[Preamble: Along with the prospect of a massive national infrastructure program has come talk of the necessity of raising taxes in order to pay for it—from Democrats as well as Republicans. That talk is a mistake. My apologies for writing the third post on this subject in the last month, but I realize I have failed to convey the importance of it. Perhaps it’s better to frame it in the negative: how balancing the budget produces not just suffering, but gratuitous suffering. ]
The tax and budget debate and gratuitous suffering
Continuing to talk about federal deficits and taxation is dull, particularly when politicians from Bernie Sanders to Paul Ryan trot out the same tired commonplaces about taxing the rich (Sanders) and saddling future generations with crushing debt (Ryan & his successors). Arguments from Left and Right are both couched in the paradigm of either balancing the federal budget or courting future disaster. Stuff we’ve heard countless times before, and just as irrelevant now as in the past.
Cloaked by the dullness is the true human cost of decision-makers getting bogged down in meaningless arguments about budget deficits and taxes, while those who bear the greatest costs of the decisions have little voice.
The bogging-down leads to what Modern Monetary Theory champion Stephanie Kelton terms “gratuitous suffering.” Kelton:
It is just about the worst kind of suffering, because we have the capacity to do better, and to do better for our fellow Americans. To do better by others. And if we can improve economic life for millions of people without creating harm, why wouldn’t we do that?
Gratuitous, because there is a way out, but getting out requires something that almost no one on the public stage is talking about: to shed the mindset of having either to balance federal spending with taxes, or having to rectify crushing debt somewhere down the road with even greater taxes.
If you—despite your generous impulse to provide tens of millions of people with economic relief through government spending—still worry yourself about terrible future costs incurred by relief given in the present, then just stop worrying. Worrying about balancing the budget keeps getting in the way of real economic progress.
For a 5-minute primer on Modern Monetary Theory and how it does away with concerns over budget deficits, watch Stephanie Kelton below:
If you have read either or both of the recent posts listed in the sidebar to the right—”Stop Asking That Question,” and “The Fix for the Economy You Never Hear About”—you probably know what Modern Monetary Theory has to say about taxes and budget-balancing. Mainly, that balancing the federal budget is based on false assumptions that the citizen’s relationship with the government is a zero-sum game.
If so, you may be discouraged about the way Joe Biden and most Democrats are now talking about the need to raise taxes on the rich to pay for the COVID-19 Relief Bill, an infrastructure program, more support for public schools, making health care affordable and universal, debt relief on student loans, and other means of lifting up all Americans.
Raising taxes on the rich is a good idea, but the way it’s being presented buys into the balanced-budget paradigm which implies, if we can’t tax enough to pay for these programs then we’ll have to cut them. For reasons why raising taxes on the rich is a good idea, see below.
Thinking wrongly and rightly about taxes
In an October 22, 2020 interview found in the Heisenberg Report, Stephanie Kelton lays to rest misunderstandings about the right and wrong uses of taxes from the Modern Monetary Theory perspective.
The starting point is the fact that the U.S., like the U.K., Australia, China, and Japan, pays for federal programs by issuing its own sovereign currency—unlike countries like Greece that are under the yoke of the Euro. The dollar is a “fiat currency,” like the currencies of most countries today, which frees the government to create as much money as it wants—by fiat. *
If the government can create as much money as it wants, then why bother with taxes?
Kelton’s answer is that taxes serve important purposes, but none of them is to offset spending. The main ones are:
(1) Curbing inflation (the true hazard from overspending).
(2) Curbing the financial and political power of the rich.
(3) Creating incentives for good behavior and avoiding bad behavior: for example, a carbon tax to rein in use of fossil fuels.
Using taxes just to balance the budget, in the absence of excessive inflation, handicaps economic activity—meaning what Kelton calls the “real economy” that involves exchanging goods and services, as distinguished from abstract arithmetical formulas handed down from above. It hurts especially the unemployed and underemployed—and, says Kelton, it is all so gratuitous.
The problem with President Biden and other Democrats pushing for federal tax increases to “pay for” spending is that it continues to reinforce the view that increases in the national debt must be held in check to prevent the economy’s future collapse. As long as the Left keeps reinforcing that view, the Right can seize upon it to choke off the kind of spending that might empower the working classes to seek better pay and benefits from employers, and to participate more actively in a political system that has been failing them. Choke it off, and disempower them as well as impoverish them.
Caste, inequality, zero-sum thinking,
and the politics of taxation
In a study published in “Visual Capitalist” a year ago, the U.S. ranked 27th out of 82 countries in social mobility, beaten out by all the Scandinavian countries (top six) as well as Germany (11th), France (12th), Japan (15th), Australia (16th), and the U.K. (21st). The vision of the U.S. as the Land of Opportunity is increasingly an illusion.
