Oct 5, 2019
In 1946, Beardsley Ruml, chairman of the NY Federal Reserve, published an article entitled “Taxes for Revenue are Obsolete.” According to Randall Wray this was consistent with the thinking of the time. In the 1930s and 40s, politicians and economists understood that taxes did not finance the federal budget. In fact, during World War II the government ran a deficit that was 25% of the GDP and a national debt equal to 100% of GDP.
This 2017 interview begins with Wray giving credit to Warren Mosler for the MMT insight that, in short, “taxes drive money.” We need only to look at colonial America for the basic facts. The colonies passed, simultaneously, the laws allowing for issuance of currency simultaneously and allowing the government to levy taxes in that currency. The purpose of that tax was to redeem those notes and burn them, a low-tech way of achieving the same effect as today’s keystrokes debiting our accounts when we pay taxes.
During the postwar years, the understanding that tax revenue does not fund federal spending was lost. It is politically expedient for those opposed to relying on government to solve social problems. They argue that we cannot expand spending on social programs unless we “find” more money somewhere. They claim that raising taxes will cause a reduction in private investment, thus stunting economic growth. There is not much daylight between the positions of conservatives and liberals. Whether they’re opposed to or in favor of government social programs, both sides believe that the money would have to come from taxpayers and, more specifically, from taxing the rich. Wray maintains that by tying these programs to taxing the rich, progressives are defeating their own policy.
In this episode, L. Randall Wray and Steve Grumbine discuss the difference between “good” and “bad” taxes, the role of the Federal Reserve and how it could be reformed, and the historic connection between attempts to repay the national debt and the onset of periods of economic depression. Finally they look at the connection between state and federal economies, and how taxes serve each. In the past, states were given block grants to make up the shortfall in their budgets. There is no reason not to do this again. Wray concludes with the observation that it is possible to create all the jobs that we need, providing income on the one hand and necessary services on the other.
Isn’t it interesting how nearly all discussions among proponents of Modern Monetary Theory lead to a federal job guarantee? This is not a coincidence.
L. Randall Wray is Senior Scholar at the Levy Economics Institute and Professor of Economics at Bard College
Co-editor Journal of Post Keynesian Economics
ISSN 0160-3477 (Print), 1557-7821 (Online)
New Book: Why Minsky Matters: An Introduction to the work of a maverick economist, Princeton University Press http://press.princeton.edu/titles/10575.html
New Book: Modern Money Theory: a primer on macroeconomics for sovereign monetary systems, Palgrave Macmillan http://www.palgrave.com/page/detail/modern-money-theory-l-randall-wray/?isb=9781137539908
Episode 36 – The Role of Taxation in MMT with L. Randall Wray
Macro N Cheese Episode 36
The Role of Taxation in MMT with L. Randall Wray
October 5, 2019
Randall Wray [intro/music] (00:00:03):
We have notions of horizontal equity and vertical equity. Horizontal means that if you and I have the same ability to pay, we ought to pay the same tax. Vertical equity means that if I earn more than you, I should pay a higher tax than you pay.
Randall Wray [intro/music] (00:00:21):
We place a corporate profits tax, which is largely evaded and avoided, with a tax on income that actually hits the rich people which is what progressives want to do.
Geoff Ginter [intro/music] (00:00:41):
Now let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
Steve Grumbine (00:01:34):
Good evening, everybody. It’s Steve with Real Progressives. L. Randall Wray is one of the original founders of the development team that created the body of knowledge known as Modern Monetary Theory. Randall Wray also for this particular MMT guy was the one that cracked the seal for me to understand the role of taxation.
His article, What Are Taxes For was after many, many, many months of hearing people talk to me about MMT and this Modern Monetary Theory thing and all this stuff. They had given me YouTube videos. I mean, I had read Seven Deadly, I’d read so many things and then I simply read this one article, What Are Taxes For, which is part of the primer series that he wrote at New Economic Perspectives.
And the light bulbs came on. The Federal government is a currency issuer, and the states are currency users. We live in a tax-driven economy and it’s not backed by gold, silver, chicken necks or anything else. Taxation created a sufficient condition to drive our currency and give it its value. So without further ado, what I’m going to do is I’m going to bring on my guest, Randall Wray. Dr. Wray, welcome to the show, sir.
Randall Wray (00:02:57):
Hi. Good to be on.
Thank you. I appreciate it very much. So, you know, one of the things that attracted me to Modern Monetary Theory was the fact that, you know, this is something that absolutely changes the way we view economics.
It changes the way we view the role of taxation and it changes the realm of possibility within our government sector as to what we can and cannot do. Can you please just explain for us what the role of taxation is in a modern money economy?
Yeah. First, let me give credit to Warren Mosler.
I actually had studied public finance and taxes. Maybe some of your listeners know Musgrave and Musgrave, which is the text on public finance. So I knew quite a bit about the tax theory and so on. But really it was Warren Mosler who said, “Taxes drive money.” Even Hyman Minsky had said part of the reason why we accept currency and bank money is because they are accepted in tax payment.
But when Warren said it “taxes drive money,” that really drove the point home. And then, you know, given that I had studied public finance, I started thinking about what kinds of taxes we would want to drive the currency and serve other functions except for providing revenue, because we know the sovereign government that issues the currency doesn’t need taxes for revenue purposes.
