5 ms·

So your thesis is that the government just sits on the tax money, rather than using it to purchase goods and services as fast as it comes in?

coralreef 5y ago
No it's not a thesis, it's how modern government (and accounting) works. Back in the day when money was a hard asset that could not be easily created (copper, silver, gold), you paid your coin dues to the regional king, and in turn he paid for security/services over the land. That was taxation. We eventually stored our precious metal in banks, and traded paper coupons representing those metals. We formed governments, who decided one day to revoke the ability for people to redeem their paper coupons for their gold. Now we still had to pay taxes with paper money, but it was no longer attached to gold's value. The government/central bank now had the ability to create money at will, and does not physically need to rely on tax dollars coming in: it can create the money, pay for services, and collect taxes later. If it spends more than it collects, it has a deficit. This deficit can be funded by creating new money (in turn devaluing it, aka inflation), or by borrowing money that already exists (raising money through bonds). So every year, when you wire your tax money to the government, bits of data are simply written to a database, indicating money removed from your account. There is no physical transfer of assets to the government; remember, the money that was paper is now digital. Money is numbers in a database. Management of money at the macro level is now just balancing accounting inflows and outflows, surplus and deficit. Debt can be infinitely be paid off (create more money) at the consequence of devaluation of course.
- Turing_Machine 5y ago
  > So every year, when you wire your tax money to the government, bits of data are simply written to a database, indicating money removed from your account. There is no physical transfer of assets to the government But there is.The government uses the tax money (plus extra money that they create out of nothing) to buy goods and services. Lots of them. Physical assets such as roads. F-35 fighters. Aircraft carriers. Schools. Services such as file clerks. Accountants. Public health doctors. All of those things represent increased demand, which in turn result in net price increases (i.e., inflation). The money goes right back into circulation, rather than being removed from it, as you claim.
  - coralreef 5y ago
    Yes, the value replacement is there. And yes, tax dollars help "pay" for services. What I mean by "physical transfer" is literally that if you mailed a brick of cash to the federal government, they would just burn it. Taxation = money out of the system Money printing/spending = money into the system The difference causes inflation or deflation.
    - Turing_Machine 5y ago
      When, in recent memory, has the amount taken out in taxes exceeded the amount spent? Ever? You are arguing a hypothetical case where the government takes in more in taxes than it spends, thus creating a trend toward deflation. But that never happens. Like, ever.
      - coralreef 5y ago
        The government could spend less and tax more, but this is politically and socially unpopular, so unlikely to happen. But its not like its not possible. Some countries have fiscal surpluses. Canada had a surplus in 2018 [1]. I don't see what I'm arguing, and none of it is hypothetical, this is just basic economic theory. It is possible for government spending to be financed by borrowing rather than money creation, resulting in no change in the monetary base. Those mechanics I'm less educated about. [1] https://www150.statcan.gc.ca/n1/daily-quotidien/201118/dq201118b-eng.htm https://www150.statcan.gc.ca/n1/daily-quotidien/201118/dq201...
jfengel 5y ago
Under Modern Monetary Theory, it doesn't sit on the tax money, it burns it. The money just disappears into a black hole. And it can invent money from the same black hole, but they don't have to balance. The money spent and money taken in are completely independent. That's the joy of running your own currency. The downside of running your own currency is that it will inflate. So you have to take some out of the system. Which you can do in any number of ways, but the most obvious is taxation: you take money and burn it. Not the physical notes, obviously, but rather the line in an account book somewhere. We've actually been doing something a lot like that for a long time. The US government hasn't had balanced books in forever, and consumer inflation during most of that time has been low. It may be doing messed up stuff to the asset markets and may be reaching its limits, but MMT prescribes a smooth slowing of the market rather than a crash. Some economists suggest just doing away with the fig leaf and stop trying to balance the budget, but rather just keep an eye on inflation and set policy (both tax and spend) accordingly. That's considered a fringe movement at the moment, but even mainstream economists will say that it's not as far removed from reality as you'd expect from a comparison to a non-currency-making entity like a person or business.
- Turing_Machine 5y ago
  Yeah, I understand how it works. But you yourself admit that the government ALWAYS spends more than it takes in, thus ALWAYS trending toward inflation, not deflation.
  - jfengel 5y ago
    Well, conventional monetary theory also calls for small amounts of inflation and avoiding deflation. But yeah, the US government has invented so much money in the last decade that they're worried about why there isn't more inflation than we've seen.

