Myth #5: The government must tax or borrow to get money to spend.
Reality: Government spending is not constrained by revenue.
Reality: Government spending is not constrained by revenue.
As explained above, the Federal government neither "has" nor "doesn't have" dollars. The government spends by creating new money and taxes by destroying money, which simply involves changing numbers in bank accounts. Suppose the government pays Social Security benefits to a retired teacher, Mrs. Jones, in the amount of $1,500 a month. At the end of the month, the checking account of Mrs. Jones is credited by $1,500. Did the government need your tax revenue to pay Mrs. Jones? No! It simply changed the numbers up in Mrs. Jones's bank account, basically creating new money. On April 15 Mrs. Jones sends a check to the IRS to pay her taxes. When the government gets the check, what does it do? It simply changes numbers down in Mrs. Jones's bank account, destroying the money.
What about selling government bonds, which is mistakenly called borrowing? These are simply interest-earning assets, similar to a savings account. Suppose Mrs. Jones has $1,000 dollars in her checking account on which she would rather earn interest. So she buys a Treasury security. What happens? Basically a bond sale involves moving funds from checking accounts to savings accounts (Treasuries) at the Federal Reserve Bank.
So if the government doesn't need to tax to be able to spend, why does it tax at all? There are two reasons. First, the government creates demand for its currency through taxation. If the public didn't need the dollars to pay its taxes, it wouldn't be willing to sell goods and services to the government in return for pieces of paper (or numbers in a checking account). Taxes, then, are what give value to money. Second, the government uses taxes to control the public's spending power. When the public has too much spending power, government taxes some of it away to avoid inflation. When there is too little spending so that unemployment results, it lowers taxes to boost private spending.
Any and all financial constraints on government spending such as issuing government bonds dollar for dollar against deficit spending, debt ceilings, and restrictions on the Fed's ability to buy treasury securities are purely political and necessarily self imposed, because they are imposed on us by our chosen institutional arrangements and not by something inherent in our economic system.
~Yeva Nersisyan, Doctoral candidate in economics, University of Missouri-Kansas City, Missouri