And I think as we talked about last time, I was talking about colonial America and how the colonies would simultaneously, with passing a law to allow note issue, would pass a law imposing a tax whose purpose was to redeem all the notes so that they could be burned.
In other words, the colonies spent the paper notes, paper money, into existence and then use taxes to take that out of the economy – not in order to spend because they had already spent. The purpose was to redeem the notes and then burn them. So we talked about all that last time.
We don’t need to repeat all of that but, given that, what kinds of taxes are good for taxes and what kinds of taxes are bad taxes. And then a lot of my public finance background makes a lot of sense.
So really what you’re saying here at this point in time, for those people who have never heard of Modern Monetary Theory, who have not followed us, who have not heard of Dr. Wray before, we are talking about the fact that taxes not only do not actually pay or finance spending for a sovereign government but taxes are actually used to take and destroy currency, if you will, destroy those notes.
And the government, the sovereign, spends that money into existence as a means of completing this circuit or cycle to drive the currency. And he was just speaking about colonial times, which we discussed in the last interview. So with that explanation in mind, why do we see so many people fervently diving in to try to raise revenue to pay for stuff?
Why do we see folks like Bernie Sanders, Jill Stein, other good hearted Progressives that we have a tremendous affinity for, why do we see them and others, even Robert Reich and on and on. Why don’t we see them talking about raising money to pay for stuff?
Yeah, well, I think this results from a misunderstanding. What MMT is saying, that taxes are not necessary for revenue for the Federal government, was common knowledge at the end of World War II. It was obvious to anyone who was paying attention because the Federal government was running huge budget deficits to fight the war. The deficit reached 25% of GDP.
The debt ratio reached a hundred percent of GDP. And so one of the very important people, Beardsley Rummel, who was the chairman of the New York Fed at the end of World War II, he wrote a paper actually entitled Taxes Aren’t Necessary for Revenue. And so then he thought, you know, as we’ll talk about in a few minutes, what do we use it for then if they’re not necessary for revenue purposes? But gradually over the post war period, this insight was lost.
And it was lost not just by conservatives who don’t like the government and so on, who have, you know, an obvious political interest in selling the story that the government needs taxes in order to spend. And we all hate taxes, therefore, we need a very small government.
I mean, that fits the conservative ideology perfectly, but why on earth would Progressives buy into that whole argument that we need taxes? And we know that the population doesn’t want to pay more taxes. Therefore, we can’t get all the progressive things that we would like to get through government. Why do they do that?
Well, the insights were lost, and we can do a whole history of thought how academic economists forgot what they knew very well in late 1940s. But that is the fundamental problem. I think there is an additional problem and I know you were at the MMT First International Conference in Kansas City. And someone from the audience asked this question and the story is repeated over, over and over again.
So here’s the way the professors think and speak. They say that we will really like to spend more money on the poor because they’re too poor. And so we need to tax the rich because as Stephanie Kelton says, money grows on rich people. So they’re the ones that have the money. So we need to tax the rich so we can afford programs to pay for the poor. And I say, well, hold it but that’s not true.
We can pay for programs, help the poor without taxing the rich at all. And, furthermore, by tying the programs you want, the progressive programs to taxing the rich, which is a very hard thing to do by itself, you are defeating your own purpose. So why link the two? Of course I want to tax the rich, too, but let’s de-link it from spending on the poor.
Let’s spend on the poor and let’s fight as hard as we can to take more from the rich. Progressives don’t like this. They think that linking higher taxes on the rich to spending on the poor is politically more desirable, but the evidence goes completely against that.
Any polls show that people don’t want to tax more, even if you’re talking about taxing the rich because Americans still have this fantasy that, hey, someday I might win the lottery. And I sure wouldn’t want to pay tax rates of 90% like we used to have in the United States. So I think it’s really self-defeating to link the two. And it’s also dishonest. It’s just not true.
You know, one of the things that I’ve noticed is that as I walked down the street and I see someone huddled up in a cardboard box, or I go down to the local shelter and I see people spread around outside funneling in to get out of the cold and I look around and I get really angry. Now that I know, you guys have screwed me up forever. I’ll never be able to look at it the same way again.
Now that I understand that it’s not just that it’s not rich people, though rich people, different story all together. We can talk at length about that. But in terms of the ability to solve this problem, it is as simple as keystrokes. It’s as simple as some political will.
And it’s up to all of us activists and you economists to get this word out there because we’re not just talking about like some, you know, fun, nerdy thing, guys do their basement. This is life changing. This is life saving. And you start putting together the most rudimentary facets of American existence, of human existence and Maslow’s hierarchy of needs.
And you start boiling it down to its least common denominator. People need food, they need shelter. They need to have some security. They need to be able to make choices, not out of disparity and desperation, but out of like what’s best for me. And they don’t have that ability because we’ve created an artificial scarcity of pieces of paper.
And it’s not about taxes though they will sit there and point at each other in the bipartisan political spectrum pointing at one another and just blaming the other. But then you go back to the missions and you go back down the street and you see the spikes on the walls to keep the homeless people from laying there.
And you see the police coming around and knock people off the benches. They don’t want the homeless there either. This is a really serious problem that’s got far reaching consequences if we don’t get it right. Can you talk a little bit about the social impact, the taxation, the way we fight these battles, et cetera?
