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A Politician’s Guide to telling the truth about taxation

Following an interview with an unusually frank and forthright politician, a journalist was struggling to absorb the reality that taxes don’t fund government spending. He was, however, still conscious enough to ask the next obvious question: if taxes don’t fund spending, why do governments tax?

The next day, while still trying to grasp how sovereign monetary governments pay for things, he returned to continue the interview. While it was questionable as to whether he was mentally ready to learn the truth about why governments tax people, he did have a deadline to meet.

The tax interview resumes…

Journalist: So, let me repeat my earlier question for you. If we can’t ever run out of money, why bother with taxation?

Politician: Taxation is one of a handful of tools the government uses to help stabilize the purchasing power of the dollar. When the government realises the economy has too much money in the system, it acts to correct the balance. It can raise taxes or interest rates, or it could cut back on spending, but that’s never a good idea because those cuts could create unemployment and make the situation worse. This my friend, is the part that gets a bit technical. So, I’ll speak in words of one syllable if necessary. Are you paying attention?

Journalist: er…yes.

Politician: Whenever the government spends, it is creating new money and it distributes that money into the community, via our banking system. That is how you get your hands on it. You think they get it from your taxes, but at this stage, you haven’t paid any taxes, have you, yet, bingo, there it is.

Journalist: Well yes, they had to do that in the beginning to get things rolling, but then taxation took over…. didn’t it?

Politician: No, it didn’t. Taxation never took over. Taxation has always been a means of removing money from circulation, so the economy won’t overheat. If too much money is allowed to circulate, we get inflation.

Journalist: Please explain?

Politician: If the money in circulation exceeds the current capacity of the nation’s production, we get inflation because suppliers haven’t had time to meet the extra demand that comes when we suddenly have more money to spend. When too much money is chasing too few goods and services, prices go up. These things must be done gradually. Taxation helps to keep a lid on things.

Journalist: But then the government has all this extra money it got from taxation. What happens to that?

Politician: It doesn’t need any extra money. It can create any amount it wants to. Your taxes are destroyed, written off the books, they go up in a puff of smoke.

Journalist: You’re kidding.

Politician: No. I’m sorry to be the bearer of bad news, my friend, but you’ve been had. Your taxes don’t pay for anything. Zip, nada, rien, niente. They disappear into the great nothing.

Journalist: My hard-earned taxes are destroyed?

Politician: Sorry about that. Do you need to take a few minutes to recover? Would you like a brown paper bag, or something?

Journalist: I bet Barnaby Joyce has something to say about this!

Politician: I’m sure he does but that won’t change anything. Keeping a lid on the amount of money in circulation helps to maintain its value, but there’s another reason why we must pay taxes.

Journalist: And that is…?

Politician: It forces people to use it. If the government says you can only pay your taxes using Australian dollars, it makes us want to get our hands on it.

Journalist: I doubt that. I’m sure if I offered the tax department a fistful of American dollars to pay my taxes they would happily take them.

Politician: Well, you’re wrong. They wouldn’t. They would tell you to go away and convert them to Australian dollars before they would accept your money. So, if we know that everyone needs our money to function and pay our taxes, we are happy to use it and be confident of its value.

Journalist: I think I need to get a second opinion on this.

Politician: Well that won’t change anything either. And you will probably ask the wrong person and get the wrong advice. The next time you hear anyone say, “my taxes are paying for that,” you can confidently say, “no, your taxes don’t pay for anything, but they do make room for government to spend.”

Journalist: But, if removing money by taxing us, allows government to spend, isn’t that the same thing? Doesn’t one cancel out the other?

Politician: If the total amount of spending equals the total of tax removed, it does look like the same thing, yes. But it isn’t. They are two quite separate functions operating independently of one another. And spending the same amount as the tax removed, is rare. It’s usually the other way. It’s not so much the amount spent, as what the spending is for.

Journalist: If what you say is true, government needs to come clean and explain it.

Politician: Well, don’t hold your breath. If they came clean, they would have to acknowledge their spending patterns are discriminatory and favour certain groups over others.

Journalist: What do you mean?

