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The EU are voting on Chat Control this Wednesday 19th June
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this post was submitted on 18 Jun 2024
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I bet I'm at least as much of a leftist as you are, but taxes don't pay for public infrastructure. In fact taxes don't pay for anything. In the EU, taxes are paid in Euros, the same currency that the European Central Bank can create at will. Why would the European states need to collect taxes denominated in the currency the EU creates? They don't.
Taxes have many purposes. Most importantly they define the area where a given currency is used (if you tax in a given currency, you force the people to earn it to be able to pay for it). But they also serve to disincentivize certain behaviours (tax on alcohol or tobacco), to remove money from the economy to prevent macroeconomic imbalances (if the state creates too much money without removing enough through taxes, there might be some problems), or simply to reduce inequality by charging more taxes to wealthier people or companies.
This is an important point, because it shifts the framing of taxes from a made up "we all need to contribute" mindset, to a more realistic "ok where do we want to remove money and by how much, what do we want to disincentivize, and how can we reduce inequality". And it also shows that states can pay for things without the need to collect taxes for this, for example we saw this during COVID, when sizeable amounts of money were created to give an impulse to the economy and to the people who temporarily lost their income sources.
There is a lot wrong with what you're saying. Taxes don't remove money from the economy, because it all goes back into the economy. Tax money is most definitely used for all sorts of things including for infrastructure. A government can't responsibly create endless amounts of money. The amount of debt a country can have should be related to the size of the economy. Where you're right is that taxes are a way of redistributing money in order to influence society in all sorts of ways. Which can be good or bad.
Sorry but there's absolutely nothing wrong with what I'm saying.
The state is the only issuer of a given currency, for example the US federal reserve is the only issuer of Dollars. If we divide the economy into private sector and public sector, we can talk of taxes as "removing money from the private economy", and of public expenditure as "introducing money in the private economy". Every dollar spent by the state increases the available currency by 1 dollar, and every dollar collected as taxes reduces the available currency by 1 dollar. The state doesn't need a "savings account" since it creates its own currency, so for all intents and purposes, taxation is the destruction of currency and public expenditure is the creation of it.
There's no such thing as "tax money" as you speak of. The state creates currency, it doesn't need to firstly collect dollars that it can create itself. We saw this in the Covid pandemic when states started to spend tremendous amounts of money without collecting it first in taxes, the US government doesn't need dollars, it can create infinite dollars at a few keyboard strokes.
This is not to say that states should start creating arbitrarily big amounts of currency, but if they CAN do so, it begs the question, when should they stop? You mention inflation, but let me ask you, are you SURE that currency creation is the main driver of inflation? The answer is no. We've been poisoned by neoliberalism, we've been told millions of times that "inflation is a monetary phenomenon", and that somehow, markets are omniscient beings with perfect knowledge of currency flow, and they have a dial that they turn up when currency is created and prices grow proportionally as much. But is that really, empirically proven to be true? The answer is absolutely not. In fact, modern empirical studies show that currency creation is a very bad predictor for inflation.
Let's look at the latest inflationary episode for example, in 2022. If we look at the REAL reasons for the inflation, they are
bottlenecks in industry and in supply as a consequence of COVID effects
increasing energy prices and market destabilisation as a consequence of the Ukraine invasion
private companies increasing prices beyond the increase of price of their inputs, riding the wave of inflation to increase their profits
If you look at any inflationary episode in the developed world for the past 80 years, you'll find that inflation has very little to do with money supply, and in fact most times is caused by shortages in supply because of external reasons (oil crises, wars, pandemics...), and not because of excesses of demand as a consequence of currency generation. I'm not suggesting that unlimited currency creation is a good thing, of course it can introduce macroeconomic imbalances. But if evidence shows time and time again that inflation isn't a good measure of this, then how much should we ACTUALLY create? These are the questions that we should be asking, not "but how are we gonna pay for this?".
You also talk about debt. How come Japan, with 250%+ of its GDP in debt, has absolutely no issues? That's because debt isn't a bad thing. First of all, if a state indebts itself in its own currency, it can ALWAYS, by definition, pay it. And it doesn't need to collect taxes for it first. Tomorrow, Japan or the UK or the US, could press 3 buttons on a keyboard at their respective central banks, and perform an early payment of their debt by simply placing the amount of money indebted in the accounts of the owners of that debt. And again, it would NOT need to collect taxes first to do that. But furthermore, debt isn't a bad thing in and out of itself. If public expenditure amounts to putting money into the economy, debt is simply a way to make the private sector more wealthy! Wealth isn't a burden on taxpayers, it's literally the opposite! Many taxpayers own debt from their own country, and they receive an interest from it! "Public expenditure" is literally a synonym of "making the private sector wealthier"!
I seriously encourage you to open your mind about this, and really examine how much of the neoliberal dogma that we've been exposed to for the past 4 decades is really, actually empirically proven to be true. If you want to read more on this "new" way of looking at economics, which matched the empirical data a lot better and offers some interesting new points of view, it's called "Modern Monetary Theory" (MMT). Stephanie Kelton recently made a documentary called "finding the money" which introduces some of the concepts, and if you speak Spanish, the economist Eduardo Garzón has a series of videos in his YouTube channel explaining the basics of MMT. For some empirically based critique of neoliberal dogma, although not explicitly MMT, I suggest the English YouTube channel "Unlearning Economics".
Seriously, please consider how much of the neoliberal economics dogma that we've been exposed to, has been proven empirically, please have a look at it.