Well, I think that it’s very politically expedient for people who don’t want to solve these problems, people who are opposed to government helping us resolve these kinds of social problems to say that well, you know, we can’t do it unless the government can find some more money somewhere.
And all these claims that if we were to raise taxes, it’s going to reduce the saving and the rich and we won’t have all the capital we need in order to invest and be innovative and to grow. I mean, all of these things are tied to that belief that the government has to find the money somewhere, has to take it out of somebody’s pocket and there will be negative consequences of doing that.
Now, even that is wrong. The idea that we need the savings of the rich in order to grow is wrong, too. It’s a different sort of a fallacy called the paradox of thrift. But it’s all tied up in the same claim. As Obama said over and over again, the government would like to do more, but we ran out of money. I mean, this is just a way to prevent anything from happening.
So let’s take it back for a second. There’s a video that we played at the beginning of our presentation in Kansas. And there’s a video that I believe Stephanie’s students put together that she kind of blended in and we kind of took pieces of that, put it together with our video, et cetera. And you see the Young Turks raising this issue. You see Harry, the guy who used to run the Senate. You see Bernie say it.
You see Obama say it. You see Sarah Palin say it. You see Sean Hannity and, what’s his name? The other guy that used to write all the books. I can’t remember his name. You see these guys, every one of them bipartisan leader saying, Pelosi, all of them saying that this is a crisis of epic proportions. That if we don’t do something about it, we are all going to pass this on to our children.
And they make this really, really compelling case. The folks that are not economically astute, that don’t have a macro understanding. And that creates widespread panic and panic is far easier to sell than hope. I mean, at least that’s been our experience.
So with that understanding what are some of the things that you’ve seen, you know, in your time and dealing with folks at the top layer, what are some of the things you’ve seen in terms of their willingness to begin to look at life through a different lens? Have you seen progress within the progressive community and within academia? Are we making progress? It’s painful, but are you seeing it?
A little bit. It’s pretty small. But when we started 20, 25 years ago, even the group of economists who are the most sympathetic to our arguments called heterodox economists, even they completely rejected this idea that government can’t run out of money, that a sovereign government can’t be forced to default on its promises, they can always make all payments as they come due. They saw those as controversial.
As I said, everyone in the late forties understood this and they all would have agreed, but it was lost over the next 30 to 40 years. So we have made progress there and you will occasionally see very mainstream, even some of our top policymakers, who say the same thing. Alan Greenspan, when he was pressed on the supposed coming bankruptcy of social security said, “Well, of course not.”
When he was pushed on it, he said, “Of course not.” The government issues money and can always make all payments as they come due. When Bernanke was quizzed before Congress and also on the 60 Minutes show, “Where did the Fed get all that money it’s using to bail out the banks? Is that taxpayer money?” “No, of course not.” He said, “We use keystrokes. We mark up bank accounts.” Okay?
So those are two successive heads of the Fed who supposedly should know how things work. And you know, they came right out in public and said it. This is the way the governments spends. And I don’t want people to get confused here because there is a difference between the Treasury and the Fed, but the Fed is the Treasury’s bank.
So all Treasury spending does involve keystrokes by the Fed in exactly the same way that Bernanke was talking about when he’s talking about bailing out the banks. So it all comes from Fed keystrokes. You cannot run out. So a little bit of progress. We still have a long ways to go because Bernie Sanders, as you said, as of the last election, still didn’t quite get this.
You bring up the Federal Reserve and such, which I don’t want us to go on a long trail down, you know, but this is one of the biggest issues that we struggle with. The end the Fed gang has been far more effective in messaging the conspiracy theories and the fearmongering, than what I call the “good guys.”
Which are fighting, not so much to protect the Fed, but make people understand the truth of the way things operate and take the monster out and show the real honest, boring facts. Can you talk a little bit about the idea of the consolidated balance sheet and the fact that, you know, when we say the Fed is the Treasury’s bank, you know, the Fed didn’t come into the United States and take over.
The Fed was created by Congress so it’s a creature of Congress and, therefore, it’s ruled by Congress in the sense that it’s charter and its right to exist is based on Congress. Can you explain a little bit about, and really, quite frankly, you wrote a great thing about the greatest myth being Fed independence. Can you just touch on that a little bit before we go into the next phase?
Yeah. Well, the Fed, like every other central bank, is the government’s bank. In the old days before we had a Fed, we already talked about colonial America, clearly we had no Fed back then, the Treasury just printed up notes and spent that. So that is how they spent but we created the Fed in 1913 to handle the payments for the Treasury.
And so since 1913, for the most part, now there are some exceptions; the Treasury did still issue currency for awhile and no longer does. The Treasury spends through the Fed. I mean, you spend through your bank too. Your bank makes payments for you, generally, and the Fed does the same thing for the Treasury. The Fed is a creature of Congress, as Bernanke said in his testimony before Congress.
When Congress critters would stand up and complain about what the Fed was doing, he would say, “Look, if you don’t like what we’re doing, change the Federal Reserve Act. You can tell us to do anything you want us to do.” Now. I think it is a shame that Congress takes this hands off approach to the Fed. I mean, this is a political issue.
I would like to see the Fed pass a law that says from now on the overnight industry target, that is the Fed funds rate, will be pick . . . your number. I like a very low number. Let’s say 25 basis points. That is going to be our short term interest rate. You will not change that. You will hit that target forever, okay?
