The Issues

Taxes and Public Spending

Recognizing that our federal government is a currency issuer has profound implications on how we think about taxes and public spending. So does learning that banks and other financial institutions create our money when they make loans, and that this money is essentially public in nature. These insights call on us to do nothing less than re-imagine what we are capable of achieving together as a society.

Government Finances Are Not The Same As a Household’s

Recognizing our government’s role as currency issuer calls on us to stop thinking of our government’s finances the way we think about a household’s, which is as a currency user that is revenue constrained. “How will you pay for it?” is not a relevant question to pose to advocates of public spending proposals given that all public spending is essentially paid for with money creation. Instead, the question should be: “What impacts should we expect this proposal to have on our economy in general, and on price stability in particular?” By assessing public spending proposals in this way we can develop a more relevant basis for deciding whether the proposal should be adopted. Broadly speaking, by assessing public spending proposals in this way we are likely to conclude that our government has much more ability to responsibly attend to public priorities than we otherwise believe.

Taxation Checks Universal Demand For Currency

Understanding that our federal government is the currency issuer also requires us to rethink our understanding of taxation. Taxes are not to fund spending as a currency issuer does not need to obtain money in order to spend. Instead taxation creates universal demand for our currency within our economy as people need it in order to pay their taxes. By establishing universal demand for the currency, taxation imbues our money with value and allows it to function as a medium of exchange and means of settlement. This facilitates economic activity on a scale that would otherwise not be possible.

Taxation Checks Inflation

Another function of taxation is to check inflation. By removing money from circulation, taxation reduces inflationary pressures in the economy. Just as public spending proposals should be assessed on the basis of their expected impacts on the economy in general and price stability in particular, so should proposed tax cuts and tax hikes. Their effect on the budget simply is not relevant. This may mean that a middle class tax cut is more viable as an idea than we otherwise would think. Recognizing that banks and other financial institutions create much of our money through their lending presents the option of restricting this money creation to public interest uses as we advocate. This measure offers an alternate way of checking inflation in place of raising taxes. This way we can place the burden of checking inflation on those who have long profited from allocating public money on their own private behalf, rather than on the general public. This measure can also be thought of as allowing us to create additional space within the bounds of acceptable levels of inflation for increased public spending.