Thanks for the elaborate response. To me the 'taxes don't pay for public infrastructure' seems bizarre. Are you saying public infrastructure shouldn't have to be payed for by taxpayers, or that it isn't payed for by taxpayers? I can understand you making a point about the first given your MMT explanation, but taxpayer money IS actually being used for all sorts of public infrastructure, isn't it? A government could use money creation for every project, but they don't, they also collect taxes....
I would also worry that the risks of (hyper)inflation are being downplayed in this theory. But too be fair I'm not an economist, nor do I have knowledge about MMT, so I'm really not the person to refute any of this. It's interesting and I'll look in to it with an open mind. Thanks
What I try to say is that taxes don't pay for public infrastructure directly. The state creates an expenditure budget, and decides which taxes it's gonna charge. The fact that many politicians don't know better and conflate the two, has more to do with ignorance and believing the dogma of neoliberalism, than it has to do with the expenditure of public money and with taxation. Most politicians effectively treat taxes as if they do pay for the public infrastructure, but those concerns suddenly disappear when it comes to rescuing a bank, or to exceeding the military budget, and they remember that states can pay for that stuff without needing to collect that money through taxes in the first place. They even bother to remind us of that when it's the case. In the 2010 Euro crisis, Spain (I'm Spanish) 60bn € in rescuing a set of Spanish banks. Our then economy minister, Luis de Guindos, kindly reminded everyone that "this isn't going to cost a single euro to the taxpayer". So yeah, they only remind us about which stuff "needs" to be paid for taxes when it's actually important, such as healthcare, education or pensions, but they suddenly forget about that requirement when it comes to increasing military budget extraordinarily after budgets were approved, or to rescue a bank.
Your point about hyperinflation is a good one, and remember that I'm not claiming we should start creating infinite money for everyone. In the EU, for example, we have a theoretical budget deficit limit of 3% for many decades now. If you examine the historical reasons for this limit, it comes from a meeting some decades ago in which some higher-ups of the EU met for some hours to decide on a deficit limit, in the full reagan/thatcher period. They came out of the meeting with the number of the 3% limit, and also with the suggested 60% maximum debt as percentage of GDP. The 3% deficit limit was made up on the spot, literally in 30 minutes by a French economist called Guy Abelle, which he has admitted to later in life. The 60% debt was based on a study that compared the health of economies and their percentage of debt... until the study was found many years later to be faulty, because it had significant errors in the spreadsheets used to calculate that number, and upon correcting that there was no suggested number anymore... Look up "Reinhart and Rogoff mistake" on your favourite search engine. So yeah, those rules are absolutely made up and they don't obey any experimental or scientific criteria. That's not to say there shouldn't be a limit to budget, but the conclusion I want to get across is that deficit isn't a bad thing since it amounts to increasing the wealth of the public sector, and the limit of deficit should be calculated or even experimented with based on real, empirical data from real economies, and not what some old neoliberal farts decide in a meeting one evening.
I'll finish with an analysis of a case of hyperinflation, that of Venezuela in the recent years. Venezuela is and has been for the past century an economy based on oil exports. In the year 2014, oil prices were reduced from $130 per barrel, to below half of that. In an economy reliant on oil exports, this meant that Venezuela's purchase power to the outside world suddenly halved, with a corresponding immense drop in GDP. This is what originally led to a high inflation. Now, the price of goods for citizens is so high that they can barely afford them or not afford them completely. As a state with a central bank, you're confronted with two choices: you leave things be, and people literally don't have money to buy their basic needs; or you create money so that people can at least afford them for some time. The response was to create the money to alleviate the harshest consequences. This in turn enables the possibility that people can still buy products that are in shortage, which makes the price even higher, and the cycle restarts. The consequence, as we saw, was hyperinflation. But this hyperinflation wasn't triggered by money creation, it was triggered by an external event, i.e. the drop to half the price of the country's biggest export good and biggest sector of the economy. Of course the government could have decided to let the people starve, and there would have been only huge inflation and not hyperinflation, but is that really a solution? The goal is to prevent hyperinflation, or to minimize human suffering? Javier Milei, for example, seems to be currently on the path to "solve" the inflation problem in Argentina... By making the citizens so poor, that they can't afford to buy the goods and services, so that the businesses can't rise the prices. Sure, inflation goes down, but not by solving the economic underlying problems, and instead by creating immense amounts of suffering so that "the line can finally go down".
I appreciate your willingness to listen, all of this seemed crazy to me just a few years ago, but everything makes so much more sens when analysing the economy from the point of view of modern monetary theory, and the predictive capabilities of the theory are so much better, it's been proven so much during the COVID pandemic and the posterior inflation crisis.
That was an interesting read. Thanks. Do you study economics as part of an education? Or did you just dive in to it out of personal interest?
And surely printing money doesn't cause inflation right. Value isn't free. If you have the same demand for a currency and increase it's supply by 10%, it's going to cost 10% more of that currency to buy any given item.
I'm sorry, but that's empirically proven false time and time again. That's not to say we should be creating as much money as possible, but for example I'm an EU citizen. Do you have any idea how much currency was created between 2010 and 2020? Look up any measure of the M2 or M3 monetary aggregate for the EU in that period, and look at the inflation rates for the period.
If you're a US citizen, I beg you take a graph of inflation for the USA since WW2, look at the inflationary periods, and tell me: what happened in those periods? Consistently, inflationary periods have been caused by external events such as oil crises, or wars like the current one in Ukraine, or such phenomena. Money creation is a very poor predictor for inflation
I know the neoliberal dogma has poisoned the public discourse for decades and it seems obvious and common knowledge that money creation leads to inflation. But it really, REALLY, hasn't been historically the case, and this has been proven empirically time and time and time again.