You don’t like 25 basis points, make a 1%. If you want a higher interest rate, make it 2%, but stop monkeying around with the Fed funds rate, okay? That really is the only independence the Fed has right now. It’s the only independence that Congress has left to the Fed, the independence to set that overnight rate target. And sometimes the Fed does really stupid things with that Fed funds rate.
Volcker raised it above 20%. That was a very stupid thing to do. I don’t think the Fed will do that again. Those consequences were terrible, but they could. So take that away from them and then we can stop with all this nonsense about the Fed being independent. Just pass an amendment to the Federal Reserve Act, 25 base points. Done. There’s no more independence of the Fed.
I don’t know what else to say. Anyone who studies the Federal Reserve Act, the history of the Fed and so on, they know that the Fed is not independent except in setting the overnight rate. And sometimes we have taken that away from them. Now, the conspiracies, I know that these are very popular. You can read the transcripts of the Federal Open Market Committee meetings.
Before 1992, the members of the FOMC did not know that those meetings were taped. They didn’t know. They thought they were having a completely private conversation with Chairman Greenspan and the other members of the FOMC, not knowing that Greenspan was taping the comments. But you can read what they said.
You can read every word that they said, okay? Those have all been released. Find a conspiracy. There just isn’t any. Do they say dumb things? Yes, they do. Does it make you worry a little because some of these people are setting the overnight interest rates? Yes, it does, but there’s no conspiracy going on. Read the transcript.
So, this brings me to one final point on this and then I do want to move on. The idea that it’s not our money, it’s the Federal Reserves’ money is just preposterous. This is the most ludicrous thing.
It has the full faith and credit of the US government behind it, okay? End of story. Federal reserve notes have the full faith and credit of the US government. These are not just a private independent banks liabilities. These are liabilities of the US government.
Okay. So every single time we made an effort to pay off the national debt, a horrific depression began. Can you tell a little bit about what the national debt is? What the role of taxes are to our national debt and, you know, deficits, et cetera? Give us a little bit of a rolodex, a nomenclature right there so that everybody understands what we’re talking about.
Because the fear, obviously, with the next part we’re going to talk about with regards to corporate taxes, what’s a good tax and a bad tax. A lot of it comes back to the idea of, hey, we didn’t tax enough. So that’s my we’re in debt.
We’re in debt to all these countries. So my God, what are we going to? And that really is a sticking point, sadly, with the left, which is mind numbing to me, but it is. It absolutely is a real sticking point. Can you talk about that for a moment before we go on?
Okay, well, this is true of government, but it’s also true of a household and it’s also true of a firm. So if your spending is greater than your income, you are deficit spending, okay? So that’s basically all that a deficit means. When the US government has spending greater than the tax receipts, then it is running a deficit.
Since the creation of the Fed in 1913, we developed these operating procedures, such that the US government is going to issue bonds more or less equal to the size of its deficit. That is more or less equal to the difference between the government spending over the period and its tax receipts over that same period. It will be issuing bonds.
There’s no necessary reason why it has to operate that way. It could, instead, just be issuing currency in excess to match the difference between its spending and its tax receipts. It could just be issuing currency although currency also has debt. It’s not included in the debt figures that the government usually reports, but it is that in the sense that it’s an outstanding IOU of the government.
So when the government balances its budget, it doesn’t issue any debt, okay? If it runs a surplus, it’s actually reducing the outstanding stock of debt. If we take the total amount of outstanding government debt, somewhere around 20 trillion, that represents the cumulative total of all budget deficits, less surpluses that the US federal government has run since the beginning of the nation.
So that’s where that $20 trillion debt equals. Now, of course, all that debt is held by someone. So that debt is the non -governments’ surpluses that have been run up over the same period. And that is our net financial wealth.
If we’re talking about taxes today and what is a good tax and what is a bad tax, having established a couple of things, number one, the taxes don’t actually get used to pay for stuff. So there’s no redistribution of Johnny’s taxes to pay for Sally’s pet issue and vice versa. We can get rid of that whole argument now. What is a good tax? What is a bad tax and why would we use either of them?
Going back to my public finance days, there are two different approaches to defining a good tax. One is based on what’s called the benefits view. That is, if you are receiving very specific benefits from the government spending, you should pay taxes to compensate for the benefits you’re getting from the government, okay?
So if the government creates some kind of a program that benefits you directly, the idea is that you should pay taxes equal to the benefit you’re receiving. And those who don’t receive the benefits should not be taxed to pay for benefits, not to pay for, but to match the benefits that you’re receiving and the public finance books, they actually do say, you know, to pay for.
But we know that that’s not really the purpose, okay? But you can sort of see the argument here. If the government builds you a super highway that you get to use and that means that the government doesn’t use the national resources to build a railroad that other people could have used, you could see some sort of logic in charging taxes to the people who benefit from using the roads.
Say truckers, because the government is not building railroads that the railroad companies should be able to use, okay? The problem of course, is that a very large part of government spending doesn’t provide direct benefits to individuals. So if you think of defense spending, for example, if you think of public education as another example, yes, it’s true students benefit, but society as a whole also benefits in indirect ways.
Other kinds of spending are transfers. So, we have transfer payments that are made to people with disabilities, low income people, children, old age people, and so on, and they can’t pay the taxes, all right? So that’s the problem with the benefits approach. You can see the logic when you’re talking about some things.
