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Hey, it´s not Taxpayers’ Money!

By Ric Testori

How often do we hear how taxpayers are funding something or other? In most cases, when it´s put like this, we can assume that our money is being wasted on something, like politician’s travel rorts. And we hate our money to be wasted, don´t we! So statements like these can usually be taken as an appeal to our emotions rather than our intellect, and most are probably fact-free.

Apart from the the fact that the target of some government spending may be either good or bad depending on our views and opinions, it is ALWAYS false that it is being paid with taxpayers’ money. In most cases, it´s being paid for with non-taxpayers’ money!

As an example, let’s take the money the federal government is going to give to Adani for it´s enormous coal mine – a billion dollars! Firstly, we are told that this is only a loan, not a gift. But if many experts are correct then that mine is likely to go bust, which means the loan will never be repaid. So it is, actually, a gift. Now here’s the question: Who pays for it?

Both the LNP and ALP are proud of their economic management abilities and encourage us to cheer when they tell us they aim to “balance the budget”. Put simply, they proudly tell us that their spending (expenses) will be limited to their tax revenues (income), just like your household or small business budget. Like you, they will be responsible and stay within their means. We should ask if you would be considered responsible if you failed to pay for your kid’s education or your family’s health requirements, but let’s not go there just now.

So, to balance their budget our government would need to limit expenses by cutting welfare spending to cover the loss of Adani’s billion dollar gift/loan. And now we get to the point – the people who are having their incomes cut, the ones on welfare, are rarely taxpayers. They are the involuntary unemployed workers who don’t have a job because there are not enough jobs to go around. Or part-time workers who’ve just had their penalty rates cut. Or those on the minimum wage who’s real income has fallen but the government firmly refuses to increase that miserly wage. These are the poor bastards who will pay that billion dollars – the non-taxpayers.

So please stop accepting the bullshit that your taxes are paying for something – they aren’t. In fact the only time your taxes are paying for something is when the government’s budget is in surplus. Think about it – they are in surplus because they are taxing you MORE than they are spending. You are being overcharged! And you need to understand that the government has absolutely no need for your taxes to cover their spending because they create the money that you and they spend. The whole balanced budget story is a lie, it is not based on reality.

Here is a video which explains it better than I ever can:

 

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42 comments

  1. passum2013

    Well where does it come from borrowed at exorbitant interest rates in then tax pays for all government spending

  2. Jennifer Meyer-Smith

    Well done, Ric Testori, for saying it as it is.

    The neoliberal language used by both the LNP and Labor of ‘debt and deficit’, ‘surplus’ and ‘the need to balance the budget’ is their excuse to rob the poor of much needed welfare and dignified increases to Newstart.

    These better welfare conditions are essential until the time much needed innovative employment programs become available with real meaningful jobs in homegrown Aussie industries.

  3. Miriam English

    Ric, while you’re correct that the whole balanced budget story is a myth, you’re not entirely correct about it not being taxpayer money that’s being spent.

    Money doesn’t just stop when it gets to unemployed people, every cent goes straight back to the community — food, transport, rent, and so on. All those do pay tax, so yes, it is still taxpayers’ money that is being spent.

    Perhaps you, like me, favor a Modern Monetary Theory (MMT) explanation of the economy. People who prefer MMT are often fond of saying that taxes don’t pay for services. In a simplistic sense that’s true. The government adds money to the economy and then use taxes to pull money back out of the system to keep it healthy. It looks like tax isn’t paying for anything. But the effect is exactly the same as tax paying for government spending; it’s just a different way of viewing the cycle.

    If some people don’t pay their taxes then that restricts the amount of money that can be added to the system, otherwise it would create runaway inflation. So in effect taxes let the government pay for services, even though taxes destroy money and the government pays for services with entirely new money, it comes to the same thing. Taxes let the government pay for stuff. So the stuff is, in effect, paid for by taxes, or perhaps more accurately, because of taxes.

