The Necessity of Collecting Federal Taxes
Executive Summary
- It is often stated that governments must collect taxes to pay for their budgets.
- For governments that create their own money, this is false.
Introduction
When the government issues its own currency, taxes are not necessary. Taxes are necessary when a government cannot issue money (that is without a private central bank). However, when it can do so, several historical precedents, as well as current examples exist without any significant taxes.
The Colonial Script of the US Colonies
One example is the debt-free Colonial Script. There are several examples of US colonies that issued their own money and therefore functioned without taxes. Before 1913 the US government had financed itself with excise taxes (taxes on luxury goods) and trade taxes. Without the US Federal Reserve, taxes may not be necessary. Although Warren Mosler proposes that taxes are simply a way to reduce spending power. This is to allow the government “space” to engage in spending without causing inflation.
The Guernsey Pound
This small island off of the coast of England did not need to collect taxes when it began to issue its own debt-free money.
The Fake Issue of Interest on Government Debt
US Republicans constantly talk about the cost of paying interest on the US debt, without observing that this interest is only necessary to be paid because the US lost its ability to create its own money three times in its history, with 1913 being the most recent — and which continues to this day.
This is also explained in the following quotation.
“The federal income tax was instituted specifically to coerce taxpayers to pay the interest to the banks on the federal debt. If the money supply had been created by the government rather than borrowed from banks that created it, the income tax would have been unnecessary.”
Source: The Web of Debt
https://www.amazon.com/Web-Debt-Shocking-Truth-System/dp/0983330859
The reality of taxes is explained in the following quotation.
“So if the government throws away your cash after collecting it, how does that cash pay for anything, like Social Security and the rest of the government’s spending? It doesn’t. Can you now see why it makes no sense at all to think that the government has to get money by taxing in order to spend? In no case does it actually “get” anything that it subsequently “uses.” So if the government doesn’t actually get anything when it taxes, how and what does it spend? There is no such thing as having to “get” taxes (or borrow) to make a spreadsheet entry that we call “government spending.” Computer data doesn’t come from anywhere. Where else do we see this happen? Your team kicks a field goal and on the scoreboard, the score changes from, say, 7 points to 10 points. Does anyone wonder where the stadium got those three points? You now have the operational answer to the question: “How are we going to pay for it?” And the answer is: the same way government pays for anything, it changes the numbers in our bank accounts.”
Source: Mosler Economics
What This Means
The implications of this are huge.
It means that federal governments spend time collecting money in taxes to “pay” for goods and services, and punish taxpayers for noncompliance, for something that they bring into existence on a computer.
The situation is clarified if federal governments create their own money rather than allowing a private central bank to create debt.
The point is made regarding the lack of connection between taxes and spending by the following quotation.
“In fact, the people at the U.S. Treasury who actually spend the money (by changing numbers on bank accounts up) don’t even have the telephone numbers of—nor are they in contact with—the people at the IRS who collect taxes (they change the numbers on bank accounts down), or the other people at the U.S. Treasury who do the “borrowing” (issue the Treasury securities). If it mattered at all how much was taxed or borrowed to be able to spend, you’d think they at least would know each other’s phone numbers! Clearly, it doesn’t matter for their purposes.”
Source: Mosler Economics
A False Explanation of Money and Taxes from the Private Banking Supported Heritage Foundation
The Heritage Foundation helps perpetuate the myth of taxes used for spending in the following quotation.
“Spending-stimulus advocates claim that government can “inject” new money into the economy, increasing demand and therefore production. This raises the obvious question: Where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed: Therefore, every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.”
Source: Heritage Foundation
This is false.
Heritage has the process backward.
The government must bring money into existence first, either itself or through banks that have been deputized by the federal government to create money. Not only can the government create money, but any bank can also create money. Observe the next quotation from Heritage.
“Government cannot create new purchasing power out of thin air. If Congress funds new spending with taxes, it is simply redistributing existing income.”
This is exactly what the federal governments and banks do.
They create money with an accounting entry.
If you borrow $200,000 from a bank tomorrow, that money is brought into existence with an accounting entry. This was proven by a test conducted by the economist Richard Werner at a German Sparkasse Banks. That money has no reserves and banks can create as much of this money as they see fit. If the government did not impose taxes on its citizens, the following quote explains what would likely happen.
Why Taxes Are Necessary to Establish and Maintain the Value of a Money
“If the tax system were removed, the government would eventually find that its fiat money would lose its ability to purchase goods and services. This would be seen as inflation in the real economy…i.e. the loss of purchasing power. You can see how this works in a real-life example. During the US Civil War, the South experienced inflation of over 2000%. While the North experienced some inflation, this passage from “Understanding Modern Money” explains why this hyper-inflation happened only in the South: Taxes equaled less than 5 percent of the South’s spending, which totaled about $2.7 billion, with bond sales equal to 30 percent, notes issued by ‘the printing press’ equal to 60 percent, and other revenue sources equal to 5 percent of spending (ibid.). Christopher Memminger, Secretary of the Confederate Treasury, advocated higher tax receipts; however, the Congress argued for lower taxes, the Confederacy did not ‘have the ‘machinery for collecting large amounts of taxes’ (ibid.), the southern states strongly resisted centralized state power, and, at least initially, the South expected a speedy victory. Secretary Memminger: “saw two immediate and indispensable benefits from levying taxes payable in government notes. First, taxes created a demand for the paper issued by the government and gave it value. Since all taxpayers needed the paper, they were willing to exchange goods for it, and the notes circulated as money. Second, to the extent that taxation raised revenue, it reduced the number of new notes at had to be issued. The tax system is vital to create demand for a currency. Without a system of taxation, governments will eventually find that a currency becomes worthless as the South found out during the US Civil War.”