So maybe we put a tax on oil that is sort of to compensate for the benefits that people who use interstate highways receive from building that Eisenhower highway system. The other argument is that taxes should be based on ability to pay. Okay? And so here what we want to do is impose taxes on those who are most able to pay taxes. And we have notions of horizontal equity and vertical equity.
Horizontal means that if you and I have the same ability to pay, we ought to pay the same tax. Vertical equity means that if I earn more than you, I should pay a higher tax than you pay. So the ability to pay is the alternative approach.
And for most government spending, this makes much more sense because the, either the benefits are going to people who don’t have the ability to pay, or because the benefits are diffused across the whole society, okay? So traditionally these are the way that we define good taxes.
Now, once we’ve decided that ability to pay is the best approach for most taxes, then we have to come up with what is it that we’re going to tax? And the two basic approaches here, you know, traditionally in literature, I don’t want to bore everyone with an economics lecture, but it is either you tax the income or you tax the spending, okay?
Taxing income that is pretty directly going to go after this ability to pay. So we measure all of your sources of income, and we have a higher tax rate on people with higher income, okay? Very straightforward. You’re going to be hitting ability to pay. Expenditure. Then we can really violate the horizontal equity, because if I spend all of my income on consumption and you save 50% of your income in order to accumulate massive amounts of wealth, then you evade, you will not evade.
You’re not doing any illegal. You avoid paying taxes. Whereas I pay taxes, even though we have the same ability to pay. I’m consuming and you’re not. And there are reasons why we might not want to tax consumption because after all, one of the things we’re trying to do is to have economic growth and provide rising living standards for our citizens.
So why are we choosing to tax consumption when we’re going to violate the horizontal equity and we’re going to tax something that we don’t actually think is a bad thing that is consuming and having a rising living standard. So when we finally get to the end, it seems that the best approach is a progressive income tax, where income includes your income from all sources, okay?
So now we’ve sort of got the base that we’re going to use for our tax system. It probably should rely heavily on income and we should have a progressive income tax. Now, what are bad taxes? Well, regressive taxes, that is to have higher tax rates for lower income people. What kind of tax system do state and local governments have? Typically regressive taxes, so those are bad.
Taxing behavior that we think is good behavior, working. The payroll tax is a tax on labor. It’s a particularly bad tax because we’re allowing income that comes from sources other than working to evade the tax. So that is a particularly bad tax.
Taxing consumption of the kinds of things that low-income people spend most of their income on, say food, clothing, shelter, those are particularly bad taxes and so on. So we can go through our tax system and evaluate each kind of tax and determine how close it fits the sort of ideal for a good tax.
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Warren Mosler talked about how Medicare for All may actually be deflationary and that may require actually reducing taxes to keep it from a deflationary bias. And, you know, that obviously is like one of the most shocking things next to what we’re going to talk about, about corporate taxes.
But when he brought that up, we had a lot of feedback, a lot of inbound messages from people saying, “What, the hell, is he talking about? You know, deflationary, that we might have to reduce taxes to give everyone Medicare for all. What do you mean?” Can you talk about that?
Yeah. Well, I imagine everyone listening knows that the US has by far the most expensive medical system in the world about double other rich nation’s percent of GDP devoted to the medical care system. So we’re 17%. You can get very good, actually better medical care than what we get at about 9% of GDP. So we’re spending far more than we need to spend.
And so what Warren is saying is if we went to a much more efficient system, which is a single payer, Medicare, the basic parts of Medicare are single payer. It’s a very efficient system and you don’t need lots of billing. You don’t need to pay profits to the insurance companies and so on. You’ll be slashing medical spending by up to 50%. And so that’s what he means.
If you’re taking that much, if you’re going from 17%, let’s say, down at 9% of GDP, you’re taking 8% of GDP away and we’re going to have to stimulate the economy unless we want GDP to fall by 8%. And of course there would also be job losses and so on in medical insurance and medical billing, all the paperwork processing and all that stuff. You’d be putting a lot of people out of work.
So we’re going to need either tax cuts or government spending rising on other things in order to replace that lost GDP and those lost jobs. And of course, it allows the opportunity to put those people to work doing useful things instead of billing us and trying to find ways to deny healthcare coverage to people who bought health insurance.
Which is basically what the health insurers are in the business of doing, denying coverage or medical care that you need. Let’s find something useful for those people to do. And so I think Warren is absolutely right that we’re going to have to have a tax cut or ramp up government spending on something else to make up for the loss there.
So with that in mind, let’s talk about corporate taxes because corporate taxes are obviously one of the holy grails for, for the left in general, the non-economic left, the populous left, as opposed to the ones that understand economics.
Talk to us about corporate tax. Folks, warning: “This is going to stretch your paradigm of understanding in a way that you have to take a step back and consider real economic truth, the underlying economics that funds what we’re trying to do, that fuels the effort, right?” Anyway, go ahead, Dr. Wray.
Okay. First let me say I’m speaking for myself. And I came to this conclusion long before MMT. I came to this conclusion in the late 1970s when I was studying public finance. Beardsley Rommel, who I mentioned earlier, chairman of the New York Fed, in the paper where he said taxes are no longer needed for revenue purposes.
He also went through examples of bad taxes and he included the payroll tax as a bad tax, consumption taxes as bad taxes, and also the corporate income tax as a bad tax. My professor, Hyman Minsky, who also talked about taxes, sort of driving money, not using that terminology but that’s exactly what he was saying, also wrote about the corporate income tax as being a bad tax.
