Garth Brazelton's article "The Purpose of Taxation" discusses the purpose of taxation, and this has generated a fair number of comments on the Mike Norman MMT website. His article discusses government finance from the point of view of Functional Finance. In this article, I want to give a high level discussion of the controversy around the Functional Finance viewpoint on the role of government taxes.Bond Economics
The Debate Over The Purpose Of Taxation
Brian Romanchuk
Brian Romanchuk
I don't think the long run budget constraint is really the issue with the "taxes fund spending" claim. The people who make this claim are often only saying that as a matter of current operational fact, taxes fund some federal spending. They are not committed to the logically non-equivalent further claim that, in the long run, all spending must be funded by some taxes.
ReplyDeleteEverybody accepts that the government currently spends from accounts it holds at the Fed. Everyone accepts that those accounts have balances. Everybody accepts that, currently, those balances get there by the processing of tax revenues and the sale of government securities (and I suppose also occasionally from the sale of real assets.) Everybody accepts that when the government spends, the amounts in those accounts are reduced by the the amounts spent.
A lot of people will describe these facts by saying "taxes and security sales fund spending". And that logically entails "taxes fund spending." Some people prefer not to use the verb "fund" to describe these facts.
Whether there is some kind of end of history when all matured securities are redeemed in dollars and thus there is a long term 1-1 match between tax revenues and spending is a separate, and somewhat bizarre, pair of hypotheses, and not essential to the "Do taxes fund spending" dispute.
Also, it is widely understood that the government has the option of adopting other operational procedures in which the question becomes either moot or is transformed. If the government had no Fed account from which it spent in accordance with a self-imposed budget constraint, but spent simply by crediting bank accounts at will; and if in the same way it "taxed" simply by directing the deleting of balances from bank accounts at will, the terms of the debate would be quite transformed. But since that is not the way it does things currently, there is a plausible basis for saying that since taxes result in balances being credited to government accounts, and since the government has adopted the voluntary constraint of spending only such balances that are in its accounts, then the taxes are funding the spending.
But again, so little hangs on this debate, which is mainly a relatively insignificant debate about the acceptable meanings of the word "fund", that it really isn't worth having. The amount of time spend churning through this well-trodden but endless ground, when there are important policy choices to debate, is depressing.
I am not a fan of the worries about using the right terms. My worry is about when operational differences appear.
ReplyDeleteI am interested in mathematical models of fiscal policy from a semi-academic perspective, so I find the budget constraint debate far more interesting than a more sensible person would. But there are real-world philosophical differences that show up from the different models. I gave as example the issue of the mix of taxes, as well as my earlier article about capitalising government pensions.