Financial Funding, Real Funding, and Coercive Taxes

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Deutscher Zwillingsbeitrag hier.

In the below video, before going into the mechanics of sectoral balances corresponding to the differing states of a government budget (balanced, in deficit, in surplus), Bill Mitchell takes up two points a previous speaker had made.

1)  Adam Smith, the speaker claims, postulated that no one should be required "to contribute more than is necessary to the effective operation of government" [by paying taxes]. The idea is to evoke Adam Smith — supposedly the patron saint of free markets — as supporting the cause of budget deficits.

Bill Mitchell retorts by saying that Adam Smith was wrong, embarrassing the speaker somewhat.

I am not sure, the criticised deserved the rebuff. I don't think he actually stated that the government needs tax money from the people to be able to spend.

Rather, the speaker had more generally referred to the tax payer's contribution "to the effective operation of government".

Bill Mitchell recognises that such a contribution is necessary — however not in terms of financial funding but in terms of real funding, for lack of a better expression (see below). 

The government does not have to take money from the taxpayers in order to be able to spend/finance its expenses ( — to which I refer as financial funding). The state is the issuer of money and can provide itself with as much money as it ever cares to spend.

But government can only spend, i.e. buy the goods and services that are available from the economy, if these wares have not yet been claimed and removed from the range of articles to be had via purchases made by the taxpayer.

Therefore, one function of taxes is to restrict the range of real goods and services that the taxpayers might snatch away from the available supply of goods to the exclusion of the government. Taxes reduce the purchasing power of taxpayers; as a consequence, more stuff is left over which government is able to get hold of (real funding) by using its spending power.

Assuming that the bulk of useful goods and services is produced by taxpayers, one could argue that government does depend on taxpayers for its spending needs in the sense that taypayers (a) have to create the wares to begin with and then (b) need to be curtailed in their ability to arrogate all of the supply to themselves by diminishing their purchasing power through taxes.

The issue is not whether government has enough money to make the purchases it wishes to make — government always has enough money.

The pertinent issue is 

• how large is the real supply of good and services, of what quality is it — especially with regard to public purpose (the needs of the community;  "do we have enough doctors and nurses?" —, and 

• what is a reasonable balance between the proportions of claims made on the real supply by government and by the non-government sector, respectively. And not least, 

• how does spending, no matter by whom, relate to the availability of real resources? 

Everyone — the private sector no less than government — is able to engage in risky, inflation-inducing spending, that is: spending where nominal demand exceeds the ability of the economy to provide the sought after resources.

2) This leads to the second point that Bill Mitchell disagrees with: the previous speaker insinuated that taxes are not coercive, while Bill adamantly claims they are. I think, Bill is right. 

Would I pay taxes, if I did not have to? I don't think I would. At least, probably not as much as might be needed from me. 

Would people be willing and able to provide the amount needed to fund government sufficiently in real terms (see above)? 

There is no doubt in my mind, first that for government to operate properly it must have coercive powers that may be used to override unwillingness and resistance on the part of tax debtors.  

Second, a strong private sector is predicated on a strong state with the requisite coercive powers — the latter, of course, being necessarily subjected to constitutional and other legal constraints as well as democratic control.

Yes, a government can destroy its own currency by destroying the economy that produces the things a government needs to avail itself of, that is: by undermining the people's ability to engender an abundance of goods and services that ensure a high standard of living and a well-resourced government.

Conversely, in order to attain such abundance, the non-government sector depends on a strong and effective state. Such a state ought to be a democratically accountable sovereign currency issuer with democratically controlled coercive powers to tax and to effectuate fiscal, monetary and other economic policies.

I suspect, in claiming taxes aren't coercive, the previous speaker was having in mind the democratic framework within which taxation is determined and controlled. However, democratic control does not make taxation any less coercive. A state that isn't able to enforce its tax regime is not viable, irrespective of the degree and quality of democracy underlying its existence.

See also my German post on Bitcoin.