So I’ve had this view for a very long time long before modern money theory. If you ask Progressives why do they love the corporate income tax? Okay, first they will say, well, we need the money in order to help the poor. Okay, well we know that’s false. Okay, so that’s what it MMT teaches us. We don’t need to tax corporations. The second thing they say is that, well, corporations are kind of evil, aren’t they?
Well, yeah, okay, maybe they are. My response to that is let’s pass laws. Let’s regulate the corporations. Let’s make them less evil. Trying to use the tax system to make them less evil doesn’t work. I mean, we’ve been trying to do this for a very long time and corporate behavior has gotten worse and worse and worse and worse, and they’ve learned how to evade the taxes.
So I don’t think that it’s a very sensible argument to me. Now, corporate taxes, going back to public finance theory, if we had a perfectly competitive economy, corporate taxes will all be pushed forward onto the consumer, okay? So yeah, economic theory tells us that what will happen is the corporations will just raise the prices to consumers to cover the tax that they have to pay.
Now, we don’t live in that kind of world. I don’t like using perfect competition as an assumption because it’s so clearly wrong. I mean, the reason why we get big corporations is because they have market power and they’re able to grow and they’re able to price their stuff. So we don’t want to start with that as our assumption.
And, in reality, out in the real world, what happens is that corporate profits taxes are pushed forward to consumers. That is higher prices that you pay for products backward to workers that is lower wages for workers, so that corporations don’t have to take out of their profits.
They take it out of wages in order to pay taxes. And some also is pushed onto shareholders in the form of smaller dividends payments. So these are the three possibilities. And the truth is that we don’t know what percentage of the corporate profits are pushed forward to consumers, what percent backwards to workers, and what percent goes to the shareholders.
Now, what progressives would like to believe is that it’s the rich shareholders that are paying these profits taxes. Okay, well, I think it’s something like 80% of all shares are held by institutional funds -that is your pension funds and so on. Okay. Those aren’t necessarily rich people. They are workers with pension funds. They are retirees who are trying to live off their pensions and so on.
So the profits tax are not necessarily, even the portion that it pushed on shareholders, are not necessarily being paid by high-income people, okay, by the capitalist class or whatever Progressives think. So it’s very likely that the majority of profits taxes that are being paid by corporations are paid by consumers, workers, and pensioners.
So that’s who is bearing the burden, I mean in the form of lower dividends payments. Likely that is who is paying it. There are also negative incentive effects of the corporate profits tax. One is that corporations get to write down their profits and therefore pay lower taxes by increasing their costs. One way that they can increase their costs is by using debt finance. So they use debt finance.
They get to write off interest just as we homeowners used to be able to write off our mortgage interest off our taxes, they write off the interest that they pay on debt. So the corporate profits tax encourages corporations to use debt finance rather than using their profits. They want to write down their profits by the amount of the interest payments. Okay, so there is a negative incentive effect.
You’re encouraging corporations to load up on debt. And then of course, one that all of your listeners will recognize because it’s the topic of discussion, at least since the last campaign, inversions. So corporations pretend like they move off shore, or they just get a post office box somewhere and pretend like they live in an Island country or maybe an Ireland like Apple did.
So they avoid paying corporate profits tax anyway. So we encourage them to move off shore. Sometimes it’s nothing more than a post office box, other times it’s actually employment moves off shore. So the Trump administration said, well, we’re going to lower corporate profits tax, were going to get all these firms to go back.
Stephanie Kelton, at one point, asked me, well, what would be a progressive response to Trump? And I said, well, don’t go to 15, go to zero. The progressive response is get rid of the corporate income tax. That completely eliminates the incentive to move off shore. Now, this is my opinion, predates MMT. I really don’t know what all the other MMT people think about it.
I’m actually writing a proposal right now. I’m not ready to discuss the details because we’re still working some of these out. What will we replace the corporate profits tax with? We’re going to impute all the profits to the owners of the corporations and we’re going to tax them as income.
Remember I said that I believe that the best tax is an income tax, progressive, and it should be a tax on your income from all sources. So this should include the profits that the corporations whose shares you hold, are being earned.
Those should be imputed to the holders of the shares, whether the dividends are paid or not. And so that’s how we base the corporate profits tax, which is largely evaded and avoided with a tax on income. It actually hits the rich people, which is what progressives want to do.
Okay. So let me ask this question, because obviously, you know, folks are inundated with the idea and you already talked about it a little bit with the balanced budgets and stuff. And our progressive community, as you’re well aware, has an inherent bias against corporations, which for many good reasons but taxation as a tool.
Not necessarily the chief tool that we should be leveraging, but we talked a little bit about how a budget based on an inflationary constraint versus a budgetary constraint would be a good way to possibly looking forward, to being able to provide for all citizens in the way that we’d like to see.
And also it’s a more honest economic measure than just an arbitrary budget stance. Can you talk a little bit about how that would play out and then maybe we can circle back to the corporate tax again, once we’ve had that discussion?
Yeah. Okay, so from inception, we need the tax to drive the currency. Okay, then after that, the problem is that if government spends too much, it’s not that the government’s going to run out of money, it’s not the government’s going to go bankrupt, the problem potentially is that it will cause inflation. If the government spends too much, we drive the economy beyond full employment.