    Of course, none of this is really true of the existing economy, which is being run as if it was still based on the gold standard. In actuality the economy has a lot more headroom than the incompetent crowd in charge think. The government’s spending should really be limited by the productive capacity of our society. The government can spend heaps more money than they currently are. It makes sense to do this particularly with respect to getting more people working, which raises the productive capacity of society, which then lets the government spend even more. Once the government spending exceeds society’s productive capacity then we worry about dangerous inflation. The deficit is actually a good thing. It keeps the rest of society healthy. By bringing the government’s deficit down they risk putting people and businesses deeply in debt, which is unhealthy for society.

  4. Keitha Granville

    I asked my husband this very question the other day – thanks for the answer.
    It has always seemed dumb to me that the government goes on and on about deficit, when they are in a position to print the money they need at any time. And all of the infrastructure built by them for us are tangible dollars of value.
    They need to stop focussing on deficits and start focussing on providing for the people, and then jobs and growth WILL follow. Constantly chasing down to the bottom of the tank will lead to zero.

  5. halfbreeder

    ‘And now we get to the point – the people who are having their incomes cut, the ones on welfare, are rarely taxpayers’. Not quite correct. There is a thing called the GST. Everyone pays that, welfare recipients and even children when they buy lollies with their pocket money from the local shop. Although I do agree with the gist of this article.

  6. Jennifer Meyer-Smith

    Beautiful explanation, Miriam.

    Besides your article I’ve booked you to write on all positive planet-saving measures we are doing and can increase doing …
    … could I book you to write one for a people-friendly explanation of MMT, please …
    … so we can send it to all neoliberal pollies whatever their political persuasion?

    The politicians, who respond positively and with courage to the heightened MMT awareness, will get ‘star’ stamps.

  7. Jaquix

    In any case, those who find themselves on welfare, may well have been a taxpayer for many, many years. And as pointed out above, THERE ARE NOT ENOUGH JOBS TO GO AROUND. Yet the Liberals continue with the mindset that anyone “on the dole” is a “bludger”. Try being in your 50s, made redundant in a small town, trying to find a job. There is no job. That person is not a bludger, he or she is in fact a victim of the current economic circumstances, brought about by many things, including the often forgotten digital disruption. So many jobs are disappearing because we have technology to replace humans.

  8. Jennifer Meyer-Smith

    Hear, hear Jaquix.

  9. Don A Kelly

    There is so much misunderstanding about Deficits and the effect on the economy. One way the government can reduce the size of a deficit is for the government to spend less in relation to tax revenue. Any non-ideologically driven economist would say that cutting government spending would not improve the state of an economy when there are unemployed resources, people looking for work who can’t find it, equipment, tools, raw materials sitting idle and gathering rust and dust rather than being used to produce the goods and services we need.
    Obviously, if a major consumer, as the Government is, spends less, then less in the way of goods and services will be purchased, resulting in less people getting jobs producing what the Federal Government isn’t purchasing, therefore making a struggling economy worse off.
    Historical evidence proves, in order to overcome a recession, if the government spends more money without changing its taxes, the effect of the government spending has such a stimulating effect on the economy by the government buying more goods and services, more people are put into work, they in turn buy more goods and services, putting yet more people into work. This stimulating effect drives up the overall economy so that the deficit actually becomes smaller as a percentage of GDP, even though the deficit was increased in an absolute way.

  10. Miriam English

    I’ve now watched the video Ric suggested. It is a beauty — one of the best and clearest explanations I’ve ever seen of how the economy really runs. Thank you for the link Ric.

  11. Miriam English

    🙂 Thanks Jennifer. I’ll try to make the time for that.

  12. Don A Kelly

    Jaquix….During the Menzies era following World War 2, we had full employment and the government fiscal position was in deficit for that entire period. Remember the “debt and deficit disaster” phrase that Abbott and Co often spruiked when in opposition during the Rudd / Gillard term of government? Well, during the Menzies era of full employment, the deficit was EIGHT times greater than during the Rudd / Gillard term and nobody noticed. When Bill Hayden became Treasurer in the Whitlam Government in 1975, unemployment began to rise and rather than accept that it was poor economic policies that caused this rise, Hayden blamed it on the ‘dole bludges’ by calling them “out of work lion tamers”.

