That's politics

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Douglas PyeDecember 18, 2015 at 9:23 am

….. duck, weave, smile, … weave ( analogies ) … duck ( lies ) ….. smile ( spin ) …. ‘nuf sed ?! … Sadly !! …
Michael LaceyDecember 18, 2015 at 9:25 am

Main stream media allow “just politics” ! That allowance gave the Abbott government a win in the election!
Matters NotDecember 18, 2015 at 10:13 am

Well we now know who are the actual ‘lifters’ and ‘leaners’. My supplier of electricity is Energy Australia with a turnover of $9 000 000 000.00 of which $52 000 000.00 was classified as ‘taxable income’. The tax paid was $0.00.

That’s right I paid more tax on yesterday’s ice cream than a company with $9 billion of turnover. Now they want to raise the GST by 50% so that they can cut the company tax rate. Where is the outrage? Where are the street marches. Where is the naming and shaming? Where is the ALP? (They allowed it to happen as well).

Note also the Murdoch’s companies paid zero tax as well.

http://www.theguardian.com/news/datablog/ng-interactive/2015/dec/18/do-you-pay-more-tax-than-australias-biggest-companies
townsvilleblogDecember 18, 2015 at 10:33 am

Yesterday’s revelation that at least 579 companies operating in Australia are paying no tax at all probably due to some clever accounting are robbing the federal Treasury at a time when the LNP are trying to shift the burden of taxation on to the most vulnerable in our community should be a wake up call to protest in every way possible to make these businesses pay their fair share of taxation, were they to do so we would be close to having a balanced budget, as things stand they are parasites living off our money.
Kaye LeeDecember 18, 2015 at 10:38 am

The Shovel did a great piece titled “Fears Businesses may pack up and pay no tax elsewhere if laws change”.

“Tougher company tax laws would simply encourage multi-nationals offshore, meaning Australia would miss out on tens – even hundreds – of dollars in tax receipts, experts have warned.

Business Council of Australia spokesperson John Bradley said that while it was likely companies would continue to operate in Australia in order to make money from us, there was a real risk they would take their tax liabilities elsewhere.

“That $0 that Chevron paid in tax last year? You can kiss that goodbye if the laws change,” Bradley said. “That’s $0 less for roads, $0 less for hospitals, and $0 less for schools. So critics need to think very carefully before making rash statements about all this”.

He said many regular people didn’t appreciate the complexities behind why 88% of Australia’s top companies paid less than 5% tax. “It’s very, very complex. There are expenses, and incomes, and offsets, and lots of other complex things that you probably wouldn’t understand,” he said.”
mars08December 18, 2015 at 11:06 am

Some words from the splendid, inspiring Joe Hockey:
“A just and fair society never leaves anyone behind.

But a just and fair society must not seek to penalise those who aspire to be better.

We must reward the lifters and discourage the leaners.”

So, there you have it. The lifters shouldn’t be penalised…
SirJohn WardDecember 18, 2015 at 11:10 am

An excerpt from They Thought They Were Free – The Germans, 1933-45 by Milton Mayer

What happened here was the gradual habituation of the people, little by little, to being governed by surprise; to receiving decisions deliberated in secret; to believing that the situation was so complicated that the government had to act on information which the people could not understand, or so dangerous that, even if the people could understand it, it could not be released because of national security. And their sense of identification with Hitler, their trust in him, made it easier to widen this gap and reassured those who would otherwise have worried about it.
This separation of government from people, this widening of the gap, took place so gradually and so insensibly, each step disguised (perhaps not even intentionally) as a temporary emergency measure or associated with true patriotic allegiance or with real social purposes. And all the crises and reforms (real reforms, too) so occupied the people that they did not see the slow motion underneath, of the whole process of government growing remoter and remoter.
The dictatorship, and the whole process of its coming into being, was above all diverting. It provided an excuse not to think for people who did not want to think anyway. I do not speak of your ‘little men,’ your baker and so on; I speak of my colleagues and myself, learned men, mind you. Most of us did not want to think about fundamental things and never had. There was no need to. Nazism gave us some dreadful, fundamental things to think about—we were decent people—and kept us so busy with continuous changes and ‘crises’ and so fascinated, yes, fascinated, by the machinations of the ‘national enemies,’ without and within, that we had no time to think about these dreadful things that were growing, little by little, all around us. Unconsciously, I suppose, we were grateful. Who wants to think?
To live in this process is absolutely not to be able to notice it—please try to believe me—unless one has a much greater degree of political awareness, acuity, than most of us had ever had occasion to develop. Each step was so small, so inconsequential, so well explained or, on occasion, ‘regretted,’ that, unless one were detached from the whole process from the beginning, unless one understood what the whole thing was in principle, what all these ‘little measures’ that no ‘patriotic German’ could resent must some day lead to, one no more saw it developing from day to day than a farmer in his field sees the corn growing. One day it is over his head.
How is this to be avoided, among ordinary men, even highly educated ordinary men? Frankly, I do not know. I do not see, even now. Many, many times since it all happened I have pondered that pair of great maxims, Principiis obsta and Finem respice—‘Resist the beginnings’ and ‘Consider the end.’ But one must foresee the end in order to resist, or even see, the beginnings. One must foresee the end clearly and certainly and how is this to be done, by ordinary men or even by extraordinary men? Things might have. And everyone counts on that might.
Your ‘little men,’ your Nazi friends, were not against National Socialism in principle. Men like me, who were, are the greater offenders, not because we knew better (that would be too much to say) but because we sensed better. Pastor Niemöller spoke for the thousands and thousands of men like me when he spoke (too modestly of himself) and said that, when the Nazis attacked the Communists, he was a little uneasy, but, after all, he was not a Communist, and so he did nothing; and then they attacked the Socialists, and he was a little uneasier, but, still, he was not a Socialist, and he did nothing; and then the schools, the press, the Jews, and so on, and he was always uneasier, but still he did nothing. And then they attacked the Church, and he was a Churchman, and he did something—but then it was too late.
Terry2December 18, 2015 at 11:17 am

