Friday, April 10, 2015

The political psychology of taxation and government spending

There's a curious contradiction (in the dialectical sense) regarding taxation and government spending. On the one hand, Modern Monetary Theory holds, correctly, that the government's spending and taxation are not connected in the same sense that household spending and income are connected. The government can always spend what it wants, regardless of the amount taxed, past, present, and future. There are always physical consequences to an activity, but there are no financial consequences, in the sense that, unlike a household, a government (with a fiat currency) can never run out of money. Indeed, given that the economy is growing (and that a stably growing economy is a Good Thing), the government should always be spending more than it taxes, and there's a lot of evidence that, at least in a capitalist economy (and I suspect also in a socialist/first-stage communist economy), there should almost always be a positive inflation rate, so that real interest rates (nominal rates minus inflation) can be negative when necessary.

What taxation actually does is control inflation: the (or some) people in an economy make a social decision to trade off explicit taxation for the implicit taxation of inflation: inflation, i.e. lowering the real value of money, is in effect the same in the aggregate as just taking money away and burning it, which is essentially what taxation is.

On the other hand, government spending is a demand on the productive capabilities of the people. When the government demands an aircraft carrier, the government must remove the workers who will actually build the aircraft carrier from creating things that that people want to consume directly, and those people still need to consume others' social product: food, clothing, shelter, etc. In this sense, taxation really does, at least to some degree, represent people actually paying for public goods: there is a legitimate conceptual sense in which our taxes not only subtract money to control inflation, but also represent actually paying for government spending. The taxes an individual pays substantively represents the proportion of her labor that goes not to exchanging her effort for her own individual consumption but goes to exchanging her effort for public goods and services.

This contradiction is precisely what Theodor Adorno in The Actuality of Philosophy would call a riddle. It is not an economic question that needs a scientific answer; it is a contradiction, a tension, in meaning that requires a philosophical answer. How can we think about taxation and government spending to resolve this conceptual contradiction? I'm not sure about the answer, but when posed like this, at least the contradiction seems clear.

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