  13. John Kelly

    Jenifer Meyer Smith is right to say EVERYONE is a tax payer, at the very least through the GST system. Miriam English is only confounding the misconception that taxes pay for “stuff’. They don’t. By suggesting that, “But the effect is exactly the same as tax paying for government spending” is wrong and only feeds into the household budgeting scenario. We must CHANGE THE LANGUAGE if the man and woman in the street is able to grasp the reality of a fiat currency. TAXES DON’T PAY FOR ANYTHING!!!

  14. Don A Kelly

    John…..It’s for those reasons that you outline why Prof. Bill Mitchell does not refer to the governments budget as such. The government doesn’t have a budget, Prof. Mitchell prefers to call it a “Fiscal Position”. To call the government’s fiscal position as their budget actually infers that their budget is like that of a household or firm. We must earn, sell, run down our savings or borrow in order to spend, the Federal Government doesn’t do any of these things. They can buy whatever they want whenever they want, they have no financial constraints whatsoever. Now this doesn’t mean they should, the fact remains that they can.

  15. John Kelly

    Don, you are right. The “Millennial’s Money” video above is leading the way by referring to the deficit as, “Net Spending Achievement” and the Debt Clock as, “The National Savings Clock”.

  16. more mainstream everyday

    @ Passum2013

    It is very clearly covered in the video link. but essentially:

    since the early 70’s currency was no longer redeemable for gold, instead, currency became an I.O.U. printed by government by decree (fiat).

    Through Government wages, infrastructure and services, this money is created as needed and “spent” into the Private Sector which includes banks, banks (through fractional reserve lending practices) expand that money supply by issuing Bank I.O.U’s (limited by how many government I.O.U’s they hold), which the government promises to exchange for government I.O.U’s on demand (getting cash from an ATM).

    Government then “taxes” (destroys) government I.O.U’s out of the private sector ( +$1 -$1= $0) to allow for more government I.O.U’s to be created through government spending with the intention of limiting price inflation. These IOU’s do not get recirculated by the issuer, only created and destroyed. There is no real reason why you would go to the effort and expense of collecting something that you can just “declare” into existence.

    Government debt in it’s own currency are generally called Bonds. This is where Gov IOUS are removed from the economy for a period of time in exchange for a reduced volume of additional IOU’s being spent in the form of interest ( in essence a govt term deposit). This is not a debt that has to be “repaid” as it is only moving figures from one column to another and is entirely about managing interest rates.

    The interest that we pay to banks is a transfer of real goods in exchange for more IOU’s.

    The only limit on government spending in its own currency is the spare capacity of the economy to produce real goods.

    When considering concepts like “budget deficit” you need to look at it from the other perspective. just like how to a bank, your liability, is their asset, so to with the government, their deficit is your surplus and vice versa.

    Howard and onwards budget surplus obsession only resulted in shifting the bulk of replacement IOU generation from interest-free government IOU’s to interest-laden Bank IOU’s. They could have regulated the banks and invested in infrastructure but that isn’t neo-liberal ideology.

    Anyone who says to you we have to have a balanced budget, or that we need to be in surplus, is either lying to you or is ignorant.

  17. totaram

    “the National Savings Clock” is correct: I point out to people that my super fund invests in govt. (treasury) bonds, and therefore these are my “savings”. People still look incredulous! It’s just too much to take in with the daily talk of govt. “debt”, which our grandchildren will have to repay, and nonsense like that.

  18. Chris Monie

    OMG like having money, lower-class or middleclass welfare money, taken from them is them paying for it. The money they should have got was tax-payers money – not necessarily income tax payers money – but how else does the Government raise revenue for the public purse now it has divested [given to their donors] ourselves of all publicly owned assets which actually turned a profit

  19. more mainstream everyday

    Chris Monie.

    Federal Government prints money, State and Local governments raise revenue.

