As soon as I start expounding on the divorce between currency and taxation to “balance” the debt and other conventionally held beliefs about what money is, where it comes from, what is debt, etc .. well Iam immediately discounted. I am trying to find a bridge for opening up people’s eyes and yes, it’s not easy in the slightest.
Here’s an important point that may help you. Most people associate taxation with redistribution and other more liberal concepts that translate into more spending of a fiat currency. The fact is that the basis of taxation and spending being separated lies in the old gold standard economics. Taxation has never been a revenue source for government spending. It simply gave the government a method of creating “policy room” to provision itself when the value of the dollar was pinned to the gold reserve. In economic down cycles the government would be shut down if it couldn’t remove currency from the private sector and didn’t wish to inflate the existing currency.
Once the currency supply equaled the value of the reserve every dollar spent would be subject to the same debate we now reserve for debt ceiling fights. If the government could show that it was removing, at least, a dollar for every dollar it spent the debate was avoided and the business of government for the public good could continue. Since spending has to precede taxation this was the only way to insure a consistent flow of economic policy to create confidence in the currency. Without a gold reserve to defend, the need to match spending with tax “revenue” (policy room) goes away.
The constraining factor now is inflation, as it was then, but fiat currency inflation is an entirely different animal that shape shifts with reserve “capacity” for production within the private sector. As long as the private sector has the capacity to absorb currency without bidding up commodities and labor inflation won’t occur. Constraining spending to balance with taxation doesn’t allow potential to be realized and the growth that is necessary to capitalism is denied.
Currency that is removed from circulation weakens money velocity. That removed currency could be saved or could be taken out of our economy altogether by moving it offshore, for instance.
An overly simplified 1/1 ratio of tax to spending imposed also ignores the very important economic drains of wealth accumulation and trade deficits, actually shrinking the effective money supply. Tax policy can, and should, be used to direct investment in a way that encourages replacing cash profits with shareholder equity. The policy should always leave an out from paying the tax that benefits the economy, as actual tax collection should not the objective. When discussing currency velocity one could support taxation of only imports and wealth to achieve a balanced budget, which most of those who argue for balanced budgets would likely strongly oppose.
Of all of the insane policy enacted out of our economic misconceptions the taxing of business is likely the most insane. It would be much more reasonable to impose no taxes on business, as they are really only hidden taxes on consumers and very inflationary, and use strictly enforced regulation with stiff penalties to avoid damage to our infrastructure and ecologies. On the tax side MMT is very conservative/libertarian.