Most of Abbott’s so called success as an opposition leader was crafting slogans than twisted the truth and relied on the majority of the populace not enquiring further into what he was saying.

A classic case was the debate on stripping Australian citizens of their citizenship whilst they were overseas and possibly involved in activities that could be construed as against the interests of Australia. Labor suggested that action should only be taken once these people had returned to Australia and been brought before the courts ; I thought that was reasonable in the circumstances but Abbott immediately taunted and sneered that ‘Labor wanted to roll out the red carpet to terrorists’.
After that, sensible and informed discussion was impossible.
SirJohn WardDecember 18, 2015 at 11:23 am

My point precisely as outlined in; An excerpt from ‘They Thought They Were Free – The Germans, 1933-45’ by Milton Mayer.
Terry2December 18, 2015 at 11:32 am

When I saw the list of corporations with gross earnings exceeding $100 million who were paying little or no tax I was extremely angry that they were able to arrange their affairs in such a way that they could elect not to make any contribution to the running of this country.

As individuals we are subject to PAYE so that our gross earnings are immediately discounted for income tax rather than the lurk enjoyed by corporations who get to spend their revenues, send some offshore pay generous salaries and bonuses to themselves and if there is anything left over they may perhaps make a tax contribution.

Clearly there is something very wrong with our corporate taxation system and we certainly should not even be considering reducing the nominal rate until we can be assured that they will actually pay it.

Why can we not tax gross revenues , no offsets, no deductions .
Kaye LeeDecember 18, 2015 at 11:45 am

Taxing gross revenue won’t work because businesses have legitimate expenses. Profit shifting is the thing we must stop.
z2610December 18, 2015 at 11:52 am

intoxicated economic driver
Kaye LeeDecember 18, 2015 at 11:52 am

One way to address it would be to give no tax relief for interest paid on inter-company loans. Also, companies should be taxed in the place where the economic activity takes place, not in their resident country. That would make James Packer’s move to Israel pointless.

A single group of companies should be looked at as a single entity rather than individual subsidiaries. The global profit of an entity is then allocated to each country in accordance with key variables, such as sales, employees and assets – and each country can then tax the resulting profit at any rate that it wishes. A system of unitary taxation has been operated within the US since the 1930s to negate the impact of domestic tax havens (for example Delaware) and profit shifting.

A financial transactions tax would also be a good idea.
mars08December 18, 2015 at 12:08 pm

Oh… and having a few thousand more frontline troops at the tax department would probably help…
Kaye LeeDecember 18, 2015 at 12:28 pm

You mean rehire all those people they made redundant who then immediately got jobs with firms to advise them on the legal way to avoid paying tax? yeah I’d rather them on our side too but I doubt we can match the wages.
mars08December 18, 2015 at 12:32 pm

Exactly what i meant…
townsvilleblogDecember 18, 2015 at 12:42 pm

Yes we couldn’t possibly afford those people the public service is already far too large according to the LNP boffins.
townsvilleblogDecember 18, 2015 at 12:44 pm

18.12.15
Letter to the Editor

In the wake of the ATO Affair where it has been estimated that these big businesses have robbed our federal Treasury of approximately $38 billion in revenue, will the people who criticise the unemployed as dole bludgers now admit that our ‘biggest problem’ lies with businesses who have so many deductions that they pay little to no taxation. This is not good enough.
One can’t criticise one without the other, they both affect our Treasury. With the unemployment numbers nearing the one million mark, the LNP Politicians seem like rabbits stuck in the headlights as far as doing anything about the situation, for example job creation projects like our stadium and entertainment centre, raising the Burdekin Falls Dam wall, or building a new dam at Hell’s Gate. When will the Abbott/Turnbull LNP government act to create jobs in North Queensland? We in Townsville have had a conservative council (LNP) with no ideas for the past 7 years other than to get the city into $400 million of debt. Now we also have a federal LNP government who have no idea on how to manage an economy, or raise revenue from big business, this must cease, we need the wealthy to pay their fair share, not to bludge on we poor families.
We must expect more from our governments who to try to burden us with a great big new tax percentage on everything we buy, the 15% GST, instead of making the 579 big businesses who have evaded paying their fair share of taxation. Enough is enough the poor and the sick can contribute no more than we are doing, if these latest cuts to the health budget go through the Senate, we will simply die off. The LNP have betrayed us, and unless we fight back, we’re finished.
Regards,
Shaun Newman
SuziekueDecember 18, 2015 at 1:17 pm

