Defining the Tax Reform Battleground

By J.D. ALT

The Republican tax reform will be criticized on many fronts. It is a battle of criticisms that will likely become as chaotic, ill-informed, and counter-productive as the tax reform process itself has been. This is because it will surely ignore the only strategic battle-front that ultimately matters: the basic premise of what taxes are for and why they’re necessary.

Before the Republican tax reformers even said a word, their arguments and proposals were packaged in the tired and tiresome macro-economic assumptions that misguidingly underpin our entire political discourse. Namely: (a) The federal government collects taxes in order to pay for federal spending; and (b) it cannot collect enough taxes to meet the spending needs of the budget it annually produces. To solve this conundrum some combination of reducing the budget and increasing taxes is therefore required. The magic Republican formula to simultaneously accomplish both of these goals is to dramatically reduce taxes on the wealthiest class of corporate operatives—which is made palatable to the voting masses by attaching to the corporate coat-tails some colorful snippets of tax-relief for lower and middle-class working families.

These mental gymnastics result in a strange form of double-speak: From one corner of the Republican mouth comes the logic that allowing the wealthy corporate operatives to keep more of their dollars will result in BUSINESS EXPANSION—creating new working-class jobs with taxable wages that will subsequently increase federal tax collections. Out of the other corner of the mouth comes the logic that because the necessary tax reductions will increase the budget deficit, it can only be fiscally responsible to subsequently reduce the budget itself which, alas, will require cuts to the nation’s retirement, food, and medical safety nets (since everything else in the budget is essential for national security, public safety, and the profitable functioning of the corporate economy.)

If these hyperbolic, self-enriching, and mean-spirited pronouncements cause you to want to rush out with your musket to one of the street barricades now manned by the Republican guard—stop! These are feigned battle-fronts where ultimately you cannot win for the simple reason that you will have bought into the false premise that underpins the whole battle scene the Republicans have laid out. (This is what Barack Obama proved when he agreed to parley over a “grand bargain” to cut the federal budget deficit.) This smoke-screen front is where the corporate operatives and their Republican guards want you to come to fight. Where they don’t want to do battle is on the field of macro-economic reality where their arguments cannot withstand the simplest of truths and facts. That’s the battlefield you want to rush to. But you don’t need a musket (hopefully). What you need to arm yourself with is just a few of those simple truths and facts. Here’s a start:

1. The federal government issues and spends fiat-dollars first―then it collects some of those dollars back This is like Time: it can only go in one direction. Or football: a wide receiver cannot catch a pass until after the quarter back throws the ball. Republican tax reformers want you to believe the pass is caught first, and then it’s handed back to the quarterback to throw!
2. The federal government has to collect tax dollars for two simple reasons:
   1. First a U.S. sovereign fiat-dollar (what the federal government issues and spends as “money”) is, in fact, a tax credit: its purpose is to make available to citizens the one and only thing they can use to pay their taxes It is called a “Federal Reserve Note.” It is called that because it is, legally, a “promissory note”―and what it “promises” is that the U.S. government will accept it back as a tax payment. That’s the only promise a “Federal Reserve Note” makes.
   2. For the fiat-money system to work, the federal government has to continuously drain dollars out of the economy because new fiat-dollars are continuously being created and spent into the economy. If dollars were not consistently drained out in taxes, we’d soon be swamped in so much money the price of everything would begin to spiral out of control.
3. If the federal government collects back fewer dollars than it has issued and spent, we call that a “deficit” because it appears to our everyday thinking that—like an undisciplined household—the government has spent more than it earned. This seems reasonable until you confront the fact that the sovereign government doesn’t “earn” Federal Reserve Notes, it “issues” them. Each Note is the government’s promise to accept the Note back as a tax payment. When the tax payment is made, the promise is fulfilled and the Federal Reserve (promissory) Note is cancelled. The Note is not something the government has “earned.” When it needs to spend again, it simply issues another Federal Reserve Note.
4. Tax-paying citizens want the federal government to collect back fewer Federal Reserve Notes than it has issued and spent! If it collects back more of the Notes than it has spent, we—the citizens—will have to dip into our savings (or even borrow) Federal Reserve Notes in order to pay our taxes.
5. The currency-issuing sovereign government doesn’t need our tax dollars to buy public goods and services for the simple reason that it has already bought them—which is why we, the citizens, have the Federal Reserve Notes in the first place to pay our taxes with. The federal government buys public goods and services first, then it collects back some of the Notes it paid to citizens to provide those goods and services.

These basic macro-economic facts ought to be defining the real questions in our tax-reform debate: What are the collective goods and services American families and American commerce are most in need of? How many Federal Reserve Notes will the sovereign government need to issue to pay American citizens and businesses to create and provide those collective goods and services? Given that level of federal spending, how many Federal Reserve Notes will need to be drained to maintain price stability? What is the fairest, most effective way to drain those Federal Reserve Notes out of the system? Where do excess Notes—the ones that aren’t being used to feed, clothe, and house families, that aren’t being used to invest in productive and useful products and services, that are being used instead to simply make bets in a speculative gambling casino—where do those excess Federal Reserve Notes tend to accumulate? These are the questions, I think, that should be establishing the real battleground of America’s tax-reform debate.