Taxpayers Pay Something For, But Do Not Finance, the Spending of a Currency-Issuing Government

Part of the opposition to MMT, at least when it comes from the left side of politics, seems to stem from a desire to believe that taxes actually finance government spending. When confronted with the observation that, as a matter of logic, taxes (and government bonds) do not – and cannot – finance the spending of a currency-issuing government, many appear to recoil. In terms of framing, and as a way of “giving taxpayers their due”, perhaps it is worth highlighting that we, as taxpayers, do indeed pay something for the functions and expenditures of government. It is just that what we pay does not finance the government’s spending.

If the distinction between “paying something for” and “financing” is not immediately clear, or seems merely semantic, a simple illustration relating to the private marketplace might help to demonstrate that the distinction is in fact both real and significant, as well as crystal clear once recognized.

When a consumer buys a privately produced good, let’s say a car, s/he pays something for that car. But s/he does not finance its production. The manufacturer of a car has to secure financing prior to its production and only later do consumers pay anything for the cars that have been produced.

In a similar way, when we pay taxes, we pay something for the goods and services provided by government, but we do not finance the provision of those goods and services. Logically, government spending comes first, and only afterwards do we pay something for what is provided.

Both as private consumers and taxpayers we clearly pay something for goods and services. But we do not necessarily pay an amount matching what is required to provide the goods and services in the first place.

If demand for cars turns out to be weaker than producers anticipate, some of the cars produced (and already financed) may go unsold. Car sellers might also reduce prices. Either way, the amount consumers pay for cars can vary independently of the financing requirements, cost of production, expected profitability and so on of car manufacturers.

Similarly, total tax payments fluctuate relative to the level of government expenditure depending on the extent to which, in aggregate, the non-government happens to spend more or less than its income. This is true by definition. As a matter of accounting, the non-government financial surplus equals the government financial deficit.

The fact that taxpayers do not finance government activity in no way implies that taxes are unimportant to the public provision of goods and services. First, the imposition of a tax obligation ensures acceptance of the currency, enabling the government to spend its currency into existence in exchange for goods and services. Second, by withdrawing some spending power from non-government, the payment of taxes enables the government’s spending to occur in a non-inflationary manner.

For a different set of reasons, the fact that private consumers do not finance the production of cars in no way implies that consumption expenditure is unimportant to the private production of cars. If firms supplying cars cannot sell those that are produced, ongoing production will not be viable.

Why is it important to recognize the difference between “paying something for” and “financing”?

Understanding the distinction makes clear that a currency-issuing government can never “run out of money”. The government does not sit around, helpless, waiting to get some money from us, the taxpayers, before it can spend. The government, after all, is the currency issuer. Instead, from inception, the government must issue the currency. Only then will it be possible for anybody to pay taxes, since these are owed in the government’s money of account.

The distinction makes clear, in other words, that the constraint on government spending is resource availability (inflation), not a supposed (but fictitious) “shortage of money”.

2 thoughts on “Taxpayers Pay Something For, But Do Not Finance, the Spending of a Currency-Issuing Government

  1. Hi Peter.

    It puzzles me why there is such an inchoate stew in economics; people not being able to agree on a definition of $money, and conflicting ideologies etc. I think social conditioning has a lot to do with it, and it is difficult because we have to work through our own conditioning.

    Certainly it draws blank stares, or blows a fuse when you point out the obvious that human beings create $money, theoretically in any amounts they like – but all is subject to the availability and deployment of real resources and our material values.

    I think the problem is that $money and material objects – values, are hopelessly blended in people’s minds, when they need to be separate and distinct.

    The production circuit could theoretically cycle without $money; planet earth and the biosphere are wonderfully abundant without it. Borrowing from an analogy of Neil Wilson’s you could think of the production circuit as one huge network, wired up all over the currency area and between currency areas. The $money circuit is like a field of force: – apply it to one section of the circuit and a current is induced, which drives the production of hospitals; apply it to another section and roads are built; to another milk and honey are harvested. We make social decisions about production and distribution based on inherent limitations in the network, and our human values.

    The one circuit does not affect the other until they are brought into proximity. So compartmentalise them; keep material values separate from the field of force which enables them. For me, this makes philosophy, psychology, and sociology, as creative qualities of the field of force conditioning the production circuit, of far greater moment than lesser studies of the resultant material output.

    From this I define $money as concretised human energy. Human energy can be deployed to realise material values, AND values that apply to human consciousness.

    So, then the real question becomes who controls the field of force? And how are they using it? This, I think is where everyone’s attention should be.

    You can submerge yourself in models and mathematics that apply to the production circuit but the guys wielding the field of force are not bothered about that. $money goes into just about every home on the planet and we associate it with our livelihood, well-being, and material values – even though we waste a lot on junk. But to the schmucks wielding the force, $money is simply used as a weapon; and crowd control, through the ‘hollow-men’ and masquerade of political theatre. There is always plenty of $money created for the biggest stick (the nuclear option and military). There is always plenty of $money finds its way straight into the hands of the ‘emperors’. I call them the bulls of the earth, fighting for dominance over the herd and the earth’s resources, trampling anyone lesser that gets in their way. They operate through illusion (ideology) glamour (emotional registration) and maya (physical confusion) and a ‘field of force’ of which $money is one aspect (conjurer’s trick).

    Obviously, by any human measure, they are not all that bright – we actually evolved through cooperation. Our genes go back to mitochondrial Eve and Y-chromosomal Adam: – we are one humanity, one species, and our skin pigmentation and physical racial characteristics are superficial. For me, it is in the evolution of consciousness that the real sign posts along the journey are seen. I think that the emperors’ day in the sun is drawing to a close, and that there is intelligence in ordinary people, and certainly in the intelligentsia whose dharma it is to penetrate the smoke and mirrors, and expose the ‘anti-life’ and ‘anti-human’ delusions. We have this intelligence and should use it. War is the most anti-life enterprise there is, and has cost humanity millions of lives over the 200,000 years we have been looking for ourselves on this earth; the issues are crystallising (nearing fracture) and becoming clearer. I think it is in the human consciousness itself that our real treasure lies. And this treasure is hidden in the human heart; people feel it and it begins to move them in ways emperors will never understand.

  2. Peter, I understand your concept of “paying for something”, as in a car, but not the production thereof, but when it comes to taxation, we are really not paying for anything. We just help balance the money in circulation. All government spending is new money, our taxes just remove some of that (eventually all of it). I have argued for too long and too hard that taxes don’t fund spending. I’m not about to give ground now, even for the sake of one or two who might be helped by your car analogy.

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