During the Coalition’s next election campaign, every utterance they make should elicit the same response “Is this politics or reality?” Morrison’s words should be made to come back to haunt them over and over.
Terry2December 18, 2015 at 1:24 pm

Kaye

“businesses have legitimate expenses”

Individuals have legitimate expenses too !
Kaye LeeDecember 18, 2015 at 1:30 pm

Yes Terry but I am thinking of my own business where sales are over $1 million but so are expenses – stock, wages, rent, superannuation, insurance etc. The difference between the two is not much.
DarrenDecember 18, 2015 at 3:13 pm

Kaye Lee and mars08,

Perhaps we can obliterate the advantage gained by accounting firms and corporations that hired ex-ATO employees by simply scrapping the entirety of existing corporate tax law and enacting a new, simple, basic tax policy. All anyone ever seems to want to do is fiddle about around the edges, but tax law, like many things, gets more complicated, convoluted and opaque over time. Just occasionally, we need to step back and work from a clean sheet of paper.
Kaye LeeDecember 18, 2015 at 3:42 pm

Darren,

They would be torn apart by lobbyists. Even trying to design a mining tax from scratch proved beyond them.

One good thing, the next election is shaping up as a battle between GST hike or cracking down on corporate tax avoidance and tax concessions for the wealthy. Throw in climate change and attacks on health and education funding and one would expect Labor to romp home.

The new year should be a busy one. Will Labor be able to be seen through the smoke and mirrors and heard over the silly distractions like Bronnie’s adventures, Tony’s proclamations, and the all too familiar attack on the head of ASIO for being ‘political’?

These people don’t want no stinkin’ advice! Any criticism is a stitch up or an attack on their freedom of speech!
Terry2December 18, 2015 at 3:58 pm

Hi Darren

There are quite a few corporations who are more than happy with the status quo and whilst they organise their affairs so that they make no contribution by way of taxes – leave that to the peasants – there is always something in the kitty to grease the palms of politicians .

This from Bernard Keane at Crikey :

“Take global energy giant Chevron, for example, which earned over $3 billion in Australia in 2013-14 but, doubtless to the dismay of its executives, somehow failed to make a profit and thus paid no tax. Nevertheless, according to Australian Electoral Commission data (we’ve confined our search just to 2013-14), Chevron gave over $70,000 to the ALP and over $120,000 to the Coalition, mainly the Western Australian Liberal Party.

Building products giant Brickworks didn’t make quite as much money — it made just $860 million, but earned the same profit and paid the same amount of tax, zero. However, it was even more generous in political donations — it gave over $260,000 in donations to the Liberal Party federally and in NSW. Local investment firm Washington H. Soul Pattinson — which has extensive co-ownership with Brickworks — enjoyed over a quarter of a billion dollars in revenue but also made no profit. Nonetheless, it too gave generously to the Liberals, donating $250,000.

Health and beauty giant Australian Pharmaceutical Industries failed to make a buck off $3.3 billion in revenue, but it found $100,000 to give to the Liberal fundraising body the Free Enterprise Foundation.”

Now, I wonder why our politicians are so loathe to consider a clean sheet of paper……..
Kaye LeeDecember 18, 2015 at 4:13 pm

Political donations are a real problem. That fruitcake Leyonjhelm is funded by tobacco companies and then wastes time and money on a Senate inquiry into the “nanny” state. How dare they introduce public health and safety legislation! We want the right to have no pool fences, and smokers are making a huge contribution by not living long enough to claim the age pension. But those wind farms have to go,,,,they make people sick yanno.
Denis Bright in BrisbaneDecember 18, 2015 at 4:30 pm

“Our ‘new’ government is indeed innovative, flexible and agile – innovative with their slogans, flexible with the truth, and agile in their backflips.”

A very appropriate interpretation!

For the moment, the electorate is not listening to these essential truths. What more can be done.

Thanks Kaye Lee.
DarrenDecember 18, 2015 at 4:57 pm

I never said it would be easy! 🙂
StDecember 18, 2015 at 5:11 pm

What gets me is that this government and the Labor opposition continue the lie that we have to pay taxes to pay for government spending

See the following from Proffessor Bill Mitchell on billy blog

Yes it’s a lot but well worth the read

Taxpayers do not fund anything

Posted on Monday, April 19, 2010 by bill

At times some document from the past is discovered that no-one much has read or paid any attention to but which offers fundamental insights into the options facing governments operating a monetary system based on a fiat currency. We have available now one such document which I will discuss in some detail. The essential insight can be summarised by the title of the blog – taxpayers do not fund anything. So when you hear commentators and politicians and the like use terms like “taxpayers’ funds are being mis-spent” etc, you can immediately conclude they do not understand how the monetary system functions. At that point, it is advisable to ignore what they have to say – given it is likely to be erroneous as a result of the initial false premises. The problem is that the public policy debate is largely based on these false premises. As a result, the policy positions that emerge are typically inferior and in many cases extremely damaging to the fortunes of the disadvantaged.

