Money, Taxes and What We Can Afford- Dan Kervick- New Economic Perspectives

This is a syndicated repost courtesy of New Economic Perspectives. To view original, click here. Reposted with permission.

By Dan Kervick

People sometimes seem to suggest that the Western democracies are at the end of the road economically.  They claim that these governments are spent, broke, tapped out.  They insinuate that Western nations can no longer afford to carry out ambitious projects of the kind they organized in the past, and must downsize or dismantle many of the governance systems and public enterprises they currently operate.  They insist that these democracies must hand over yet more of their nations’ destinies to the financial and corporate baronies that dominate the private sector, and give the latter a free hand to arrange whatever kind of future they might deign to mash up for us as a by-product of  their voracious struggles for private gain and glory.


This line of argument is quire wrongheaded and fundamentally illogical.  There is no way that a democratic political community can be poorer than the parts of that community, and contemporary developed nations remain stupendously rich by global and historical standard.  Those riches all lie available for potential use by mobilized, organized and ambitious democratic societies.   Contemporary democracies in the developed world are by no means poor, but are lacking only in morale, political will and determination, and audacious visions of the future.  This failure of will is due in part to the fact that our plutocratic landlords have used the mass media that they own to demoralize and humiliate the public, to divide and distract its discontents, to sow confusion and disinformation, to sponsor unthinking brutality and barbarism, and to convince us to hate our fellow-citizens and hate democracy more than we hate the landlords who buy us and sell us.

To restore clarity, let’s first reflect on some of the basics of political and economic organization.  How is does any organized political community afford any of the things it seeks to do?

Begin with the fact that there are certain large and important tasks that only governments can carry out well, and that these tasks both cannot and should not be entrusted to the hurly-burly business of private sector entrepreneurs seeking their own self-interest in the competitive capitalist ruckus.  Such tasks might call for government direction and enterprise because they require an organizational scale and geographic reach that private firms can’t achieve; or because they require the mobilization of publicly owned resources that private firms don’t control; of because the end results they are meant to produce are diffuse good that can’t easily be divided up and packaged as separate products to be sold in markets to multiple buyers; or because these end results are the kinds of things we want to distribute evenly, and not according to market imperatives based on ability to pay; or because the values the tasks are meant to realize are the fruits of humane wisdom and deep historical experience, and thus exceed the moral capabilities of the mercenary and philistine forces that drive most entrepreneurial profit-seeking.

To carry out these important tasks, the public will often have to shift control of many of the needed resources from private hands to public hands.  For example, suppose the public decides to build a network of new schools and put them into operation.  It will need resources.  How can it get them?

One primitive option would be for the public to obtain the resources it needs by resorting to taxation in kind.  There will exist some people or firms who already own bricks, and concrete, and steel, and glass, and books – or that at least own the resources needed to make these things.  And some people will already possess the skills that enable them to perform the kinds of work that are needed to turn these material resources into schools.  So the government could simply require those private individuals and companies to hand the material resources over to the public, and it could also demand that the skilled workers provide their labor services to the public free of charge.

But this approach would be unfair and oppressive.  The taxation in kind system is unfair because even though the schools are a public need and building them is a public project, only some people would be required under this system to contribute their limited property, time or energies toward the project, while others would free-ride on those contributions.  The system is also oppressive in its treatment of labor, since impressing the few into work for the sake of the many is a practice close to slavery.

What we would like to do is share the costs of the school project fairly, and take equal amounts of the needed resources from each citizen – or rather take those resources in proportion to the citizen’s ability to contribute.  But not everyone has a little bit of concrete, or a little bit of glass, or some of the necessary labor skills.  So what to do?  An alternative approach would be to tax only some of the needed resources form the people who possess them, and then pay those same people for the rest of what is needed.   But with what do we pay them?   We could pay them with ordinary goods and services of the kinds that almost everybody wants and needs, and we could tax these latter goods and services from everyone else.  Everyone could chip in a little bit of whatever it is they have – food, televisions, movie tickets, gasoline, plumbing services – and then those things could be exchanged for the concrete, glass and construction labor that the public needs to build its schools.

