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 that can only be extinguished in the currency 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”.