Taxes pay for things, or do they?

You originally said you didn't really understand the systems, and now you're calling them condescending? Isn't that the definition of ignorance?

In that case, Buy this. Read this.

I have it next to my desk and use it on an almost daily basis.

To prove a point...:

 

Maybe condescending was a poor choice of words but IDK what other word would best fit being told...

Taxes do pay for things, clues in the name, and the general attitude that somethings a fact because i said it is, end of, as if they were speaking down to a child.

That's not directed at yourself BTW as you've been very courteous in your replies.

Also i appreciate your suggestions on reading materiel however i don't have a spare £50 laying around to buy a book that deals with the mathematical models of financing when what peeked my interest, and the reason for starting this thread, was the theoretical models of economics.

 

Ooh, that's a classic. We need more shoutouts to actuarial textbooks on this forum!

 

^^ Meh, people in my firm think im weird because I always print everything off to read it. I find it significantly easier to remember stuff that way.

As for reference books, or books with equations, SO MUCH EASIER than hunting through endless formula sheets on back office.

 

I hear you. I have a couple of textbooks by my desk, and I also have hard copies of various pieces of legislation for easy reference, despite it all being available online these days.

 

Sauce.

....

My emphasis, although i think he meant to say prevent.

 

So, taxes technically do not pay for government spending in the same way my wages do not pay for things brought with my credit card: my bank pays for things brought with my credit card, and my wages just coincidentally happen to be spent on paying my bank.

Money in as taxation becomes money out as spending, which is topped up by loans from other nations, loans from private individuals (e.g. bonds/gilts), and loans from your future increase in productivity (printing more money). You could claim that money paid in from taxes is 'destroyed', and 'new' money of the same value is printed to pay for spending, but this seems a needless obfuscation.

 

Your wages pay for things because you're a currency user not an issuer like private banks (issuing credit) and our government, when you buy things on you're credit card the bank has created X amount of currency and if you wanted to keep the system in balance when you pay it back that currency is destroyed.

Say the bank had a balance of £1000, it's a small bank, if you wanted credit of £500 the bank credits your account with it but if it left that £500 in the system forever we'd have massive inflation, so when you return that £500 it's removed from the system, that's a simplified version as obviously the extra currency you paid in interest remains and cause a small increase in inflation over time, even less once the government who gave out the currency in the fist instance taxes it.

I guess you could say it's making things difficult to understand but technically it's more accurate IMO as you can't pay for something using a currency until the person issuing that currency provides you with a supply of it.

To use Gareth's original thought experiment of "Let's make an economy, just you and me. We each have half the 200-unit monetary supply, which we'll call £s." we can't just give away 200 units of currency, we need to give it value by creating a demand and also a supply by exchanging it for something.

 

If you're receiving £x billion in Taxes, destroying it, then printing £x billion to spend, then why bother with the conceit of the funds being destroyed and created in-between? It makes much more sense to consider the taxes as spent on services, plus any additional currency printed from whole-cloth (QE) or printed from sold debt (bonds etc) in the case of a deficit.

 

Because it's a concept, the currency isn't actually destroyed it's just returned to the organisation who created it in the first place, in the same way as if i gave you an IOU for a box of nails as a payment for work you did and later you used that IOU to pay for a fine i levied against you.

You can't tax to spend without having spent the money into existence in the first place, as i said earlyier if the currency issuer stopped all spending and only ever collected taxes eventually there'd be no money left in the system, if the currency issuer only even spent and never collected taxes there'd always be money it would just become worthless because of inflation, ipso facto you can't tax to spend as first you have to spend the currency into existence.

It's sort of important as debt and deficit is a perfectly normal thing to have in a sovereign fiat currency system, the debt is just a record of the amount of currency issued (in circulation) since records began and the deficit is how much currency is being spent into existence.

 

Well, except for that people don't pay 100% taxes, so there would always be money in the system that people save and spend on goods and services.

If I want internet at home, I have to pay the internet bill each month. If I want decent roads, healthcare etc, I pay taxes to the government who pay people to build the roads that I might drive on or to pay the doctor that I might need treatment from some day. Yes there's more to it, but that's what it boils down to.

 

You're a currency user not an issuer and as such you have to first acquire some currency before you can exchange it for goods and services, if taxes where 100% you make it impossible for anyone to acquire said currency, you create a form of slavery.

A currency issuer doesn't have to acquire their own currency before they can spend it, just like a famous person doesn't have to acquire their own signature before they can sell it, they just take pen to paper.

If taxes pay for things then how do we pay for wars? We don't borrow the money as you can't borrow from yourself and we don't save up before going to war.

 

Exports, Bonds, gilts?

 

Exports are paid for in the currency of where they're sold and then a third party exchanges the foreign currency for the exports currency, basically the third party who conducted the exchange of currency has gained currency in the country where the export was sold and lost it in the country it was exported from.

RE: Bonds and gilts this probably explains it better than i can as like i said a lot of this stuff is new to me so I'm learning as i go along.

Sorry i can't say more about bonds and gilts it's just from my perspective they serve no purpose but obviously that's wrong and i just don't understand the role they play.