Two news stories over the weekend were interesting demonstrations of how ill-informed the policy debate is in the UK. And the debate in the UK is just a replica of the debate that is being conducted everywhere.

Statements are continually being made by economists and others about important matters of public policy which are based on outrageously incorrect premises about how the monetary system operates and the opportunities that system provides to government policy choice.

While it is heartening to see Goldman Sachs now being pursued in the courts (how long did that take?), my choice of target for prosecution would be my professional peers in economics who should be charged with torturing the minds of our youth with lies and ideology made to look like eternal truths.

On Thursday (April 15, 2010), 77 economists wrote a letter to the UK Timessaying:

As expected, a key election issue concerns how much to cut government expenditure in 2010/11. The main opposition party now proposes to cut an extra £6 billion in 2010/11, on top of the measures already planned by the government. This cut is described as efficiency savings. But in macroeconomic terms it is just a cut by another name. It will lead directly to job losses and indirectly to further falls in spending through the standard multiplier process. At a time when recovery is delicate, it could even affect confidence to the degree that we are tipped back into recession – with much larger job consequences.

This is not the time for such a destabilising action. The recovery is still fragile. Firms and households are saving more to rebuild their balance sheets. This means that firms are investing less and households are spending less. Only when the recovery is well underway, will it be safe to have extra cuts in government expenditure.

The first step is to make sure that growth returns, and thus that tax receipts recover. Rash action now could imperil not only jobs but also the prospects for reducing the deficit.

While many of the 77 economists are mainstreamers who have helped to perpetuate the NAIRU myth (for example, Lord Layard) over the years and contributed to supply-side policy developments (for example, the OECD Jobs Study) which have damaged the life prospects of millions by prolonging unemployment, others among the 77 are leading Post Keynesians. Again, it is another demonstration of the enemy within

Predictably, the letter was reported as providing a boost to the current UK government (Source).

As you read the text you will probably find yourself nodding in agreement. But the underlying tenor of the letter is orthodox. They are expounding a deficit dove line that old-style Keynesians follow. While they argue that tax revenues “funds spending” they are not loathe to see governments use deficits sometimes. They worry about public debt issuance and totally fail to understand why it is issued. To tell them when deficits are sustainable they have nonsensical rules about stable public debt-GDP ratios. They think that these rules, if followed, will limit the size of the deficit – or so they think.

So “deficit doves” think deficits are fine as long as you wind them back over the cycle (and offset them with surpluses to average out to zero) and keep the public debt-GDP ratio in line with the ratio of the real interest rate to output growth. Torturous formulas are provided to students on all of this under the presumption that the government faces a financing constraint and as long as it is cautious things will be fine.

The point is that deficit-doves are essentially no different to the mainstream in perpetuating myths about the way the monetary system operates. The letter has all the deficit-dove hallmarks.

=> Now is not the time to cut but later will be.

=> Wait for recovery and then cut government spending.

=> Wait for tax revenue to rise then cut.

=> Cutting too early will increase the deficit which is a bad thing.

You will see all of those sentiments expressed in the letter. From the perspective of Modern Monetary Theory (MMT), none of the sentiments is of any applicability to a fiat currency-issuing government.

You might say that MMT would consider cutting too early to be a bad thing. That is certainly the case but the point is that it is the underlying sentiment that is misplaced and inapplicable. Cutting too early but having to cut later because you have to balance over the cycle is the erroneous sentiment that is rejected by MMT.

The overwhelming anxiety of the doves is that a government can live on the “wild side” (deficits) for a finite period only and then have to cut net spending and achieve surpluses during the other times. There is a constant level of anxiety underlying the positions offered by the doves.

They know that deficits help underpin demand and employment but are in fear of their inflationary consequences and also consider high public debt ratios to be dangerous and indicative of higher future tax rates. Doves think that governments are financially constrained.

MMT doesn’t offer an opinion about public deficits in this way. MMT considers them to be endogenously generated by non-government spending (and hence saving desires) and have to be whatever is necessary to underpin aggregate demand to achieve adequate employment growth. The goal is not a particular deficit position but other more important indicators of socio-economic well-being – for example, full employment.

Whether the budget deficit required to achieve full employment is 1 per cent of GDP or 10 per cent of GDP is immaterial to MMT. The differing scales just signal differences in non-government spending behaviour.

But a deficit-dove clearly sees a limit on the size of the deficit relative to the economy and current proportions are seen as needing attention. MMT also sees a limit on the deficit to GDP ratio – 100 per cent!

So while these 77 economists are trying to appear reasonable they miss the boat as badly as the more extreme mainstream economists.

Another glaring example of how economists get it wrong is found in the recent report from the UK-based Institute of Fiscal Studies, which was reported in the Guardian on April 18, 2010 as saying Chancellor Brown left public finances “ill-prepared for the crunch”. I plan to write a separate blog about the logic contained in this report.