    Federal Government prints money into the economy by making payments, buying stuff and building stuff, e.g. “welfare” and removes money through taxation so the cost of stuff made isn’t pushed up by too much cash sloshing around (think housing bubble)

    Profit is irrelevant to the Government as it prints as much as it wants. Money taken out by taxation isn’t then used to buy stuff again. The only thing that happens is that when you pay tax (of whatever type) the plus component (your money) is put against the negative component (your tax debt) and through the magic of double entry accounting, cancel each other out resulting in zero.

    IF all debt were repaid tomorrow, there would be NO money, literally.

    What we are actually talking about is purchasing power. There is only so much purchasing to be done within an economy limited by actual goods, what we consider as a dollar is a 1/1238734768756….ishth (just random numbers but you get the idea) share of the currently utilised productive capacity of the nation.

    In order for some sectors of the economy to be able to purchase more, other sectors of the economy have to purchase less so that prices don’t increase for all. Look at the rest of the economy during the mining boom to understand this at play.

    Governments get to pick who gets to have more and who gets to have less of the real goods of the economy through its spending and taxation policies, i.e. poor people, students, pensioners get to have less so that Big Business and holders of capital get to have more.

  20. Jennifer Meyer-Smith

    Everything was going swimmingly for me,

    until mme’s last paragraph. Why should governments pick poor people, students, pensioners to get less and Big Biz and holders of capital more?

    Maybe I sound like a Communist but better balance between those groups should be priortised so we don’t have poor people and struggling students. Governments sound like they are fully equipped to make that happen.

  21. Phil

    MMT makes a lot of sense to me as did that video by jdalt.com. So you MMT experts, tell us why MMT, a system that is logical, sensible and practical is of no interest to the political class that rule supposedly in our interests?

    I know this much: the unemployed are vilified, insulted and harassed because those we elect to create the legal, economic, social conditions that generate jobs and growth, are wedded to their failed monetary system and in order to avoid the responsibilities we pay them handsomely to undertake, they have decided it is easier to scapegoat the unemployed.

    And the more damaging that scapegoating is when you have a corrupted right wing media as your megaphone.

  22. Jennifer Meyer-Smith

    Spot on, Phil.

  23. thenationaldebit

    The video is perfect…because….JD doesn’t veer away from that MMT pillar that says ‘taxes are NOT NEEDED to fund spending.’ Instead of innocently misinterpreting that MMT pillar with ‘taxes / taxpayers don’t fund spending’, JD says it correctly, that (at 15:03) “The federal gov’t DOESN’T NEED the cancelled iou in order to issue and spend new fiat dollars.” He says (at 22:17) “The sovereign federal gov’t HAS NO NEED to harvest what it can create on its own anytime it needs to.” Until the mainstream (the fiscal policymakers) stop using the ‘old diagram’ (gold standard mentality); until everyone stops calling it deficit spending and instead calls it (at 27:22) “Net Spending Achievement”; until folks stop calling it the national debt and instead calls it (at 28:02) “The National Savings,” ( or as I suggest ‘The National Debit’), if an MMTer says ‘taxes / taxpayers don’t fund spending’ before then, that verbiage simply doesn’t make sense to anyone outside the MMT circle…so…(at 24:33) “We need to make sure we use the right terminology.”

    Ric, in my opinion, your last paragraph would be a little better if written as:

    Please stop accepting the bullshit that your taxes ARE NEEDED to pay for something – they aren’t. You need to understand that unlike local & state gov’t (users of dollars), the federal gov’t (issuer of dollars) has absolutely no need for your taxes to cover their spending because they create the money that you and that they spend. Federal revenues (federal taxes & bond sales) as a financing operation is obsolete. In the post-gold standard, modern monetary system, the actual functions of federal revenues are to maintain price stability and to maintain demand for the currency. In other words, users of dollars balance the budget and issuers of dollars balance the economy. Unlike for local & state gov’t (the users), for any monetary sovereign (the issuers) the whole balanced budget story is an idiosyncratic relic of a bygone era.