While this is certainly fairer, it represents a dauntingly complex logistical and bureaucratic undertaking.  The added costs of administering that comprehensive taxation and distribution plan seem wasteful.  And the results will still probably not be as fair as we want, since not everyone owns the kinds of goods that are generally wanted.  One thing we might try to do instead, then, is distribute certain certificates or vouchers to the people who are providing the concrete, glass, bricks, labor, etc. for the schools – vouchers that they could exchange almost anywhere for whatever it is they want, and whose exchange value is roughly equal to the value of the goods they are providing to the public, minus the value of their own fair contribution.  But to make this work, we need to guarantee that almost everyone is willing to accept these vouchers in exchange for some good or service they provide.  For that to work, the vouchers must have some value for the people who receive them.

But this is precisely what we have with a publicly administered and legally backed monetary system coupled with a supporting system of monetary taxation.   We can issue a large sum of tokens or certificates, and demand that each person delivers back to the public a certain quantity of these tokens, according to any system that seems fair.   In this way we can create a demand for the tokens.  We can then pay the suppliers of the building supplies and construction labor with the tokens.  The tokens will have value to the recipients because there is now a broad general demand for the tokens, and so those recipients will find a market for the tokens among people who need to obtain some to pay their tax obligations.  In order to make the system work we only need to credibly commit to taking something from people who do not deliver up the required quantity of tokens.  To discourage shirking and make the system work effectively, we should probably commit to taking something from any given person of substantially more value than the anticipated exchange value of the quantity of tokens that comprise that person’s tax obligation.

This approach probably solves most of our administrative problems by letting the broader public work out most of the distributional details among themselves.  Instead of taxing some of the goods we want from a construction company and taxing other goods from many other people with which to pay the construction company for the rest of what we want, we just give the company tokens that have acquired value by being attached to tax obligations that are simpler to manage bureaucratically.  Then we let the construction company exchange the tokens with others for goods and services of the company’s choosing.  This tax-driven monetary system is a good way for the public to provision itself with goods and services that are also provided by the same public, especially when the units of the goods and services that are needed cannot be provided in equal shares by all members of the population, but where it is nevertheless considered desirable that the rule for provision be just, and that everyone contribute a fair amount to the provision.

But the method described is only one way of organizing the public mobilization of resources for public purposes.  We don’t need to focus on the monetary system in order to understand the fundamental reason why the citizens of a country can always afford major investments in infrastructure and long-term strategic projects when they have the material resources and labor power they need to build the infrastructure and carry out those projects.   Money is just a tool for conveying resources from one place to another.   Ultimately, what the country spends on the projects it carries out is not the money it uses to move resources, but the resources themselves.  The country can afford to use its resources for the desired purposes when the value generated for the nation by achieving those purposes would be greater than the combined value of the resources consumed and the pains of the labor expended, and when that value is greater than the value of anything else the country could do with the resources instead.

As we noted, in order to carry out its purposes the public usually has to shift control of resources it needs from private hands to public hands.  This might be somewhat easier for a country that runs its own currency system, but it can always be accomplished one way or another by a resource-rich country with an effective government, and no monetary innovations or special monetary cleverness or insight are needed for the task.  Even if the United States of America, for example, were dependent on an external monetary system that it did not control (for example, if Americans used the Euro), the US would still not be “out of money” or “broke”, since a whole political community is not constrained by the present distribution of private property within that community.  The US would just have to harness the resources it needs the old-fashioned way via the tax system, relying on whatever monetary tools it happens to use to make payments and collect taxes.  Every country can always afford to employ unemployed resources and unemployed people, and if its privately-owned economic systems show themselves manifestly incapable of doing that job completely and effectively, then government must be used to summon these resources into action.  Anything less is a waste.

So the reason we can afford to develop and improve our countries has little at bottom to do with the monetary system.  We can continue to develop and improve our countries because we haven’t run out of material resources and human resources; because we haven’t run out of the capacity to invest our nation’s resources intelligently in building a better future; because real progress is better than stagnation and decline; and because our systems of governance are still effective enough to accomplish the job so long as they are prodded and animated by an energetic, organized and mobilized public that knows what it wants.

However, once we run out of intelligence, or run out of the willingness to cooperate, then it won’t matter any longer how rich we are in resources and people, or what kind of monetary system we have.  Social isolation, ignorance, lack of community spirit, lonely rage, and the prevalence of radically individualistic laissez faire outlooks that atomize and weaken the public are all forms of national poverty.  If we continue to succumb to pervasive corporate entertainment-system messages that encourage us to think anti-socially and individualistically, to despise our remaining democratic institutions and our fellow-citizens, to worship interpersonal domination and subordination, to disdain equality, to wallow in shallow and imbecilic barbarism, and to value forlorn self-assertion over cooperation, then we will horribly degrade the value of the resources we still possess in abundance.

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