“. . . Budgets should balance the value of the goods and services we are buying against the cost of the taxes (and borrowing) needed to fund them. These recommendations are as uncontroversial – even bland – as advocating baseball and apple pie on the Fourth of July.” – David Schizer
These ostensibly obvious recommendations are also wrong. Not only from a bleeding-heart, anti-austerity perspective, but in the coldest functional sense. Our outgoing Dean’s fiscal policy framework may be simple and intuitive, but it relies on a fundamental misunderstanding of the connection between federal taxation and spending in the U.S economy.
Lawyers should know better.
In previous editorials, we’ve noted a tendency among macroeconomists to downplay the fact that money is a legal construct, built upon malleable foundations of property, contract, and accounting. We’ve also highlighted a reciprocal tendency among lawyers to defer to the same macroeconomists’ normative visions of responsible public finance. These two phenomena create a hyperformalist fog, whereby the illusion of money scarcity distorts our ability to have informed policy discussions. As Frank Newman observed in his recent MMN talk with Professor Graetz (quoting Mark Twain), “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Schizer’s hawkish piece incorporates a theory of the causes of the global financial crisis, a critique of conventional Keynesianism, and a call for spending cuts and lower corporate tax rates. We disagree with much of his analysis, but Schizer’s chief misstep is his omission of any discussion of money itself. The closest he comes to grasping the central premise of functional finance is on the penultimate page of the paper, where he acknowledges:
[T]he experience of states and the federal government are not perfectly analogous. For example, the federal government can print money, while states cannot.
There lies the rub. The U.S. federal government, unlike Texas or Greece, issues its own sovereign currency; it doesn’t need to “fund” spending through tax revenue, today or ever. Yet federal taxation is still relevant and crucial, for multiple reasons.
Amusingly, the contemporary connection between taxes and spending is best explained in another paper delivered to the legal community on the merits of low corporate income taxes. The essay, “Taxes for Revenue are Obsolete,” was delivered to the American Bar Association in 1946 by then Chairman of the Federal Reserve Bank of New York, Beardsley Ruml. The Chair writes:
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 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. . . .
Federal taxes can be made to serve four principal purposes of a social and economic character:
- As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
- To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
- To express public policy in subsidizing or in penalizing various industries and economic groups;
- To isolate and assess directly the costs of certain national benefits, such as highways and social security.
Thus, Ruml inverts Schizer’s position, placing the fiat quality of the U.S. dollar front and center, noting that “[t]he public purpose which is served should never be obscured in a tax program under the mask of raising revenue.”
Once we abandon the false clarity of Occam’s Schizer, the Overton Window— the range of politically viable options–instantly expands. As financier Warren Mosler argues, instead of worrying if a spending increase or tax cut will “bankrupt” the federal government, budget analysts should evaluate proposals for their impact on real output, prices, behavior, and the distribution of wealth.
Like Schizer and Ruml, the Modern Money Network thinks corporate income taxes don’t make sense. But why stop there? Regressive payroll taxes crush working people and small businesses, and as FDR explicitly recognized, are fiscally unnecessary. So let’s eliminate them as well. The sustainability of Social Security ultimately depends on real resources, not our infinite supply of dollars, so to quote former Deputy Treasury Secretary Frank Newman, saving for future retirees today is like “wearing a sweater in August to save warmth for January.” Let’s move beyond the current left-right impasse and pass the largest Main Street tax cut in American history.
In addition to overtaxing production, we undertax “rent-seeking” activities that concentrate individual wealth but produce few social benefits, like owning land without improving it or trading in financial instruments without increasing their underlying value.
Why not implement a Land Value Tax (LVT)? An LVT would be levied on the intrinsic value of the land itself, without taking improvements into account. After all, land value cannot fully be attributed to the landowner; it is derived from geography, community, and public infrastructure. An LVT would discourage speculators from holding onto unimproved parcels of land, extracting profits they did not help create, instead of returning value back to the community. In addition to implementing an LVT, there are other taxes we should raise–for example, inheritance and estate taxes– if we don’t want to live in a society defined by dynastic wealth and predation (a worry recently articulated by a French economist of some renown).
Whatever your political beliefs, the conventional framework for discussing tax policy is anachronistic and broken. Dean Schizer argues the assumption of scarcity “focuses the mind.” In fact, it misdirects our attention toward fictions about money, and away from our real economic problems.