  24. zoltan balint

    Dear Ric, are you taking the piss. Any money the government has is from the taxpayers. The only connection to the unemployed is instead of spending it on them the government will GIVE it to a company or business. How many jobs is it going to create … ??? Divide 1billion with that number and what you have is how much this government is willing to pay for each of those new jobs rather then pay them newstat or what ever the $#@&$ they call it.

  25. silkworm

    “… removes money through taxation so the cost of stuff made isn’t pushed up by too much cash sloshing around (think housing bubble)…”

    Caused by negative gearing, which is in effect a tax concession to the wealthy. Remove this tax concession and impose a tax on second and other homes.

  26. silkworm

    According to MMT, there should be no impediment for Commonwealth grants to the arts. Here is a huge potential for creating employment.

  27. Miriam English

    John Kelly, you slightly misinterpreted what I said. I wasn’t saying that taxes actually pay for government spending. I was saying that the effect is the same as if they did.

    Taxes destroy money, yes. Spending by the government is created out of thin air, yes. But that doesn’t change the fact that spending is constrained by taxes. If the government fails to take much money out of the economy then it can’t spend much — not because it needs the tax money to spend, but because if it simply adds more and more money to the economy then inflation spirals out of control. In this way taxes do determine how much the government can spend.

    Other things affect it too, but tax, as far as I know, is the main way of taking money out of the economy to make room for new govt spending.

  28. Miriam English

    zoltan, the money comes from the government, not the people. Who owns the printing presses that create the money? They print money, spend it into society, then it circulates until it is taken out again through taxes and destroyed.

    The video Ric linked to (https://youtu.be/bHQCjFebIf8) does an excellent job of carefully explaining it. Watch the video and be prepared to be surprised. Everything we have had bashed into us is wrong. The mainstream economists genuinely don’t understand how money works.

  29. Ric Testori

    Miriam English: Your ¨Spending is constrained by taxes¨ only applies if the economy is at full production and all resources are being utilized. This can happen, but it isn’t happening now. Look at the number of hours wasted through underemployment – that represents unused, available resources. Federal govt funding of a Job Guarantee programme, for example, would allow those labour resources to be used with zero risk of inflation or any change to taxes.

    Inflation can only become a problem when there is too much demand for limited resources – I’m not aware of any developed economy with this problem at this time.

  30. stephengb2014

    Doubters should run the video again

    Then look up the RBA Act 1959 part IV

    Its quite clear as to who creates currency

    S

  31. Miriam English

    Ric, that’s true that there is a lot of unused room for spending in our existing economy. I pointed that out in my earlier comment (final paragraph at 10:17am). I should have repeated that caveat in my comment at 11:23pm.

    Yes, hyperinflation is a problem when there is too much money and/or too few goods/services. It is a big problem today in Zimbabwe, but that is a developing nation.

  32. Ric Testori

    Miriam English, I hope you didn’t think I was picking on you 😉 but I couldn’t resist the opportunity to bite back at the reference to INFLATION. I think it’s the most misunderstood aspect of the real economy and the widespread lack of understanding is so ruthlessly reinforced by mainstream economists & other neo-liberal ideologists. Another contentious point is ¨too much money¨ which is a problem many of us would love to have. I just want to point out that it’s not the volume of money in existence that creates a problem, it’s when that money starts to chase limited resources. If it’s locked up in bank reserves or savings accounts or under the bed it’s not doing anything to affect inflation.

  33. Miriam English

    🙂 No worries.

    Yes, as you say, inflation comes when either there is too much money (if a government has printed too much of it), or there are too few goods/services (such as after a war), or both (Venezuela?).

    I hadn’t thought about the case of large amounts of money locked up. I’ll have to think more on that.

  34. Harquebus

    “I just want to point out that it’s not the volume of money in existence that creates a problem, it’s when that money starts to chase limited resources.”
    Get ready.
    Cheers.

  35. Don A Kelly

    From a macroeconomic perspective, the only reason why the fed.government tax us is to create room for itself to spend in a way that is not inflationary. Taxes are inflationary quelling. The government should spend enough to ensure that they at least maintain the sustainable capacity of the economy. That is all that matters. Inflation is caused when total spending exceeds the productive capacity of the economy, sometimes called full employment. Governments haven’t maintained the productive capacity of the economy for about 40 years.

