Since federal taxes don’t pay for anything then why do we pay federal taxes? Federal taxes are very important, but we’ve never been taught the real reasons why. This post summarizes the real reasons and provides many sources to learn more.
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This post was last updated September 13, 2020.
Disclaimer: I am a layperson who has studied MMT since February of 2018. I’m not an economist or academic and I don’t speak for the MMT project. The information in this post is my best understanding but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.
First of all, to be clear
Federal taxes don’t fund federal spending. Federal spending funds federal taxes.
The idea that they do pay for stuff (at the federal level) is quite insidious. When MMT says “taxes can’t pay for stuff” it more precisely means that the revenue can’t be collected and accumulated in order to be reused for future respending.
(The same is true with all federal revenue, including taxes, bond sales, fines, and fees. As stated in the introduction to Stephanie Kelton’s (then Bell) 1998 paper, Can Taxes and Bond Sales Finance Government Spending? the very nature of how revenue is collected at the federal level “implies their destruction.” How exactly is it destroyed? In the same manner as the 100 is “destroyed” when you do
1000-100=900 on a calculator.)
All federal spending is money creation.
All federal revenue is money destruction.
This isn’t a choice or an option. It’s inherent by its very nature. There is no other way for it to be.
The purpose of federal taxes: An overview.
- “Drive money” (or “drive the currency”)
- One of many tools for controlling inflation.
- Impose moral decisions (higher to discourage, lower to encourage).
Now, the details:
1. Federal taxes “drive money.”
The federal government doesn’t need your money (they’re the ones that gave it to you!). They need you to need their money, so you do what society needs doing. To put it concisely and perhaps a bit cheekily:
The purpose of federal taxes is not to generate revenue.
The purpose of federal taxes is to generate workers.
The idea that taxes drive money is a major aspect of the state theory of money, or chartalism. You can learn more about chartalism here: Chartalism (the state theory of money) is historical. Barter is a-historical.
2. Federal taxes are one of many tools to control inflation.
Taxes can be increased to reduce purchasing power, and decreased to increase purchasing power. Here is a layperson tutorial on the difference between inflation the Boogeyman, and inflation in reality, and the MMT theory of inflation from a more academic point of view (with sources).
3. Federal taxes also impose moral decisions…
…where “morality” is defined by government, and government is defined by society – that is, us as a collective. (At least, that’s how it’s supposed to be.) For example, we could increase taxes on gas guzzlers in order to discourage the use of fossil fuels. Alternatively, we could decrease taxes on solar panels and electric cars in order to encourage their use.
We could also decide that our obscene wealth inequality is immoral and increase taxes on the super-rich. Importantly, this does not “take from the rich and give to the poor” – it only takes from the rich, which indirectly redistributes wealth. [Related post: Redistribution via federal taxation can only be *indirect* (audio compression analogy)]
Here are several expert-created resources explaining the reality of federal taxation in general, and the MMT view of taxation.
First is a 2014 Naked Capitalism article by Phillip Pilkington called “Taxation, Government Spending, the National Debt and MMT.”
Here are many resources on the MMT view of taxation by original developer L. Randall Wray:
- 2014 New Economic Perspectives articles:
- 2016 paper called “Taxes are for redemption, not spending.”
- Videos hosted by Deficit Owls (here is a whole playlist on MMT and taxation)
- A five-minute video hosted: MMT: Taxes/Borrowing DO NOT “Pay For” Government Spending
- Four minutes: “Taxes Do Not Fund Social Security, Investment Does (very slow, with Spanish translation)“