The Guardian was content to just pass on the myths contained in the Report to its readers. So we read that:

IFS says Gordon Brown as Chancellor fell short of efforts by other industrialised nations to cut government debt … Gordon Brown put Britain’s public finances in a better shape in the run-up to the credit crunch than the Tories managed prior to the recession of the early 1990s, but he fell short of efforts by other industrialised nations to cut government debt and left the UK in a weak position to handle the fallout from the financial crisis, according to the Institute of Fiscal Studies.

The IFS is described by the Guardian as a thinktank (although not much thinking of substance seems to go on there given the poverty of reasoning contained in the Report) admitted evidence from the Office for National Statistics showed that “public services have improved considerably over the period from 1997 to 2007 with measured outputs suggesting a one third increase in the quantity and quality of public services” as a result of deficit spending.

But their main emphasis is that the “high debt levels going into crisis meant the UK would have one of the weakest fiscal positions in 2010 after a deterioration in public finances only exceeded by Ireland and Iceland over the past three years”.

The IFS said that:

Most OECD governments did more to reduce their structural deficit during the period from 1997 to 2007 than Labour did. This fiscal position formed the backdrop to the financial crisis …

To which I would add the sentences: However most OECD governments in slashing their deficits in a headlong, obsessive pursuit of surpluses also maintained higher unemployment rates and lower levels (quantity and quality) of public service delivery as a result. The UK government achieved far better outcomes as a consequence of their fiscal strategy in terms of indicators that matter (employment, etc) than the governments which were intent on abandoning their fiscal responsibility.

But the main point that you should take away from this is the nonsensical notion that past fiscal stances can in some way inhibit or constrain the capacity of a currency-issuing government to implement whatever fiscal policy choices they deem fit now. That belief is a myth and underpins much of the deficit-dove and mainstream thinking.

To be clear: a government which runs a surplus or deficit budget position last year (or for longer) is in a no better or worse position to run a deficit now should it deem that necessary.

For a start, the endogeneity of the fiscal position (driven by the automatic stabilisers) promotes swings in the balance as private spending fluctuates. This provides some counter-stabilising aggregate demand flows. But, in addition to those flows, a currency-issuing government can choose whatever level of discretionary net spending that they want.

Running surpluses in the past does not provide the government with any extra capacity to spend. In the same way, running large deficits in the past does not reduce the capacity of the government to spend and maintain those large deficits. Whatever large means anyway!

The UK government had exactly the same capacity to meet the economic crisis head-on with a properly-scaled fiscal intervention as any other sovereign currency-issuing government. That is, they all had an unlimitedfinancial capacity.

The limitations on fiscal policy are all real. The government can only purchase what real goods and services are available for sale. Further, when there is strong private demand for these resources, the government’s bid can drive prices up.

But with nations all around the globe facing a depression, the government was unlikely to be competing for resources with non-government demand.

Taxes for revenue are obsolete

As noted in the introduction, sometimes a document emerges that categorically exposes all these myths that economists perpetuate. Unfortunately, these documents get very little attention when they were originally published and then lie buried somewhere as the mainstream economists continue with business as usual.

In the last year of World War II, the then Chairman of the Federal Reserve Bank of New York, one Beardsley Ruml addressed the American Bar Association.

You can access Guide to the Beardsley Ruml Papers 1917-1960 at the University of Chicago Library.

Historical records suggest the speech was a non-event and “attracted then less attention than it deserved”. In January 1946, the speech was published in the periodical American Affairs and you can see the full text HERE.

The title of the speech (and article) was Taxes for revenue are obsoleteand I bolded this to make sure it resonated in your consciousness for a little time. Read it again – taxes for revenue are obsolete.

The Editor of American Affairs at the time wrote that Ruml’s:

… thesis is that given (1) control of a central banking system and (2) an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences. The paragraph that embodies this idea will be found italicized in the text. Mr. Ruml does not say precisely how in that case the government would pay its own bills. One may assume that it would either shave its expenses out of the proceeds of taxes levied for social and economic ends or print the money it needs. The point may be academic. The latter end of his paper is devoted to an argument against taxing corporation profits.

Ruml was writing at the time after the gold standard had broken down and before the Bretton Woods agreement which re-restablished currency convertibility and fixed exchange rates. Ruml, himself, was a major player at the BW conference.

But in 1945, the US was a sovereign currency-issuing nation as it is today! The intervening years saw world governments voluntarily cede this sovereignty to the fixed exchange rate system outlined in the Bretton Wood agreement which collapsed, finally, in 1971.

The main political intent of Ruml’s speech was to make a case that taxation is bad for business which is certainly not a central MMT perspective. But Ruml makes his case by arguing that if a government doesn’t need to tax to spend and when it taxes it hurts business then why would the government levy taxes.

So there are several propositions that are linked but separable.

This is how Ruml started to make his case:

The superior position of public government over private business is nowhere more clearly evident than in government’s power to tax business. Business gets its many rule-making powers from public government. Public government sets the limits to the exercise of these rule-making powers of business, and protects the freedom of business operations within this area of authority. Taxation is one of the limitations placed by government on the power of business to do what it pleases.

There is nothing reprehensible about this procedure. The business that is taxed is not a creature of flesh and blood, it is not a citizen. It has no voice in how it shall be governed — nor should it. The issues in the taxation of business are not moral issues, but are questions of practical effect: What will get the best results? How should business be taxed so that business will make its greatest contribution to the common good?