Politician: Look at all the areas that could really improve our productivity. Our health for a start, our education, public transport, planning, infrastructure, making sure everyone who wants a job can get one. All these areas where spending is kept to a minimum, are the very areas where we should be investing. If our economy is under-utilised, as it is now, the value of our currency will always be less than it would if we had 100% utilisation of our available resources. Instead, we give huge subsidies to the business sector who then use them to feather their own nests.

Journalist: But they employ us. They create the jobs.

Politician: They couldn’t create those jobs without the infrastructure governments provide for them. Roads, rail, airports, seaports, hospitals, schools, police, the military. They reap the benefits of all those services the government builds, and they profit from it. I think the least we can expect of them is to employ people.

Journalist: But they pay their taxes too.

Politician: Well, you and I know that is not true. Some do, many don’t. But that’s another reason for taxation; to enable the subsidising or penalising of various industries and economic groups. Government has a responsibility to create a society that is fair and equitable, something, which is sadly neglected these days.

Journalist: You’re right. They don’t pay their fair share.

Politician: If companies fail to pay their share, you and I pay more. Remember, the wider and more equitable the tax collection is, the more equitable the distribution of the wealth. Taxation also forces governments to be transparent, to show where they are spending the money they create. The fiscal statement they produce every year, what they call the budget, means we know who gets what, and how much things cost.

Journalist: I’m feeling tired. I think I’ll go home now.

Politician: Your headline in yesterday’s paper was very misleading. I hope you’ll do better this time.

The interview ends

In fact, the journalist doesn’t go home. He heads for the nearest bar to clear his head. It’s all too much. He decides to stick to what he knows best. His afternoon headline reads, “Politician confirms taxes are necessary but doesn’t know why.”

20 comments

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  1. Miriam English

    John, dog knows how many times I’ve tried to explain this to people. It is something that will gradually filter through with repetition. We need our education system to be teaching people about this. In the meantime distributing the info via the internet is the next best thing.

    Just one point I’d quarrel with: the idea that taxes make money valuable. I disagree. What you can buy with money gives money value. Taxes just stabilise that value. Money has no intrinsic value, and taxes have no direct effect on that value. The only way to make money have any value is to buy stuff with it.

    To illustrate: Say I have money, but don’t need to spend it because I do favors for my neighbors and they repay me with milk, vegetables, and cheese, etc. So I have money, but it sits idle because I have nothing to spend it on. The government taxes the money, but I don’t really care, as the money is useless. Suddenly the government doubles its tax requirements. I still don’t care as it is useless to me anyway. If they take all the money I have coming in it still wouldn’t be a problem, unless I had my eye on saving money to buy something from the outside world. Taxes don’t give any value to money. What you can buy with it gives money value. Taxes can only indirectly affect value by stabilising the size of pool of money related to goods and services available to be bought.

    Also, bitcoin has value, but isn’t taxed. There are some share systems that have their own kind of tokens. They’re valued, but not taxed. Barter has value but can’t be taxed.

  2. diannaart

    Thank you John and thank you Miriam

    Every day I learn a little more, its the retention that is the issue, like money the memory can just slip away

    😉

  3. Joseph Carli

    ” Barter has value but can’t be taxed.”..actually, if we go back a little into contemporary history, there was a time (in the 80’s , I think) when there was an attempt to set up a system of barter-exchange for goods and services…this came to the attention of the govt’ (LNP, If I recall) that decided to authorise the taxation dep’t to assess those goods and services to see if a “universal value” could be placed upon them and then included as a taxable service/income.

    Someone might have more info’ on this piece of history..?

  4. Keith

    Thank you, John. I’ve seen academic articles about the monetary system which I have found difficult to comprehend. You have explained it beautifully.

  5. Miriam English

    Joe, You’re right, of course. I’d forgotten about that. That’ll teach me not to make sweeping statements (probably won’t).

    All sweeping statements are wrong. 🙂

  6. Miriam English

    John, this is a great idea, using a question and answer interview format to explain MMT. It certainly helps to get the concepts across. Also, it makes it much better than most articles I’ve seen on the topic because you carefully avoided the jargon that often makes the subject unnecessarily opaque. Thanks for this. I’ll be able to point people to it in future.

