As they say, even
a broken clock is right twice a day, the implication being that not even
something inherently wrong is always wrong in its conclusions. That is something capitalists and socialists —
and MMT theorists — would do well to remember.
What brought this
on was one of our faithful readers finding an article on “Naked Capitalism,” a “pro-MMT”
website, that as its title made the declaration, “Taxes
for Revenue are Obsolete.” What was
particularly interesting was that the article was originally published in the
January 1946 issue of American Affairs, and was by Beardsley Ruml,
Chairman of the Federal Reserve Bank of New York.
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| Beardsley Ruml |
Ruml opened his
article with the statement, “The
necessity for a government to tax in order to maintain both its independence
and its solvency is true for state and local governments, but it is not true
for a national government.” And why is
that? Ruml had the answer: 1) National
governments have central banks, while state and local governments do not, and a
lot had been learned about how central banks can be used to finance government
without taxation. 2) Convertibility of
the currency into gold or any other asset is no longer an issue.
We can respond to both these
reasons why taxation for revenue is not “obsolete.”
1) What has been learned about central banking is how a national
government can circumvent the entire purpose of a central bank, something that
is not in the power of a state or local government.
State and local governments
are expressly prohibited under the U.S. Constitution from “emitting bills of
credit.” That is constitutional language
for “create money.” No state or local
government can create money, and therefore cannot owe more than it can borrow
(which is still quite a bit of money).
The federal government on the
other hand has no specific power to emit bills of credit — the language
permitting that was removed from the enumerated powers during the
constitutional debates. If you are a
strict constitutional constructionist, you would necessarily conclude that the
federal government cannot create money, either — which, if you read the debates,
is precisely what the framers of the Constitution meant.
If, however, you are an
adherent of the “living Constitution” theory, the federal government can do any
damn’ thing it wants as long as the Supreme Court can twist the interpretation
of the Constitution to mean what it wants.
So what Ruml claimed was a new understanding of central banking was
really just an old theory of constitutional law applied to allowing the federal
government to monetize its own debt.
2) Any currency should be
convertible into some kind of asset on demand, and be backed by assets. Convertibility gives confidence. By taking away convertibility, people become
suspicious that maybe the currency really isn’t worth anything, and the whole
thing may be a con game. Gold is
actually not the best thing for a standard, but that’s not the point here. By removing any tie to a hard asset (a
government that backs its own currency with its own debt is backing it with a
liability, not an asset. . . .), a government gets a free hand in how much it
can spend. It only needs to create as
much money as it can force on the public.
In other words, under
MMT taxation is unnecessary for the purpose of raising revenue because
government can simply create whatever money it needs by emitting bills of
credit which are purchased by the central bank and used to back new issues of
currency or new demand deposits.
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| Harold G. Moulton |
This, of course,
raises the obvious question, If governments don’t need to tax to raise revenue,
why tax at all? Not surprisingly, that
same question occurred to Dr. Harold G. Moulton, president of the Brookings
Institution from 1928 to 1952, who published a short pamphlet three years
before Ruml’s article appeared . . . and which was itself a response to a
pamphlet Ruml published early in 1943.
As Moulton said,
The implications of the new
philosophy of public debt from the point of view of taxation are engaging. If the growth of the public debt is of no
moment, one might at first thought be inclined to ask — Why go to all the
trouble and expense of collecting taxes?
Why burden the public with ever-increasing levies? Indeed, if the purpose of fiscal policy is
not to balance the budget but to obtain the largest possible “net income-creating”
expenditures — as measured by the size of the cash deficit — why not promote the desired end by canceling all taxes? (Harold
G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution,
1943, 71.)
Ruml was able to
answer the question, however. As he said
under the heading, “What Taxes Are Really For”:
1. As an instrument of fiscal
policy to help stabilize the purchasing power of the dollar;
2. To express public policy
in the distribution of wealth and of income, as in the case of the progressive
income and estate taxes;
3. To express public policy
in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess
directly the costs of certain national benefits, such as highways and social
security.
This is such a
huge can of worms that we’ll take it up in the next posting on this subject.
#30#