It is sometimes instructive when faced with alternatives to ask the underlying question. If we are to understand the problems involved in the taxation of business, we must first ask: “Why does the government need to tax at all?” This seems to be a simple question, but, as is the case with simple questions, the obvious answer is likely to be a superficial one. The obvious answer is, of course, that taxes provide the revenue which the government needs in order to pay its bills.

First, you understand that taxation is a way that government imposes limits on the non-government sector. Ruml is specifically interested in the busines sector but the argument generalises to all non-government entities.

Second, you also glean from the text that the question that needs to be asked in relation to some policy choice that imposes limitations on the non-government sector – is what “will make its greatest contribution to the common good”? In MMT we talk about advancing public purpose as the fundamental goal that should inform public policy choices. The correspondence between this concept and common good is close.

Third, are these limitations necessary? “Why does the government need to tax at all?” The superficial answer presented is the underlying claim of mainstream (and intuitive) thinking with regard to the purpose of taxation. But like all superfical appearances they are bound to be wrong. The point is that taxes do not “provide the revenue which the government needs in order to pay its bills”.

Ruml then continued to outline how governments could historically spend more than they received in tax revenue by borrowing. He says that borrowing “is an alternative which governments use to supplement the revenues from taxation in order to obtain the necessary means for the payment of their bills.” But:

… if a government persisted in borrowing heavily to cover its expenditures, interest rates would get higher and higher, and greater and greater inducements would have to be offered by the government to the lenders. These governments finally found that the only way they could maintain both their sovereign independence and their solvency was to tax heavily enough to meet a substantial part of their financial needs, and to be prepared —if placed under undue pressure — to tax to meet them all.

So at this stage you will be thinking what is Bill quoting this guy for – all this sounds very mainstream – crowding out; increasing debt forcing taxes up in the future and the rest of it.

But then you will see what is going on by the next passage:

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 the penny drops! State and local governments are similar to a household in the sense they face financial constraints on their spending. They have to raise funds before they can spend. Sure enough, state and local governments have a taxing power that households do not possess. But this is a matter of degree not form.

But a national government is unique in a fiat currency monetary system. Ruml considers two developments to that point (in the last 25 years) had “substantially altered the position of the national state with respect to the financing of its current requirements”.

Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.

The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes. In general, it may be said that since all taxes have consequences of a social and economic character, the government should look to these consequences in formulating its tax policy. All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.

So that statement is as clear as you will get and totally consistent with the fundamental insights offered by MMT. When there is no currency convertibility and exchange rates are flexible, then the central bank has total liberty to create financial assets (money) and the federal government is totally free from any financing constraints.

Please read my blog – Who is in charge? – for more discussion on this point.

So this raises the question: if the government is not financially constrained then why does it impose taxes (especially if they are bad for growth etc)?

Ruml offers four insights into the purpose of taxation:

Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:

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.

Purpose 1 is about inflation control. A fundamental principle of MMT is that the imposition of taxes allows the government to manage the state of aggregate demand. So if nominal demand is outpacing the capacity of the economy to respond in real output terms then tax rises withdraw non-government purchasing power from the expenditure system and reduce the multiplier.

Ruml says that “(i)f federal taxes are insufficient or of the wrong kind, the purchasing power in the hands of the public is likely to be greater than the output of goods and services with which this purchasing demand can be satisfied. If the demand becomes too great, the result will be a rise in prices, and there will be no proportionate increase in the quantity of things for sale. This will mean … inflation. On the other hand, if federal taxes are too heavy or are of the wrong kind, effective purchasing power in the hands of the public will be insufficient to take from the producers of goods and services all the things these producers would like to make. This will mean widespread unemployment.”

Purpose 2 is about redistribution and the point is obvious. Purpose 3 is obvious.

Purpose 4 is awkwardly expressed because it invokes the superficial logic. But it is actually about hypothecated spending. The argument is that politically contentious spending should be transparent. Taxes are, in fact, “demand drains” and so reduce the capacity of the non-government sector to spend. In this sense, the transparency allows the non-government sector to see exactly what “demand injection”(say highway spending) is replacing the command on resources that households and firms would have had in the absence of the taxes. It has nothing to do with the taxes funding anything. Just a $-for-$ matching to help expose the opportunity cost.

Please read my blog – Functional finance and modern monetary theory – for more discussion on these point.

Ruml then outlines the notion of public purpose:

In the recent past, we have used our federal tax program consciously for each of these purposes. In serving these purposes, the tax program is a means to an end. The purposes themselves are matters of basic national policy which should be established, in the first instance, independently of any national tax program.

Again, nothing could be clearer. National policy priorities are the central question. Then the taxation serves as part of an overall functional finance policy package to advance these goals as best as the government can. For Ruml “(t)he tax program should be devised as an instrument, and it should be judged by how well it serves its purpose”.

Conclusion

This speech as delivered in 1945 as the US economy was in transition between the gold standard and the Bretton Woods system. In other words, the US government has much the same currency sovereignty that it enjoys today.