The government continues to try to bid resources away from the private sector including labor it’s going to cause inflation. So we want the tax system to reduce aggregate demand to keep us at full employment and not go beyond full employment, okay? So that is the second purpose of taxes from the macroeconomic perspective.
You want the taxes to be high enough to prevent inflation from occurring. So I know this led to a little bit of a controversy where some critics of MMT said, well, hold a second. Let’s say that, I don’t know, next December, the economy is overheating and we realize, oh, oh aggregate demand’s too high. And we need to raise taxes in order to fight inflation.
How are you going to get the tax bill through Congress quickly enough to reduce, take enough aggregate demand out of the economy, to prevent inflation through the tax law changes? We know how hard it be to get tax laws changed in order to reduce aggregate demand. And of course that criticism is correct. You can’t rely on discretionary increases of taxes with tax law changes.
It has to be an automatic stabilizer. This is really why you want a progressive income tax, because that will automatically increase the tax take out of the economy as incomes rise. So the answer is you want automatic stabilizers. You don’t want Congress to have to change the tax rates. You want the tax rates to rise automatically as aggregate demand rises and income rises.
Beyond that, you want your spending to also move automatically so the government spending will decline as the economy heats up, okay? And we have some kinds of spending that already do that. So unemployment compensation, ending food stamps spending will automatically decline as the economy heats up.
But my belief is that right now, the overall budget might not have enough automatic stabilizer built in. And the answer, of course, the MMT answer to many of our economic problems is the job guarantee. If you put in place the job guarantee that will give us enough of an automatic stabilizer because people will be pulled out of the job guarantee program into the private sector.
That will reduce government spending on workers in the job guarantee program. The budget will move to smaller deficits and possibly towards a balanced budget as the economy heats up. So we need to build more of an automatic stabilizer into the spending part.
I actually think we already have enough automatic stabilizer in the tax part of our system. Our tax revenues virtually explode when we get the unemployment rate down to 3 to 4%. So I think our tax system already moves with the cycle sufficiently. We just need the spending part to move more counter cyclically.
So when you’re talking about this counter, this is really Keynesian economics here. We’re not talking about anything different. This is not some new fancy thing. We’re talking about the stuff that we’ve grown used to built in so that it doesn’t have to go through a bunch of congressional deliberations baked into the economy.
And for folks that aren’t aware of this, there are a great many of these stabilizers like food stamps and other things that you’ve grown used to – SNAP, TANF, you know, et cetera. So I want to kind of finish things off a little bit with the role of state taxes and federal taxes, going back to your good tax bad tax thing.
Is there a way of, since the federal government being the currency issuer and the states being currency users. And you look at Puerto Rico, for example, albeit a territory. We’re looking at some pretty dire situations because the states are cannibalizing themselves.
As you see, you know, Texas, all of a sudden waves its hand and says, well, we’ll cut all your taxes down to nothing if you just come on and put your headquarters down here. And then all of a sudden you’ve got all this corporate flight flying down to the low tax zone and the race to the bottom is on.
So you see a state like where I live in Pennsylvania, where we have a $600 million budget deficit going on at the state level. That matters. Federal level, maybe not so much, but all of a sudden now states have to start whittling away cutting things because there’s just not enough federal spending to keep it afloat.
What should be the relationship between state taxes and federal taxes and to what degree can the Feds encumber and spend money into these states directly for like infrastructure, bridge repair, green energy, you know, normal school building, upkeep, whatever?
Yeah. So there’s sort of a long story behind this. The federal government grew between 1930 and say 1960 from about 3% of GDP to around 20% of GDP and it’s been about that ever since. State and local governments continued to grow as a percent of GDP until the 1970s. So all government growth since 1960 was actually at the state and local government level, no growth of the federal government level.
And then state government stopped growing and state governments are not sovereign. They really do need tax revenue or borrowing in order to spend and they are limited in their ability to borrow. 48 out of the 50 states have constitutional requirements to balance their budgets. That doesn’t mean they always do, but they are mandated to do so. They can’t intentionally run budget deficits.
And if they do try to do that, the credit ratings agencies downgrade them, their interest rates spike, and they become the next Greece, okay? So they can’t do it. Now in the seventies, President Nixon, his administration in spite of being Republicans, recognized that there was a big problem at state and local government level when the recession hit in ’74.
And they had block grants. So block grants were federal government distributions giving grants to the states that the states could augment their own spending using federal government money. And so the end of this long history story, we need to do that again. The global financial crisis is a disaster for state and local governments.
They still have not recovered. So our economy sort of has recovered but state and local governments are still mostly in very serious financial trouble. They’re slashing educational spending. My own University in Missouri, I’m now retired, but University of Missouri has had no increased state allocations for, I think, more than a decade – in dollar terms, not as a percent of anything, just in dollar terms.
And so we need the federal government to provide the equivalent of block grants to state and local governments so that they can increase their spending and try to get their fiscal houses in order because they really are constrained. And, of course, they have problems with taxes.
Most counties in the United States have not recovered. The recovery has been very spotty around the country and only a handful of counties really account for all the economic growth that we’re seeing. Most places are stagnate and they need help. And it’s got to come from the federal government.