coralreef 5y ago

No it's not a thesis, it's how modern government (and accounting) works. Back in the day when money was a hard asset that could not be easily created (copper, silver, gold), you paid your coin dues to the regional king, and in turn he paid for security/services over the land. That was taxation. We eventually stored our precious metal in banks, and traded paper coupons representing those metals. We formed governments, who decided one day to revoke the ability for people to redeem their paper coupons for their gold. Now we still had to pay taxes with paper money, but it was no longer attached to gold's value. The government/central bank now had the ability to create money at will, and does not physically need to rely on tax dollars coming in: it can create the money, pay for services, and collect taxes later. If it spends more than it collects, it has a deficit. This deficit can be funded by creating new money (in turn devaluing it, aka inflation), or by borrowing money that already exists (raising money through bonds). So every year, when you wire your tax money to the government, bits of data are simply written to a database, indicating money removed from your account. There is no physical transfer of assets to the government; remember, the money that was paper is now digital. Money is numbers in a database. Management of money at the macro level is now just balancing accounting inflows and outflows, surplus and deficit. Debt can be infinitely be paid off (create more money) at the consequence of devaluation of course.

Turing_Machine 5y ago
> So every year, when you wire your tax money to the government, bits of data are simply written to a database, indicating money removed from your account. There is no physical transfer of assets to the government But there is.The government uses the tax money (plus extra money that they create out of nothing) to buy goods and services. Lots of them. Physical assets such as roads. F-35 fighters. Aircraft carriers. Schools. Services such as file clerks. Accountants. Public health doctors. All of those things represent increased demand, which in turn result in net price increases (i.e., inflation). The money goes right back into circulation, rather than being removed from it, as you claim.
- coralreef 5y ago
  Yes, the value replacement is there. And yes, tax dollars help "pay" for services. What I mean by "physical transfer" is literally that if you mailed a brick of cash to the federal government, they would just burn it. Taxation = money out of the system Money printing/spending = money into the system The difference causes inflation or deflation.
  - Turing_Machine 5y ago
    When, in recent memory, has the amount taken out in taxes exceeded the amount spent? Ever? You are arguing a hypothetical case where the government takes in more in taxes than it spends, thus creating a trend toward deflation. But that never happens. Like, ever.
    - coralreef 5y ago
      The government could spend less and tax more, but this is politically and socially unpopular, so unlikely to happen. But its not like its not possible. Some countries have fiscal surpluses. Canada had a surplus in 2018 [1]. I don't see what I'm arguing, and none of it is hypothetical, this is just basic economic theory. It is possible for government spending to be financed by borrowing rather than money creation, resulting in no change in the monetary base. Those mechanics I'm less educated about. [1] https://www150.statcan.gc.ca/n1/daily-quotidien/201118/dq201118b-eng.htm https://www150.statcan.gc.ca/n1/daily-quotidien/201118/dq201...

jfengel 5y ago

Under Modern Monetary Theory, it doesn't sit on the tax money, it burns it. The money just disappears into a black hole. And it can invent money from the same black hole, but they don't have to balance. The money spent and money taken in are completely independent. That's the joy of running your own currency. The downside of running your own currency is that it will inflate. So you have to take some out of the system. Which you can do in any number of ways, but the most obvious is taxation: you take money and burn it. Not the physical notes, obviously, but rather the line in an account book somewhere. We've actually been doing something a lot like that for a long time. The US government hasn't had balanced books in forever, and consumer inflation during most of that time has been low. It may be doing messed up stuff to the asset markets and may be reaching its limits, but MMT prescribes a smooth slowing of the market rather than a crash. Some economists suggest just doing away with the fig leaf and stop trying to balance the budget, but rather just keep an eye on inflation and set policy (both tax and spend) accordingly. That's considered a fringe movement at the moment, but even mainstream economists will say that it's not as far removed from reality as you'd expect from a comparison to a non-currency-making entity like a person or business.

Turing_Machine 5y ago
Yeah, I understand how it works. But you yourself admit that the government ALWAYS spends more than it takes in, thus ALWAYS trending toward inflation, not deflation.
- jfengel 5y ago
  Well, conventional monetary theory also calls for small amounts of inflation and avoiding deflation. But yeah, the US government has invented so much money in the last decade that they're worried about why there isn't more inflation than we've seen.