The insights provided by Ruml accord with the essential principles outlined by MMT.

They are totally at odds with the intuitive logic applied by the person in the street and the lies expounded in mainstream macroeconomics textbooks.

Taxpayers do not fund anything. They just lose or gain purchasing powere as the national government manipulates the policy parameters in search of public purpose. The fact the government doesn’t achieve desirable outcomes (through incompetence etc) is not the point.

The Fiscal Sustainability Teach-In and Counter-Conference Update

I mentioned that a group has formed in the US to promote MMT and the first event is a conference on fiscal sustainability on April 28, 2010 in Washington DC to rival the sham conference exploring the same topic which is being sponsored by the Peter Peterson organisation.

You can see Update with program etc.

The conference Home Page also information about purpose etc.

If you are near to Washington DC and have the means it would be great to meet you next week. As soon as a venue is confirmed I will post more details.

That is enough for today!

Spread the word …

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32 Responses to Taxpayers do not fund anything

Sergei says:

Monday, April 19, 2010 at 22:27

Just an idea:

Japan is the country with the largest debt to GDP ratio
… (do not know which one but lets say Australia) is the country with the lowest debt to GDP ratio

Does Japan have a lower capacity to spend fiscally in own currency than Australia? No and from political standpoint Japan probably has greater capacity to spend fiscally than Australia.

Maybe it could be used in discussions about debt if properly worded. By a native speaker 🙂

Tom Hickey says:

Tuesday, April 20, 2010 at 1:15

Bill: The IFS is described by the Guardian as a thinktank (although not much thinking of substance seems to go on there given the poverty of reasoning contained in the Report)

Let’s just call a spade a spade. Most “think tanks” are part of a propaganda apparatus used to give credibility to disinformation that supports interests. Generally, investigation of their funding sources and connections of their principals reveals the interests involved.

john says:

Tuesday, April 20, 2010 at 6:27

Remembering the Peso and Lira from the 70s and 80s with the long strings of zeros after the denominating digit, as someone not trained in economics and no doubt indoctrinated to the status quo, I have a little trouble with the implication of much of what I’ve read as I’ve followed this blog for the last several months.

Much above and in the months before implies that in a fiat currency system there is no constraint on government debt. Is this true and if so how does the system maintain credibility, or am I misinterpreting your position?

Those memories of old Mexican and Italian bank notes are filed right next to memories of collapse and gross miss-governance in those countries, but all observed in ignorance of MMT. Thank you in advance if you can find the time to respond.

Stephan says:

Tuesday, April 20, 2010 at 6:44

John,

I’m not the expert on MMT here and I’m sure the experts will jump upon your question. My 2 cents in regard to “how does the system maintain credibility?”. I’m assuming you’re coerced by your government to pay taxes? Most probable in the currency your government issues – i.e. US$? Thus there’s only one way to comply: you need to get somehow some green paper. Otherwise … all the gold in the world won’t help. Uncle Sam does not accept it. In regard to the implications of MMT there’s a lot to say. For us in Europe I think the following link from Greece speeks for itself, what happens if you’re caught up in some lunatic monetary arrangements:http://bit.ly/dneK4d

john says:

Tuesday, April 20, 2010 at 9:19

Thanks Stephan,
Perhaps it is the depths of my indoctrination, but I’ve come to rather enjoy the water, roads and police protection as well as the scale of economy and concomitant standard of living that my multiple and hierarchical governments provide me. Sure I’ve got issues with our imperialist bent, but that is sort of the point of my question.

If there is not some real constraint on government debt, we can finance our most deleterious tendencies ad infinitum. Neocons summarize those tendencies to be the appurtenances of of the welfare state where I see them as those of empire. I don’t see how you can have an open ended funding system for one without it being equally available for the other. It may be that MMT is simply stating that these are political and not economic issues, an idea to which I’m open, but if it is true I’m exceedingly baffled as to why Neocons aren’t entirely on board with MMT: is this what Dick Cheney meant by “deficits don’t mater”?

Stephan says:

Tuesday, April 20, 2010 at 9:40

John,

Again not the expert on the issue. But you can only purchase what’s on the market. This is a hard lesson the Spanish Crown learned already in the 16th and 17th century. You can have the biggest silver mining (Potosi, now in Bolivia) at your disposal and ship tons of the stuff to the homeland and still you can’t buy victory. The limit on government spending is the real output it can purchase from the private sector without causing inflation. The Spaniards bought inflation. And lost to the Dutch, who ironically waged their war on debt based on IOU without recourse to silver and gold.

mahaish says:

Tuesday, April 20, 2010 at 9:48

“Taxpayers do not fund anything. They just lose or gain purchasing powere as the national government manipulates the policy parameters in search of public purpose”

hi bill,

but this is the poblem, in that the political process has a considerable degree of inertia built into it in terms of raising taxation when required, and so we have this miss guided attemp to control aggregate demand through monetary policy and all its pervers distributional impacts.

dont get me wrong , im a convert when it comes to mmt, but i seem to recall looking into treasury white papers from the late 80’s early 90’s many years ago when keating had his obsession about the current account deficit, and the tenor of treasury policy recommendations where in favour of raising taxes not interest rates. and guess what , the government chose not to raise taxes, no surprises their,

not that raising interest rates arent going to lose you an election, john howard can attest to that.