  36. zoltan balint

    Dear Miriam had this argument before. Money represents the value of things we create. Problem starts when money printed by government or authorities is not in line with that value. That money belongs to the creator of the good not the government. Think of the taxes as pocket money you give to a child to spend on things or to go and get stuff from the shops for dinner. The government is that child and what would you do if it decided to spend more than you gave it or not get what you told it to purchase and made excuses about what it did.

  37. John Kelly

    Miriam, without labouring the issue of taxes v spending too much, let me say that it is not the level of taxes that determine how much can be spent, but what the spending is capable of producing. We can spend far, far more than we tax without flooding the money supply, if the spending is VALUE-ADDING. If that spending brings us to full employment taxes are incrementally increased through production output. At full employment we can then create an effective inflationary balance with either our tax rates or bond issuance.

  38. Miriam English

    Don A Kelly, that’s how it really works, but it seems with the current government that’s more an accident than anything. They think tax works an entirely different way, and their misconception is gradually ruining the country.

    Zoltan, the money is created by the government. They are the only ones allowed to create it; if you or I try to print money we go to prison as counterfeiters. After the government spends the money into society the funds change various hands as trading tokens whose purpose is to make it easy to transfer goods and services around and sustain a society. Eventually, every dollar finds its way back to the government as tax, where it is destroyed. Money sometimes represents real value, sometimes pretend value — a diamond has almost entirely imaginary value, whereas a bowl of oats has real value. Value, especially monetary value, isn’t an objective thing. Monetary value is really a kind of collective hallucination. Your suggestion that the government is like a kid and taxes its pocket money doesn’t really fit. If the kid printed its own pocket money, and the money you gave it could only come from the kid first, it would fit better, but that isn’t any sort of kid anymore.

  39. Miriam English

    John Kelly, at the moment the government can spend far more than it taxes, but that’s just because we have a bunch of incompetents in power. If the economy reached its full potential, with effectively full employment, then a stable point will have been reached where spending is basically limited by taxes — not because taxes pay for the spending, but because they make room for spending, but it has the same result. I doubt bonds would or could be used to impact that much (though I have to admit they have been used pretty heavily during wartime).

  40. Zoltan

    Miriam we elect every few years a group of people to manage our money. In doing so we entrust them to manage our finance (tax we pay) and to put a value on what we create. This group of people is called A government. The government should only print money if the society creates things and is of value. Exchange rate of the Australian dollar is a good indication of how good the rest of the world views the performance of the government valuing what we created or what we have to sell to them. I can write a book about this and the value of US as a society – but – it would be beyond of what people would like to think about or comprehend. So let us differ of who should or is in control and who should or is serving whom.

  41. Mark

    Just a few random thoughts –
    1) The govt doesn’t “print money”
    That term is of a bygone era when govt did some dodgy deals.
    In a fiat currency all govt spending is new dollars created digitally.
    The dollars are not backed by anything so the govt can create how many it wants.
    Since dollars are created through spending then then must be destroyed or else rising inflation is a real risk.
    Federal taxation destroys dollars.
    i.e. govt spends $100 (says their balance is $0) and is now -$100 and the non govt is +$100 … money creation
    The govt taxes $100 and their balance is $0 and so too is the non govt sector … money destroyed.

    2) Govt spending adds dollars to the banking system
    Bonds drain dollars from the banking system
    The govt does not issue bonds (or borrow) to fund spending. Its to control interest rates.

    3) A govt deficit is a surplus for the non govt sector.
    Arent we meant to save for our retirement ?
    There is no way we can if the govt wants to run surpluses.

    4) The govt cannot run surpluses is the country is running trade deficits and the public is net saving.
    Its impossible.

    5) A govt can only run a surplus after it has run sufficient deficits first to change the non govt sector from net savers into net spenders.

    6) The govt supplies the dollars. Banks can create IOUs only on the conditions that they convert them to the govt unit of account (dollars) on demand ie at the atm or over the bank counter.

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