What do you get when you drop taxes? Well, Bitcoins. Sometimes the only appropriate response to critics is embarrassment. For them.

Witness the following exchange on twitter

Full disclosure: I don’t twit, but someone sent this to me. I have no idea what transpired after that doozy of an exchange.

In that, Doug Henwood repeats a bit of silliness I’ve seen from monumentally uninformed critics: MMT claims government doesn’t need taxes. Where do they get this stuff?

How does every MMT explanation of government currency begin? Taxes Drive Money. Put the damned phrase into your favorite search engine. I just did it in quotes to limit the hits. I got 36,000. I did not scroll to the bloody end, but virtually all the links up top went to the MMT literature.

We emphasize over and over and over that without the obligation, acceptance of the government’s currency would come down to a Dumb and Dumber greater fool theory: I accept the currency because I think BiffyBob and BillySue will accept it.

Now, to be sure, taxes are not the only obligation that will drive the currency. As we’ve pointed out countless times, the farther you go back in history the more you will find that other kinds of obligations drove the currency—tithes, tribute, fees, and fines. History is on our side. There are very few examples of currencies that do not have such obligations behind them.

OK, there are Bitcoins. More later.

Jesse Myerson has this right—this is just Post Keynesian theory explained simply. Does anyone doubt that modern sovereign governments impose taxes? Does everyone notice that in almost all cases governments choose a money of account, impose taxes in that unit, and issue currency in that unit.

Is the following logic oh-so-difficult to understand?

From inception why would anyone except BiffyBob and BillySue accept a “fiat” currency if there were no better reason to accept it other than the dupe-a-dope expectation that someone else is dumb enough to take it? OMG if that works, I’ve got a stack of my business cards I’m willing to exchange for your Beemer.

No, we are not that stupid.

As Warren Mosler long ago realized, if he could impose a business card tax on his kids, he could get them to wash the car to earn the means of tax settlement. When he paid the business cards to them, his kids did not wonder if they could find dopes to take them. But they understood that if they didn’t pay their taxes they’d face punishment. Probably not prison, but perhaps straight to bed after dinner with no TV.

Taxes drive business cards. And currencies.

Now, did Warren need to receive his own business cards in tax revenue in order to pay the kids to wash the car? Of course not. He spent first, then got the tax revenue.

Yes, Jesse, this is Post Keynesianism for Dummies. (No disrespect meant; just a play on a common theme used for book titles.)

What, you mean government does not need tax revenue in order to spend? Precisely, Sherlock. Is that an outrageous statement? For anyone who has lived in the USA since its inception, it should be obvious. Except for seven brief periods, our government has always spent more than it received in taxes.

And that would mean exactly what? That the revenues were not needed for the spending, Sherlock.

Now, since we’ve established that government can spend without revenue, what is the danger of spending more than revenues?

Again, Jesse hit that nail on the head: a potential for inflation—if the economy is driven beyond full capacity. Hence, one response to such dangers could be to raise taxes. Another could be to cut spending. There are other responses that we won’t go into here—wage&price controls, rationing, importing, encouraging more production.

Well, if government can spend without tax revenue, why doesn’t it just eliminate taxes altogether?

It is elementary, my dear Holmes. Taxes drive the currency.

Another way of putting it is that taxes redeem the currency. All issuers of IOUs must stand ready to redeem them.

Redemption is important in both monetary and spiritual affairs.

Again, this is just good Post Keynesianism. It is actually a basic law of credit: you must take back your own IOU when it is presented to you in payment.

Banks do it, too. Believe it or not, debts to banks drive acceptance of “bank money”. That is the private money analogue to taxes.

Imagine if banks were willing to buy IOUs (we call that lending) but refused to accept their own IOUs (we call them demand deposits—or checking accounts) when debtors tried to repay their loans.

Would you be willing to accept the bank IOUs that the issuing banks would not accept in payment?

Or, more relevantly to our taxes-drive-money question, what if banks bought your IOUs by issuing demand deposits (again, we call that lending—and this is the way it works in the real world, even though some very famous economists, including one PK, deny it) but then told you “Oh, you don’t need to ever return those demand deposits to us.”

In other words, you could sell your IOUs to get demand deposits issued by banks without ever being required to “redeem” them (and yourself) by repaying banks?

How much would those bank demand deposits be worth? You and everyone else could run down to the banks to sell your debt to banks—without you or anyone else ever needing the bank IOUs for repayment of your loans.

Just how long would you be able to dupe some dope into taking the bank IOUs in payment?

Probably not too long. Same story with taxes. Abolish taxes and see how long the dopes who don’t need US currency to pay taxes will continue to sell stuff to get US currency. Oh, it could go on a while. If PT Barnum was correct, there’s a dope born every minute. Sixty an hour. It adds up.

Witness Bitcoins. ‘Nuff said.

I don’t need Bitcoins to make any obligatory payments. And no Bitcoin issuer is required to take them back. Bitcoins are not redeemable.

Unless you are involved in illegal activity or trying to hide income and wealth, there’s really only one compelling reason to accept them: you really do believe in the greater fool theory. You’re going to dupe the dopes and ride that Bitcoin up and pray that a) you don’t lose your wallet; b) your exchange doesn’t go bankrupt; and c) you can sell out of Bitcoins before the whole thing crashes.

So, to sum up.

MMT says that taxes and other involuntary obligations create a demand for the currency—so long as that currency is needed to pay taxes.

This means government can buy stuff by issuing its currency since taxpayers need it. Others will accept it—not because they think they can dupe BillySue, but because there are a lot of BiffyBobs out there who owe taxes.

Are taxes needed to “pay for” government’s spending? No. Taxes are needed to create a demand for the currency.

Now, I’ve heard even a prominent Keynesian say: “But I never think about taxes when I accept the currency. I accept it because I think BiffyBob will take it.”

Obviously, not a particularly deep thinker, that one.

This comment was made before an audience of legal history scholars, who broke out in hysterical laughter at the apparent shallowness of economists. That is to say, those who are supposed to be studying the economy and its institutions.

I saw the look of sheer terror on his face. He’d killed with this line dozens of times, before audiences of economists. The ultimate take-down of MMT. But here he was, in front of people who actually knew the history of money, who could cite the court cases going back to Roman times that delineated the sovereign’s power to issue a sovereign currency. Guffawing at him. He looked for the exits.

They all yelled at him: “It’s all about the taxes!”

I was embarrassed for him. Forty years of studying economics down the drain. Not just economics, but macroeconomics. Not just macro, but monetary economics. “I accept dollars because I think BillySue will take them.” It was all he had. He mumbled as he left “I guess I’ll have to think about this a little deeper.”

(True story.)

I wonder how many Bitcoins he’s got in his wallet?

TDM (taxes drive money) is a secret only to economists. Time to break it loose.

We are not making this up. Read Marriner Eccles, Beardsley Ruml, and Frank Newman. All of them — FDR’s Fed Chairman, President of the NY Fed and former Deputy Secretary of the US Treasury, respectively, have said EXACTLY the same things we’re saying when we talk about the role of taxes.

I’ll continue this thread.