given that our current policy obsession is with controling inflation, i suppose the challenge for mmt is to put together a detailed policy framework that adresses the whole issue of how a taxation regime would operate under mmt. i presume ELR(employer of last resort) would be a fundamental plank of such a regime as far as controlling the inflationary pressures in the economy.

but exactly how would mmt dynamically adjust taxation policy given changing circumstances, outside of just imposing ELR. so as an self actualising exercise how would you re constitute the tax act and taxation policy.

forgive me if these laymen questions border on the bleedin obvious, because you may have addressed these issues in some detail elsewhere, and i would be greatfull to be pointed in the right direction.

great post as usual, and all the best

mahaish says:

Tuesday, April 20, 2010 at 10:05

i was going to add,

so much of taxation is about symbolism and not about what actually works.

reward and punishment based on the predelictions and prejudices of the particular group of zealots who walk the corridors of power at the time. so public good or purpose can mean whatever hair brained sceme thought to be politically advantageous at the time.

so whilst it may be a good idea to raise property taxes and lower other transactional taxes, the chances of it happening in a real estate mad nation like ours are virtually zero until we have our little cathartic moment with our property market.

mmt has some considerable political hurdles to jump

Panayotis says:

Tuesday, April 20, 2010 at 10:38

Several points.

1. As I have mentioned before in comments to this blog, taxation can act as a means to restrain excessive behavior as speculation and overconsumption as in purpose nos. 1,3 in addition to distributional/allocational effects.

2. As far as inflation is concerned, it depends on the source of inflation. If it is the result of excessive demand, taxing consumption and public spending automatic stabilizers can help. However, in cases of stagflation and structural inefficiencies/inadequacies as in small non diversified economies, dependent on strategic materials, automatic deficit spending imposes inflation from supply bottlenecks and currency devaluation. In order for public deficit spending to be effective, it must be discretionary(horizontal) directed in projects of infrastructrure, alternative technologies/innovative practices, human capital development and skill training. You cannot base MMT analysis only on large and developed economies

markg says:

Tuesday, April 20, 2010 at 10:47

John, You mentioned constaints on govt debt. One thing Bill teaches in MMT is govt debt is the private sector’s desire to net save. The following example is simplistic but makes the point. If the govt spends X amount of money and the recipient of that money then spends 100% of the money, it becomes income to someone which the govt taxes. If each recepient spends 100% of their income and the govt collects a certain percent in taxes, the govt will eventually collect back all of the original X amount. The number of transactions to collect all the money back will be based on the tax rate, but eventually all the money is returned to the govt. Now try the same exercise again, only this time each recipient pockets (saves) 10% of their income. You will find the govt will collect back all the money except what the private sector desired to save (pocketed).
Again, this is simplistic and can take years to eventually play out. But it demonstrates that govt spending and tax policy does not determine the size of the national debt, the public’s desire to net save does. At least this is my understanding and hopefully Bill will correct me if I am off base on this.

lilnev says:

Tuesday, April 20, 2010 at 12:29

Hi Bill,

Would you agree or disagree with the following statement:

“Over the long term (averaged over multiple business cycles), it’s reasonable to expect government debt and GDP to follow the same growth trend, and thus to maintain an approximately constant ratio.”

My thinking here is that money/govt securities fulfill a role as a store of value, and it’s reasonable to expect that the desire for stored value would fluctuate over the business cycle, but in the long run would scale with overall economic activity.

Alan Dunn says:

Tuesday, April 20, 2010 at 12:58

Inflation should neither be targeted let alone even mentioned until everyone who wants a job has a job.

Neo-liberals always worry about inflation and yet you never see the bastards knock back pay increases for themselves that are above and beyond any change in the CPI or indeed their own productivity.

cheers, Alan
RosemaryJ36December 18, 2015 at 6:18 pm

But where do shareholders dividends come into it? Are they simply being paid part of the profits in order to reduce tax or does their payment come from after-tax income?
Sen Nearly IleDecember 19, 2015 at 5:46 pm

pragmatists cannot lie because they know it will be alright in the end. The media ran with the rabbott’s pragmatic truth because it made them money and they would run with little billy’s truth if he had the stomach to attack his parliamentary colleagues. Turnball has been to japan why is labor silent on subs??? Why is little billy not raving about robb signing an FTA with japan including subs? Why is little billy not blasting morrison’s confession (without a bible) and the rabbott’s use of the loonies to double the debt, all over hadley and the media boys?
shame billy, shame tanya, shame penny shame labor
townsvilleblogDecember 20, 2015 at 12:43 pm

Because little billy is a meek and mild bloke who does not posses any passion, he is a weak man, and shouldn’t be leading the party. Either Tanya or Albo should have the job, but because of the AWU/SDA gerrymander it can only go to a weak as water right wing stooge like Shorten.
TrevrDecember 20, 2015 at 3:59 pm

Thanks for nailing down that godless lying thieving heathen Morriscum, Minister for Terror, Kaye Lee