Source: Contrahour
However, this does not say what is the appropriate level of taxation. Only that some taxation is necessary for the following reasons.
- Reduce the spending power in the economy — to allow for the government to spend without causing inflation.
- To establish and maintain the value of the government’s fiat money.
The Correct Way to Look at Government Taxation
How the government differs from a private company is covered in the following quotation.
“First, the government’s interest is the public interest. The government is there to provide for the general welfare, and there is no correlation between this interest and a position of surplus or deficit, nor of indebtedness, in the government’s books. Second, the government is sovereign. This fact gives to a government authority that households and firms do not have. In particular, the government has the power to tax and to issue money. The power to tax means that government does not need to sell products, and the power to issue currency means that it can make purchases by emitting IOUs. Unlike private firms, the federal government maintains no stock of cash-on-hand and no credit balance at the bank. It doesn’t need to do so. There are surely limits of wisdom and prudence on federal spending, as well as numerous checks, balances, and self-imposed constraints, but there is no operational limit. The federal government can, and does, spend what it wants. It has no need for the income in order to spend. This is why it is a mistake to look at federal tax receipts as an equivalent concept to income of households or firms.”
Source: Mosler Economics
http://moslereconomics.com/2009/02/20/galbraithwraymosler-submission-for-february-25/
A Feature and Benefit of Creating One’s Own Money
When the government can create its own money, why would it need to receive money from its citizens? How would your own perspective on money change if you could make your own money? Clearly getting money from others would lose its meaning. Money only has value to an entity if it has some limitations on how much it can make itself. This would not only mean the money itself would no longer have to be collected, but taxes also consume an enormous amount of time on the part of individuals, corporations, and the government.
Taxes change behavior and reduce the efficiency of behavior because the behavior is being modified to match with the tax policy. All of this effort and behavioral modification could be eliminated by simply having a public central bank and eliminating private banking. The question of what the government does with taxes is explained in the following quotation.
“So why then does the federal government tax us, if it doesn’t actually get anything to spend or need to get anything to spend? (Hint: it’s the same reason that the parents demand 10 coupons a week from their children, when the parents don’t actually need the coupons for anything.) There is a very good reason it taxes us. Taxes create an ongoing need in the economy to get dollars, and therefore an ongoing need for people to sell their goods and services and labor to get dollars. With tax liabilities in place, the government can buy things with its otherwise worthless dollars, because someone needs the dollars to pay taxes. Just like the coupon tax on the children creates an ongoing need for the coupons, which can be earned by doing chores for the parents. Think of a property tax. (You’re not ready to think about income taxes—it comes down to the same thing, but it’s a lot more indirect and complicated). You have to pay the property tax in dollars or lose your house. It’s just like the kids’ situation, as they need to get 10 coupons or face the consequences. So now you are motivated to sell things —goods, services, your own labor—to get the dollars you need. It’s just like the kids, who are motivated to do chores to get the coupons they need.”
Source: Mosler Economics
This is further explained in the following quotation.
“The imperative of taxation is to create sellers of real goods and services willing to exchange them for the unit of account selected by the government. Dollar denominated tax liabilities function to create sellers of real goods and services who must have dollars to extinguish their tax liabilities. Raising revenue, per se, is of no consequence to the government, as dollars are not a limited government resource, but a liability, or tax credit, that can be issued at will. The government’s ability to raise revenue does not limit what it is able to purchase. The purchasing power of the government is limited only by what is offered for sale in exchange for dollars.”
Source: Mosler Economics
http://moslereconomics.com/wp-content/uploads/2019/02/Full-Employment-AND-Price-Stability.pdf
And in this quotation.
“That Barnes & Noble gift card Aunt Betty gave you for Christmas has value because Barnes & Noble will redeem it for a book. If you don’t want a book, you can exchange the gift card for dollars because Barnes & Noble has promised to honor that gift card, no matter who holds it. Gift cards are a form of currency. In a similar way, the US dollar has value because the government spends it on goods and services and then demands it back through taxation. The government designates the dollar as the only currency to meet your tax obligation. The US Dollar is simply a tax credit. You can argue this has no intrinsic value but it does. The government has a claim on your property and income if you don’t meet your tax obligation. If you don’t pay, the government takes your stuff. So a tax is an important tool for the government because it creates demand for its currency.”
Source: Contrahour