>   
>   (email exchange)
>   
>   On Tue, Feb 16, 2010 at 9:18 AM, wrote:
>   
>   A payroll tax holiday would be tantamount to a currency devaluation, no? As Warren’s
>   rightfully described the current US dollar as being merely a tax credit at the end
>   of the day, a reduction in tax burdens will reduce the demand for dollars, all else
>   equal.
>   

Valuation with a floating fx currency is what it can buy, aka the price level. (different with fixed fx/gold standard, etc.)

Anything that is inflationary is ‘devaluing’

Increased demand may or may not be inflationary or even deflationary as the payroll tax holiday reduces costs for business which, in competitive markets, reduces prices.

11 Responses

  1. “The U.S. dollar is merely a tax credit . . . thus a reduction in tax burdens will reduce the demand for dollars, all else equal.”

    This could be saying “the value of a fiat currency allegedly rests on the fact that the govt requires tax be paid in said currency, thus as tax declines, the value of the currency declines.”

    My answer to the latter point is that the value of a currency depends on the fact that a whole range of goods, food, fuel, etc can be bought with it (actually more or less what Warren says above). Thus if tax as a proportion of GDP gradually declined to near zero, the value of the currency would be maintained, as long as the currency was administered competently (least that’s what I think).

    But the tax driven currency folk won’t be too pleased with the latter claim. In contrast, MMT folk SHOULD be pleased, because if it can be shown that MMT does not require support from the tax driven currency idea, then MMT is a more robust theory.

    1. Ralph,

      I disagree on a few of the points. Taxes are the first component of demand, but not the sole component of demand.

      I think that this is not true:

      “Thus if tax as a proportion of GDP gradually declined to near zero, the value of the currency would be maintained, as long as the currency was administered competently (least that’s what I think).”

      At some point, you need to collect a decent amount of taxes. At near zero levels, there is no reason to use this currency initially.

      I am starting to develop a hierarchy of money uses. I outlined it in another post, and I suspect that Basil may have done this in his book which I haven’t read.

      The hierarchy is as follows:

      Level I

      extinguish tax liabilities

      Level II

      claim on useful work
      medium of exchange

      Level III

      short to medium term store of value
      establish relative prices

      Level IV

      Medium of Savings
      Scorekeeper
      Claim on the assets of the state

      I think people get confused because money and currencies have so many different uses, it becomes difficult to separate these uses. Additionally, money is a highly emotionally charged topic.

      Then, the way money gets its “value” is different from the daily “value” imparted by this getting of value. The value of a currency is what it can buy, but this value is far in excess of the value imparted by its ability to extinguish tax liabilities.

      Money is given its value by the Level IV properties of money, but is given its viability by the Level I property, and the subsequent Level II and III properties.

      You can imagine in these levels a currency that fails these properties – and therefore fails as a useful currency.

      1. if only every word had a single meaning, we could grokk meanings so much easier.

        “The value of a currency is what it can buy, but this value is far in excess of the value imparted by its ability to extinguish tax liabilities”

        should be:

        The final value of a currency is what it can buy. The final value of a currency is far in excess of the initial value of the currency, which is imparted by its ability to extinguish tax liabilities.

        and:

        “You can imagine in these levels a currency that fails these properties – and therefore fails as a useful currency.”

        s/b

        “You can imagine a specific currency that fails in one of these properties. The currency will then fail at any of the higher level properties. Any failure at any level makes it fail as a currency.”

        I think talking about money vs. currency is not useful at this website. Talking about money doesn’t lend itself to thinking about the strengths and weaknesses of that specific money framework very well, because the term money is so broad and emotion driven. It is almost impossible to talk with anyone about “money”. If you are talking about money – what specifically are you talking about? At moslereconomics.com, we are talking about something very different than when I talk about “money” with my 63 year old dad who is a small business owner in northwest Indiana – which is possibly the most devastated economy in all of America.

        Money may be a word that has lost its meaning in sophisticated economic discussions due to lack of specificity.

    2. Thus if tax as a proportion of GDP gradually declined to near zero, the value of the currency would be maintained, as long as the currency was administered competently (least that’s what I think).

      Ralph, there is a certain truth to this in terms of functional finance, where the purpose of government disbursement is to increase non-government net financial assets and the purpose of taxation is to reduce NFA, in order to balance nominal aggregate demand with real output potential. This would work to a degree in a simple economy, but not so much in a complex one where government activity is required for public purpose. As a society becomes more complex, it becomes more wealthy, and need a larger military to prevent foreign incursion, for example. Increasing societal complexity also requires more internal security. And it goes on from there. There are a lot of societal necessities that the private sector is either unwilling or unable to meet and that becomes government’s role. As a result, disbursements affect NFA and therefore NAD, and the fiscal adjustment process requires taxation to withdraw NFA when NAD threatens to exceed real output capacity. But, you are correct, in an ideal situation, taxation could be minimal, and the currency would still function as a medium of exchange, unit of account, settler of debt, and store of value.

    3. Ralph,

      State and local governments tax income, sales and property, but they don’t have the money creation power of the federal government so they have to tax or borrow what they spend (or receive transfer payments from Uncle Sam).

      So I’d frame your question as, would state and local taxes would be sufficient to establish the value of money, or is it necessary that the same federal government that creates money also impose taxes?

      1. Thanks Warren. Sorry for the belated reply.

        Slammed at work this week, so not as diligent in checking your site as I should be. :o)

  2. Mr E: You say “At near zero levels, there is no reason to use this currency initially”. Agreed. I.e. one way of getting a currency started is to have it tax driven. But I suspect that if taxes subsequently drop to zero or near zero people will continue to use it because in anything other than very simple economies, people and businesses definitely need and want a currency.

    You say “….people get confused because money and currencies have so many different uses, it becomes difficult to separate these uses” Agreed. Currencies are complicated and abstract. That’s the big fascination, of them.

    You say “if only every word had a single meaning, we could grokk meanings so much easier.” One of the Greek philosophers about 2,500 years ago said that most apparent differences of opinion are caused by failure to agree on the definition of a word. Too right. Seems Greeks were smarter then than now.

    Sensei asks “How is the US dollar a “claim on the assets of the state?” My answer: monetary base appears on the liability side of a central bank’s balance sheet. To that extent it’s a “claim”. But I think it’s a pretty meaningless claim.

  3. dollars are on the liability side in that they are the thing govt accepts for payment of taxes.

    the gov has an obligation to accept them as payment to itself

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