Stanley Dundee

Top: Getting Money Right

Taxes Do Not Fund Sovereign Spending

Stanley Dundee

2018-08-28 v. 1.1

Despite all the loose talk about spending taxpayers money, taxes do not fund the spending of the sovereign. Indeed the sovereign must spend to enable taxes to be paid! This has been known for quite some time. MMTers are fond of citing a 1946 paper by Beardsley Ruml, at that time Chairman of the Federal Reserve Bank of New York, entitled Taxes for Revenue Are Obsolete. Here's a snippet:

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... 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.

Bill Mitchell includes a valuable discussion of Ruml's paper in a 2010 post entitled taxpayers do not fund anything. Here's an excerpt:

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

Warren Mosler has also called attention to Ruml's classic paper, incorporating it into a 2010 HuffPost blog.