  7. Joseph Carli

    Miriam..I remember it because I was involved in one of those promising barter-exchange systems, where I could exchange my carpentry skills for another trade..say ; plumbing..to build our family house…Unfortunately, when I inquired if there were any trades on the books that I could exchange work with , I was informed that there was a spiritual healer, a tarot card reader and perhaps I would be interested in having my shakras aligned…oh! and yes. there was a psychologist I could consult..I lingered for a while on the possibility of the latter…but just a while..

  8. Clean livin

    Now all we need is to eliminate ALL taxes and replace with one variable “expenditure” tax on ALL transactions. No taxes, therefore no deductions. Just transaction tax! Essentials have very low tax, luxuries have high tax.

    Control amount of cash in the economy by a set amount equal to total cash in banks on any given day, plus or minus to meet objectives in value.

    This does a number of things. One, eliminates tax haven useage. Two, ensures everybody pays their dues, and Three, makes money worthless unless spent.

  9. Harry

    Miriam, John Kelly could probably explain it more clearly than I can but here goes: We MUST pay out taxes in $A. $US dollars or Shekels or Roubles, Kuna etc will not be accepted as JK says; you first have to exchange them for $A. That necessity is what gives all money value, in OZ’s case the $A. In essence its all just electronic entries in bank accounts, apart from physical notes and coins- which will probably become less and less used as we move to a more digital world.

  10. Harry

    It should also be re-emphasised that all the foregoing, as well as the first instalment, refers to currency-issuing governments, ie our federal government, that of the US, UK etc.

    Eurozone nations which have adopted the Euro as their currency essentially demoted themselves to the status of currency users like State and Local governments. These entities DO have to fund themselves from taxes and charges + transfers from the fed (eg GST), and some (limited) borrowings. And our tiers of government fund a good deal of education and health etc programs but reliance of taxes results in chronic under-resourcing of programs.

    Our Neoliberal federal government behaves more like a State government. They could do so much more before they ran into resource constraints. But they NEVER will run short of funds.

    All the tiers of government are artificial creations; we only allow them to be limitations because we are convinced there is a money shortage.

    Strange how money is such a dominant part of life yet we often use it without really understanding it!

  11. Keitha Granville

    wow, I had no clue at all how that worked – or why. Thanks for explaining to an older bear with very little brain 😛

  12. John O'Callaghan

    I read in the early days in the colonies in America before independence,some of the colonies use to burn the taxation money people sent into them,they could’nt get rid of it fast enough!

  13. OPPOSE THE MAJOUR PARTIES

    taxation does create value for a currency because it creates a demand for that currency so john is right here. although miriam is also right because having a currency that is legally deemed to be legal tender for transaction purposes within a jurisdiction or an economy also creates a demand for that currency and hence value for that currency. so u r both right. one is not exclusive of the other.

  14. Jai Ritter

    Wow, thankyou for making it extremely easy to understand. Mind blown and sharing away!

  15. Peter Tolley (@PeterTolley2)

    I have read this analysis of taxation and government spending a few times over the last few years, and it is a fascinating twist on what we I have aways assumed to be true. Is there an example anywhere of a government openly espousing this world view and adopting the measures that go with it, and was it successful? If not why not? I presume the answer will be along the lines that vested interests will always stepping to stop it happening, or some version of the “no true Scotsman” argument.

  16. John B Kelly

    Not openly acknowledging it, let alone espousing it, Peter, but we are all practicing it, just not the way it should be.

  17. Pingback: A Politician’s Guide to telling the truth about taxation – » The Australian Independent Media Network | kickingthecat

  18. stephengb2014

    Part V of the RBA Act 1959. Also section 51(xii) and section 115 of the Australian Constitution.

    Note section 81 of the constitution also refers to the ” revenues of Government going into “consolidated revenues”, and section 83 says that government can not draw money from Treasury unless by approproation

    So there It is, all revenue money (taxes) go into consolidated revenue.

    Now go to Treasury where government gets money, ask the question “consolidated revenue” and find 0 of 0.

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