Federal Taxes Don't Fund Federal Spending, And That Really Matters
Taxing The Rich To Fund Federal Spending Isn't A Thing And We Need To Stop Pretending It Is
The Con
In the United States at the federal level, the endless insistence that we must "tax the rich to pay for" is a con job. It’s intended to keep us tied up arguing back and forth over abstruse tax policy, and sets a subtextual frame based on and reinforcing the (faulty) assumption that we must wait for the billionaires to give us permission to have basic social welfare programs, which they will as a reward to us for crafting a tax policy favorable to them.
We’ve become so enraptured by this revenge fantasy that even people I respect who know better like Bernie Sanders and Elizabeth Warren and Robert Reich still habitually fall into the linguistic habit/trap of appealing to people’s sense of fairness and equity by talking about how we have to tax the rich to pay for federal social welfare programs like universal publicly funded health care or education programs.
Worse, even when they don’t make that additional leap, journalists reporting on them will frequently make it for them. Sanders in particular has really improved in terms of not reaching for this concept so often, but nine times out of ten the media will add the “to pay for” concept to the narrative even if it isn’t there.
Why?
The conversation is framed this way to appeal to your sense of belonging to an outgroup; being part of a band of scrappy underdogs fighting relentlessly against the oppression of billionaires.
One of the most destructive aspects of continuing to cling to this narrative is that’s an absolutely valid set of concepts in our present circumstances…and that validity is undermined almost completely by the “tax to pay for” narrative when one understands basic economics. It’s based on a fundamentally wrong idea that must be rejected before productive discussions of resource allocation (aka “budgeting”) can even begin.
It is not necessary for the US Government to take a single dime from Elon Musk or Jeff Bezos before we implement a universal single payer health care program or publicly funded university tuition and accouterments, nor is it necessary for said dime to pay for one bit of federal spending.
Federal taxes don't fund federal spending. Federal taxes control involuntary unemployment, inflation, and - when applied in the classic “progressive” taxation framework of a greater percentage of income/wealth levied as your income/wealth grows - wealth imbalances.
Informally speaking, they're used to stop people like Elon Musk from having as much political power as nearly all the rest of us combined because he's beyond rich, because that sort of concentration of power is very, very bad for democracy.
In a capitalist system money and political power are basically the same thing, and concentrations of one are effectively synonymous with concentrations of the other.
About the time someone wrote that down in a short paragraph for the first time, a whole bunch of folks with money and a craving for power decided that meant it was natural law that they own the government.
Taxes administered in a progressive system are vital to preventing that from happening, because the kind of folks who are gonna do that aren’t the folks who are gonna be swayed by the ethical arguments. So you make sure they don’t have the option to get uncontrollably powerful by taxing their excess wealth away.
That’s why taxes on billionaires are necessary.
But they're not necessary to fund federal spending.
How?
Federal spending is funded by congressional appropriation - literally Congress spends money into existence. This is how the vast majority of all money is created in the US or any other nation that owns and controls its own currency (England, Japan, Australia are examples).
"We must tax the wealthy" is true. Even "we must ensure the wealthy pay their fair share" is true, if you understand how to properly define "fair share" and what makes it more or less "fair."
(From a standpoint of political communication the “fair share” argument is particularly artful because it holds the emotional valence of the “to pay for” argument, but doesn’t rely on propagating a lie to do it. It detaches arguments relying on the idea that the very rich, being individuals, consume far fewer resources than would be the case if their holdings were spread across thousands of people and are thus reasonably subject to lower tax rates “to pay for” their consumption. Finally it shifts the tone and center of the conversation from vengeance or punishment to equity.)
The minute you add the phrase "to pay for" to either of those statements in the context of federal taxation in a sovereign currency system (like ours), you've gone off the rails.
When you start to understand this in the broader picture of a layperson's grasp of modern monetary theory ("#MMT"), the policy implications are enormous.
First and foremost it becomes unavoidably clear that poverty is a deliberate policy choice, that a whole big chunk of us are quite deliberately KEPT poor in service of those at the top of the heap, and the reasons we're given for that are absolute BS.
Second it becomes clear that the whole "tax the rich to pay for things" narrative serves the interests of the rich by framing every bit of our existence as requiring their approval before we can pursue it.
Third it becomes clear that there is literally no good reason we haven't had a universal single payer health care plan and universal publicly funded higher education for decades except that a handful of very rich people don't want us to because it will cost them money and possibly increase their competition.
Why Does Any Of This Matter To You?
