense connected with the completion of the dam… the entire $40,000,000 issued can be retired out of the earnings of the plant.” (Steve Keen, 2023, quoting the New York Times, Dec 6, 1921)

British economist William Beveridge wrote:

“There is no financial limit to spending by the State within its own borders, as there is a financial limit, set by their resources and their credit, to spending by private citizens.” (Beveridge, 1944)

Beardsley Ruml, the Chairman of the Federal Reserve Bank of New York:

“At the end of World War II, the Chairman of the Federal Reserve Bank of New York (the most important branch of the Federal Reserve System), Beardsley Ruml, said the same thing in a paper he titled “Taxes for revenue are obsolete.”11 While taxes might be important for other purposes (that we’ll examine later), government doesn’t need “revenue” in order to spend.” (Randall, p. 19 quoting: Beardsley Ruml, “Taxes for Revenue Are Obsolete,” American Affairs, vol. 8, no. 1 (January 1946), pp. 35–9.)

Prof. Stephanie Kelton:

“Taxes are critically important, but there’s no reason to assume the government must raise taxes whenever it wants to invest in our economy. [..] Your taxes don’t actually pay for anything, at least not at the federal level. The government doesn’t need our money. ” (Kelton, pp. 22)

Prof. William Mitchell et al:

“.. the tax flows that national governments receive are certainly not intrinsically necessary to facilitate government spending [..] This sounds shocking because we are so accustomed to thinking that taxes pay for government spending [..] in the case of a government that issues its own sovereign currency without a promise to convert at a fixed value to gold or foreign currency [..] taxes are not needed to pay for government spending” (Mitchell et al, p.323)

The UCL Institute for Innovation and Public Purpose writes:

“the UK Government creates new money and purchasing power when it undertakes expenditure, rather than spending being financed by taxation from, or debt issuance to, the private sector” (Berkeley, A. et al, 2022)

References

    1. Wray, L. Randall. Making Money Work for Us. Polity Press.
    2. Kelton, Stephanie. The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy (p. 22). John Murray Press. Kindle Edition.
    3. William Mitchell (Author), L. Randall Wray (Author), Martin Watts (Author) , Macroeconomics 2019
    4. Berkeley, A., Ryan-Collins, J., Tye, R., Voldsgaard, A. and Wilson, N. (2022). “The self-financing state: An institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom“. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2022-08).
    5. Lord Beveridge, Full Employment In A Free Society, Publ. 1944 Bradford and Dickens
    6. Steven Keen, “Just Because You Know How to Make Money, That Doesn’t Mean You Know How to Make Money“, Feb 11, 2023. Quoting Henry Ford, also reported in Congressional Record: Proceedings and Debates of the 76th Congress, Volume 85, Part 2, United States Congress, Publisher U.S. Government Printing Office, 1939 “Declare War on Unemployment and Money Shortage“, Nov 3, 1939, page 836.
    7. Beardsley Ruml, “Taxes for Revenue Are Obsolete,” American Affairs, vol. 8, no. 1 (January 1946), pp. 35–9

See also

 

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