 

Most E/I goods are paid in USD.

 

True, but you either need your own reserves of USD or find someone willing to trade your local currency for their USD, in either case you've not changed your local currency into USD, you've just moved some local currency and some USD from one bank account to another.

Oh and I've had a little think about Bonds and Gilts, would i be right in saying they're like government backed savings accounts? Because if so they'd serve the same purpose as taxes only on a much shorter time scale, in other words they attempt to negate the effect of to much or to little government spending by removing currency from the system to prevent inflation / unemployment.

 

Yes, then no. They are a savings instrument effectively for the bond holder however the bond holder will be putting money into bonds that would have otherwise been used for say a bank deposit that would have then been lent out for investment/consumption and the government is providing the gilt to pay for their spending instead. This at least holds true outside of liquidity trap conditions, where there is a glut of savings with interest rates at zero.
They avoid any change to inflation simply by reallocating lending and then spending from the private sector to the public sector sterilising the inflationary effects (rather than creating or destroying money, as it would have the same effect whether with a bank or the government on the money supply).

It's not returned to the organisation that created it in the first place most money is created by private banks subject to the bank's liquidity requirements, solvency and borrower's credit constraints.

http://www.bankofengland.co.uk/publ...lletin/2014/qb14q1prereleasemoneycreation.pdf

 

The thing is as the BoE said in that PDF you linked to all deposits in bank accounts are the result of loans made: the loans create the money that is then deposited so the money the bond holder put into the bond is not a deposit but, most likely, on loan to them from the currency issuer as is all money, when someone puts money into a bond they're in effect returning an IOU to the currency issuer with a promise that they can get it back later with interest.

I'll have to read up on what a liquidity trap is as I've seen you mention it a few times and not had time to reading about it.

I'd disagree that it's not returned to the organisation that created it in the first place as the private banks don't create currency, they create credit and that credit is on loan from the currency issuer.

The part you quoted talks about horizontal transactions and they stem, or can only take place if vertical transactions take place (transactions from the currency issuer to the private sector), the private sector can only issue credit if the public sector (the currency issuer) goes into deficit by issuing the currency in the first place.

My emphasis added to highlight how the currency issuer being in deficit creates deposits in the private sector and when a bond is issued that private deposit is used to lower that deficit.

 

No the money was likely created by a private bank rough example then used to invest in a firm, who made a revenue, then gave money to their staff who put their money into a pension fund. The pension fund has more liquid money and therefore decides what to do with having liquid cash on the books and the government is selling bonds, so makes a portfolio decision towards purchasing those bonds. The government requires those bonds to spend and that is used for balancing the deficit over the month which means spending the money on interest, investment and consumption. Alternatively the government is not selling bonds and the pension fund invests in corporate bonds, this then boosts private investment/or consumption

[/quote]
MMT is hocum, that makes broad claims about fairly mundane accounting mechanisms and technicalities understood in every type of macroeconomic school for decades and acts like it has invented them whilst ignoring the limitations of their truisms. The constraints are large and don't fit the fantasy that deficits don't matter. You need to just look up the flaws. The whole idea is like a poor reinvention of the wheel.

Governments don't receive currency as you mean it they receive money that has been created by credit, and then proceed to spend it, they don't receive bank reserves and most people don't send coins and notes, everything else is private bank created.

And government actions are not predicated upon the idea of controlling inflation through taxing and spending, or the chicken and egg argument around it, that is not their job. The bank of england controls the price of money to control inflation, government fiscal policy may cause inflationary pressures but then again if you decide to increase your consumption inflationary pressures increase but the primary purpose of taxation and spending isn't about inflation and money supply management, that's what the BoE is for.

 

Private banks can't issue currency, not only would it be highly illegal but it would also be a logistical and accounting nightmare trying to keep track of all the new money entering the economy.

Private banks only, and i mean only, get their money via a loan from the central bank (aka the currency issuer) or the government spending the currency into existence, whether that be on the day they spent it into existence or 322 years after the first currency was issued.

Currency issues don't need to get hold of currency before they can spend it like currency users.

If i had to guess you appear to be confusing the issuing of credit with the issuing of currency, credit, much like a credit card, is nothing more than a loan, and in the case of private banks that credit card takes the form of their central bank reserve accounts they hold with the lender of last resort, the BoE.

Instead of just saying MMT is hocum how about actually addressing the key point you don't agree with, it's all well and good saying it makes broad claims about fairly mundane accounting mechanisms but as those accounting mechanisms appear to leave out highly important information that's not really saying much, is it.

I would pick apart the rest of what you said but it appears you've not put much thought into what you're saying, i mean for starters if the government only receives money from credit (payments) then how do you think the government pays for wars? They don't ask the other guy to wait while they collect enough credit, and we don't borrow the money because you can't borrow money from yourself.

Then there's your doozy about currency issuers not controlling inflation, i mean do you seriously not know inflation is just the other side of the coin (no pun intended) of the price of money, if goods and service increase by 20% that just another way of saying you're currency has lost 20% of its value.