So I want to touch on a few things here real quick before we close off. The first thing is I just did a rant the other night about, you know, jobs and not just talking about the federal job guarantee, but jobs that we would create that will be for skilled and blue collar workers by providing block grants encumbered so that there’s specific instructions that go with it.
I wasn’t as, you know, free about, hey, here’s some money do with it. I was very specific in terms of, you know, making sure our bridges have a long-term maintenance built into law, that those bridges are never to go below a B rating, for example.
And the millions of jobs that would come with maintaining just bridges, like forget anything else, just looking at bridges – what it takes to maintain and grow and futurize, et cetera, bridges. And then I added in a couple other things like, for example, seawalls, dams, levees, other pieces of Americana infrastructure that is universal across the states that have, each one, have their own pieces there.
And if we just looked at a maintenance schedule, it’d be almost like a built-in stabilizer for jobs as well. If you put a law in effect that maintained, they must meet a certain standard and we will give you the money to maintain that standard.
And then the last piece of this was looking at the federal job guarantee, which would allow, you know, federal funding for low to no skilled workers and people that had different desires that could roll off, get a living wage and have benefits just as if they were a federal employee to some degree that would raise the bar for the rest of the world to hire against.
And that’s my spin and it was quick and it wasn’t a really detailed white paper version of it. But to what degree could we expect to see a job revival that would bring about a closer to full employment if we invested in infrastructure, and Medicare for All, or a national healthcare service, even, free education, you name it? What kind of job output do you expect would come by way of fully funding those things?
Well, of course, it’s possible to create all the jobs we need. The federal government can provide the funding to employ everyone who wants to work. And yes, we need to create jobs for skilled people. And, look, we’re not reinventing the wheel. The Roosevelt administration did exactly this in the thirties and the forties. They put together reports.
I was just reading one yesterday, National Resource Development Board, I think, where they went region by region. They had each state submit their needs for development and they put forward plans and it was so deja vu to read it because it’s all the stuff we struggled with creating the job guarantee.
How do you put projects on the shelf that you can just take off when the unemployment rate goes up, take them off the shelf and start doing them? This was exactly what they were thinking about in the thirties and forties. You have far more things on the shelf, then you have people to do.
And when there is a recession, of course, their problem was they were building up for the war effort so a lot of the workers were already working in the defense sector. So they came up with an inventory of all the infrastructure projects that are needed all over the country and they put them on the shelf and they said, as workers are released from the defense needs.
We will put them to work to build the infrastructure. And that’s exactly what they did. Most of the infrastructure that you’re talking about that we have now was built in the thirties and forties. And that’s why it’s falling apart because we did it and then of course, we had the Eisenhower effort to build our interstate highway system.
And then since the mid-sixties, we have not added to it, but we haven’t even taken care of what we already built. So now we’re stuck with infrastructure that is 50 years behind the time and it’s all falling apart. I don’t know how many of your listeners have been to China and looked at the infrastructure and looked at what they are doing over there. We are being left so far behind.
I can tell you if Americans went to Beijing, saw what they’re doing in Beijing or any other major cities in China, they would be absolutely dumbfounded. Anyone who walks around New York City and then goes to Beijing, they are in for a shock. Look at the airports, JFK, and then go to Beijing and look at one of their airports. We are being left behind. We have to do something.
When I went to Beijing, I actually got to go to Shanghai as well. And, you know, it was just amazing to me to see that many people and that high, high tech investment. And this is going back to like 2007. You know, I come from a technology background, they’ve gone full IP version six, everything is optical to the Nth. They’ve got high speed rail.
They’ve got immense investments in things that we always talk, I mean, just seeing the bike parking garages they have, where you bring the bike. And they’re automatic things just to encourage bike riding. I mean, it’s amazing stuff that they’re doing over there.
And quite frankly, you know, they’ve got a far greater population than we do, and it’s not to say that China’s got everything going for it because I got to talk to some of their government officials and it was kind of like, they couldn’t answer half of my questions.
So they’ve got their own problems there. But one of them is not investment on the future. They have definitely got that going on in spades. And Shanghai was like a trip to the future. It was amazing.
And I know lots of people in China live in poverty. Yes, absolutely true. That was also true in the United States in the 1930s and 1940s when we started building our infrastructure, okay? How did we become richer? We built the infrastructure.
It made us much more productive, connected by the United States, connected our cities. It made it easier for us to raise living standards. You have to have in place the infrastructure and we are losing that. Our infrastructure is way behind where we need to be.
I guess, with that, I want to thank you so much for coming on board with us. It’s always a pleasure. I’m super excited to be able to have access to you. If you’d like to close us out with any comments regarding taxes, just to put a bow on it, I’ll leave the floor to you, sir.
Well, I think, you know, there’s a really strong urge to believe that, you know, anything that Trump does, anything Republicans propose has to be wrong. But think about the corporate tax and think about the problems it causes. And I think the benefits of one thing saying, hey, yeah, you guys are, you know, the corporate tax does have a lot of problems and it’s evaded by lots of our firms.
The biggest firm in the world evades the corporate tax. Let’s think about doing it another way. Let’s tax the rich. If you really want to tax rich, let’s tax the rich. Don’t tax the corporations. Tax the rich.
Great. Alright with that in mind, thank you so much for joining us again, for enabling us to get this message out. I cannot tell you how much I appreciate it.
OK, thanks a lot.
Alright, thank you, everybody.
Ending Credits (01:04:45):
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