The economic hierarchy in the U.S. has become so rigid it resembles a caste system as much as a class system. Recent illustrations of the advantages of those in the upper economic strata in terms of education, access to health care, connections to high-wage employers, capability to borrow, possessing enough of a nest egg to bridge a setback, etc., explain how the caste system gets reinforced. Children of parents who are struggling financially get poorer nutrition, less parental attention, and often emotional turmoil at home—not to mention they live in public school districts that are starved of funding. They are the “losers” in a zero-sum game of which the balanced federal budget is not only a manifestation, it is also a cause.
Tax policy has much to do with this plight. We know how the wealthy avoid taxes. We know how tax cuts to the rich fail to pay for themselves, which has been proven time and again since the Reagan era and the selling of trickle-down economics. The irony is that members of the U.S. Congress who give exorbitant tax breaks to the rich are aware of this and tolerate deficits as long as they benefit the rich: they implement their own version of Modern Monetary Theory by another name: “Supply Side Economics.”
Furthermore, the Earned Income Tax Credit (EITC), designed to encourage those in poverty to work, also acts as a poverty trap: the benefits grow until the family reaches the poverty level, and then fall off until they cease entirely once the family reaches an income of $50,000 for a family with three children (see chart here)—while the median income is $68,000. Since a public four-year college costs an in-state student $9,000 a year in tuition and fees, that doesn’t leave a whole lot of room for getting three children through four years of college ($108,000 in tuition and fees alone) unless they get scholarships and/or work full-time jobs themselves while getting through school. Needless to say, as the three-children family works its way out of poverty toward the median income—assuming it can do so while the national minimum wage languishes at $7.50/hour—the ability to save money gets stuck at a level where an emergency can quickly either knock a family into bankruptcy or force them to borrow money at high interest rates. According to Forbes magazine, 63% of American families in 2016 didn’t have enough savings to cover a $500 emergency. Yup, that’s 63%—before the COVID-19 pandemic of 2020-2021.
The lack of steeply progressive income tax rates comparable to rates in the U.S. 50 years ago (and in Europe now) keep present-day economic strata fixed in place. Along with economic inequality comes political inequality. Rich individuals and corporations leverage their wealth into political influence not only with campaign financing, but also with lobbying and personal connections that are available only to those near the top. Warren Buffet famously observed back in 2013 that he paid a lower tax rate than his secretary, and he also joked grimly that if there was indeed “class welfare,” the rich (including him) were winning.
To hammer once again on this vital point in regard to Republican tax and budget policy: at the end of the day, it’s more about maintaining the political power of the rich than about dollar deficits.
It’s no coincidence that the countries that excel in social mobility are countries with stronger safety nets, universal or near-universal health care at relatively low-cost, stronger public education, more parental leave, and the like. All of these policies give more opportunities to those on the lower rungs of the economic ladder. These are countries with mixed economies that conservatives in the U.S. perversely brand “socialist” or even, to stretch a definition all out of proportion, “communist.” The economic success of Germany and the Scandinavian countries show that what makes them “socialist” is mainly high tax rates—not the absence of free markets.
What you get with communism, on the other hand, is total state ownership of the means of production and supply chains, and state price controls—a system that provides its citizens with neither personal freedom nor a modicum of prosperity, and has always led to a level of corruption that induces deep cynicism about its leaders and the role of government wherever it has been practiced. Equating the current mixed economies of western European countries with communism serves only to shield the wealthy in America from the kind of criticism that could break up their rigged game.
Is Modern Monetary Theory right or wrong? As a non-economist, my guess is at least mostly so, since it makes so much common sense. I may have been unduly persuaded by the tempting rhetoric of Stephanie Kelton. There are plenty of economists to include the liberal Paul Krugman who call it unrealistic. Deficit spending—such as the COVID Relief bill—to overcome a recession is all very well, says Krugman, but to keep it a fixture is to repeatedly risk hyperinflation.
Next up: capital accumulation and permanent oligarchy
Fair warning: I recently completed Thomas Piketty’s massive 2012 tome CAPITAL in the Twenty-First Century, which raises the specter of a permanent oligarchy rising to rule the Western world (if it hasn’t already). Piketty, whose insights are shaped by his study of a centuries-long arc of wealth, insists that’s the future to expect without progressive and international taxation of capital—a tall order even without the political upheavals we’re experiencing today. Once I’ve finished his 2021 book, Capital and Ideology, I’ll have more to say—whether you like it or not. 🙂
============= footnotes ===============
* Economist Alex Mashinsky, CEO of Celsius Network, declares that “every fiat currency, over time, will lose all its value.” Hmm. In the video linked to, Mashinsky says the dollar has lost 90% of its value since it went off the gold standard in 1971. Still, in 40 years, the dollar has managed to hold its own against other currencies, most of which are also fiat currencies. (China introduced fiat currency 1,000 years ago.) They float against each other depending on monetary policy, trade policy, and market forces. The key to “value” of a fiat currency, as Mashinsky himself points out, is the mutual trust users have in the currency. The trust is based largely on the strength of the real economy and the stability of the government that issues the currency. The greatest threat to the value of the U.S. dollar is not the lack of a gold or silver backing, but domestic terrorism or civil war. The next worst risk is hyperinflation.