When you take all of THAT together it becomes clear that we have been in thrall to plutocracy this whole time and the United States of America has never really been a 'free country' for anyone but the wealthy. That’s in italics because it’s big truth that needs emphasis, but I want to be clear that I’m not Alex Jones-ing about all of this, asserting some shadowy cabal of billionaire conspirators. As one of my longtime heroes George Carlin pointed out long ago it doesn’t require some organized conspiracy for these like interests of like mind to arrive at similar conclusions when motivated by the pursuit of similar ends. There Is No Cabal.
One of the key reasons we continue in this unsustainable top-heavy model is that we're allowed - encouraged, coerced even - to exist in a state of misunderstanding how a key part of our lives functions, for the benefit of those who wish our lives to function to their profit and to the great detriment of our own interests.
If we admit out loud that poverty is a deliberate policy choice, that - as anyone who paid attention in 7th grade social studies can tell you - only Congress has the power to create dollars (in modern banking, banks generally do this now when they issue loans as well), then we have to admit that about 70 percent of our political rhetoric is based on absolute nonsense that exists only as a set of convenient, well-labeled, easy to operate emotional levers with which to manipulate the emotions of the electorate to the satisfaction and prerogatives of status quo politicians and the billionaires who own them.
The whole frankly dumb picture starts unraveling, it doesn’t require special insight or understanding, you don’t have to be a genius to “get it.” The politicians use the “tax to pay for” routine to keep us tangled up with each other and rooting for our chosen teams while the people who pay them continue generating money by the unsustainable and unethical exploitation of resources, including human beings.
Detach these notions of “taxing the rich” and “paying for federal spending.” Of any kind, period. The two simply aren’t related in that way. If you dig in deeper you can find that having those dollars sitting in billionaire bank accounts may create a minor issue in resource management that is alleviated by taxing it out of the economy, and some will argue that’s the same thing, but it very much isn’t and the distinctions are critical. Again, when you separate taxation from spending, you no longer have the excuse of “we can’t pay for it.”
Of course we can pay for it, we own the money.
Caveats
That doesn’t mean we can just “print the money” and buy everything we need, not because we can’t print the money but because those resources may not exist. We need professors and medical professionals; it will take years to get those roles filled, even just to stopgap the period before automation takes over a big chunk of those jobs. Can’t have universal single payer health care if you don’t have enough doctors, nurses, hospitals, beds, sheets, bedpans, bandages, and drugs to treat people with. All of those things take time and energy to create, before we can “buy” them at any price.
The whole online sphere of discussion about Modern Monetary Theory has become quite polluted over the last three or four years as the concepts themselves have gained more traction in the mainstream. Sometimes this results in perhaps well-intended but often ill-motivated, under-informed, and over-amplified advocacy.
It is in no way my intent to do more than scratch the surface of MMT in this article, but I do recommend most highly the work of Warren Mosler (“MMT” originally stood for “Mosler’s Monetary Theory”), Stephanie Kelton (prominent macroeconomist, best-selling author, sometime economic advisor to Bernie Sanders and others), Claudia Sahm (formulator of the “Sahm Rule” in economics and a former Fed and White House economist), and Ellis Winningham (a US-based economist & consultant-educator for various central banks around the world, currently working in the UK) for much more intricate examination should you choose.
MMT has some quite aggressive “opponents” and detractors. It’s important to keep this in mind; these folks generally have a vested interest in the status quo, and they’ll run all kinds of compliance-gaining tactics (appeal to ridicule, appeal to social approval, appeal to tradition, etc.) trying to talk it down and go on about why it “won’t work” or “shouldn’t be done.” Opposition tends to come in a much more aggressive way the further right you progress on the political spectrum, as the observations of MMT - which are themselves as apolitical as e=mc^2 - lend themselves very naturally to the validation of various progressive or leftist (that is to say, “people-oriented”) ideals, goals, and values.
These folks can be safely ignored as they entirely miss the point of MMT inasmuch as MMT is not a prescriptive theory but a descriptive one. It’s not a normative arguement, an attempt to assert “how things should be,” but rather a series of observations of the way things are, subject to testing and review, which is why it’s a “theory.” “Gravity” is a “theory” in precisely the same sense; “here’s a set of observations and the descriptions of those observations, the predictions of what further observations will reveal, and an explanation of why, as best as we can ascertain,” (in other words, “science”), “and thus far there’s zero evidence of a flaw in our explanation but we allow for the possibility.”
Finally: All of the observations above regarding taxation and its purposes rely on the assumption that we are talking about at the “federal” level of a sovereign currency issuing nation, which in the US would be the US government. US states, cities, and municipalities do not issue their own currency but use US dollars, and consequently they do use tax revenue, among other things including everything from private contributions to bond issues to federal grants and loans, to fund spending.