Analysis: If Deficits Don’t Matter, Why Bother with Taxes?

On March 18, Joe Wiesenthal of Bloomberg Markets had MMT economist Stephanie Kelton on the show. If you’re not familiar with modern monetary theory, they think governments should print more money because deficits aren’t a big deal. At one point in the show, Wiesenthal asked, “If we don’t need to worry about deficits, why do we have taxes?” Kelton’s response was illuminating.

Now, the traditional excuse for taxes is, paraphrasing Oliver Wendell Holmes, that they are the “price of civilization.” Skeptics point out that, historically, societies with very low taxes were often far more civilized—think the Dutch Golden Age, Islamic Golden Age, Victorian England, the pejoratively named “Gilded Age” in American history—that thirty-year golden age when almost everything useful was invented. And, yet, throughout that period, federal receipts were one-fifth what they are today.

Why so much civilization? Because much of what governments do today was done by charities or businesses competing for customer dollars instead of seizing their budget in taxes. When doctors, firefighters, and schools have to satisfy customers, things get quite civilized.

Still, even if we accept a “night-watchman state” argument for, say, national defense or salaries for Supreme Court justices, it gets tricky if government can simply print up the fresh money to pay for all that civilization.

Kelton’s answer? Taxes would still be needed because they make us poor. And because they can punish people she doesn’t like.

Specifically, Kelton likes that taxes “remove dollars from our hands, so we can’t spend them,” leaving more purchasing power for the government. So taxes make the people poor, and that’s a selling point to her, presumably because she thinks governments are really good at lifting people out of poverty. Anybody who’s spent time in America’s inner cities, where government money is pretty much the only money, might disagree.

Ah, but it’s not just about spending our money more wisely than we ever could, Kelton adds two secondary reasons she loves taxes: to punish particular people by redistributing their money and to punish people for doing things she doesn’t like. Such as failing to buy energy-efficient appliances (no, really). In other words, social engineering with carrots for your friends sticks for your not-so-friends.

Aside from the morality of preying on our neighbors, demanding they pay an ever-growing “fair share” that invariably exceeds what, say, a journalist or professor pays, using taxes for redistribution and punishing—“nudging,” in the fashionable parlance—carries enormous collateral damage. Because redistribution arranges society into hostile factions either trying to violently dispossess one another or defending against that dispossession.

Moreover, redistribution isn’t simply innocently shuffling the chips; it is wholesale destruction. A paper coauthored by Christina Romer, former chair of Obama’s Council of Economic Advisors, found that each dollar in government spending leads to between $2 and $3 in lost economic activity.

A separate study by Harvard economist Martin Feldstein came to similar deadweight estimates that “may exceed $2 per $1 of revenue.” In other words, in order to move a dollar, you have to destroy at least two to three dollars.

There is a similar mix of moral and practical costs to using predatory taxes for social engineering. It also breaks the social compact to live and let live, rendering our every decision subject to public vote, from what we eat, to where we vacation, to what kind of bag we use to carry our groceries. There is nothing outside the realm of the nudgers, no detail too small.

Moreover, by mass imposition of what are effectively judicial fines for noncrimes, such taxes can achieve a level of control that would never be constitutional if written as law.

For example, today in the United States, 90 percent of students attend public schools, despite the terrible quality of education. Why do they stay? Because each voter must pay for public schools whether or not they use them but would have to shoulder $11,200 per child per year for opting out of the public system while continuing to pay that $12,600 per year in taxes for the “free” public system. Especially for the working class, this penalty becomes prohibitive for all but the most committed.

Pair these facts—no detail too small for the social engineers and their ability to achieve near-universal obedience via fines and subsidies—and we risk a totalitarian “permissioned” society where we are free on paper, but using that freedom comes with ruinous fines.

If indeed, the only remaining justification for taxes in an inflationary regime is to redistribute and punish—to erode social harmony in a fiscal war of all against all while impoverishing society and enabling a creeping totalitarianism—then it is much closer to the mark that modern taxes have become not the price of civilization, but the predator of civilization.
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Peter St. Onge is a Mises Institute Associated Scholar and a Fellow at the Montreal Economic Institute.  For more content from Dr. St. Onge, subscribe to his newsletters on the economy and cryptocurrency.