The idea of paying "your fair share" is a lie, and the sooner we stop telling ourselves it, the faster we can actually get to a tax policy that makes sense for everyone.
Bottom line is this... what I've written is grounded in two theories of economics, one is called MMT - Modern Monetary Theory, the other is called HPM, High-powered Money theory.
The peculiar nature of how the government pays for things is complicated. Admittedly, I've simplified the hell out of it so that it's digestable.
But the basic premise about control, inflation, demand for currency, and the ability of the US government to issue currency, is how this works.
If you needed demonstration that ultimately it's about "trust," Trump tanking the economy last week and the US bond market going into the dumper should have been a lesson.
When it comes time for us to issue more debt, it's going to be considerably harder. The ability of the Republicans to push a tax cut now without it being inflationary is zero. The tariffs, the tax cut, and the lack of confidence in the U.S. economy, are all going to drive inflation through the roof.
That said, I assure you, the government will not run out of money... even with the fact that apparently tax compliance this year is expected to drop to an all time low.
I suppose that happens when you fire half the IRS, explicitly the tax compliance divisions. LOL!
The government can never run out of money. It literally has a printing press located on the National Mall in Washington DC. It's very nice...I've seen it. Once you understand that, then everything Finnegan says should begin to make sense. He is 100% correct.
So much is in this one post! It would be worth splitting out the healthcare section into a separate post. Would you consider doing that? It debunks and demystifies so many false narratives about healthcare that are out there. Many that I believed, and as you clearly explain, are not valid. You do good work.
I have, actually, written it in several articles. I could do a specific article on Health Care... why it doesn't work here... and why it works in Europe, etc.
Excellent piece! I’ve been arguing those exact points about healthcare and student loans for years. I did the math comparison to a paycheck in Canada and in some nordic countries and came up with the same result you did - for the same income, the take home pay was the same or more in Canada and the European countries, but you got more for it and saved a ton in out of pocket expenses, including healthcare but also in other realms.
What the US has focused on and regulated for across many industries is the creation of third party rent seekers that do nothing but collect money and siphon it away from the economy.
Wow. The failure of logic here is stunning. Proof that you can be highly literate and highly stupid.
“Canceling debt doesn’t inject new money into the economy – Unlike stimulus checks or tax cuts, which add new spending power, canceling student loans simply removes an existing drain. It’s not new money—it’s just stopping unnecessary money extraction.”
I laugh every time reread this.
If I was going to take money from you, but then decide not to, I’m not giving you more spending power, in just “stopping unnecessary money extraction.”
I can’t stop the giggles because the context is so serious, finger wagging, and faux-insightful in tone. If it was a random Facebook comment, I would just roll my eyes.
If you read this article and didn’t trip over the poorly disguised logical errors, consider how much else you’re being fed every day.
Of course, baghead cites plenty of true things. You need lots os true or mostly-true ingredients to make schizo soup.
But the central “ackchyually” premise is so silly. The government creates spending packages, and approves actual spending, with an understanding of how much in taxes being collected. If they collected no taxes, they would not make the same spending options.
You can reframe them situation in any number of ways, but the baghead’s framing is a tool to make his wrong arguments about student debt slide down the reader’s gullet easier. It is masterfully written, in that sense of manipulative utility.
By baghead’s logic, the government can simply “print” money to cover all of public education for everyone and this wouldn’t impact inflation. I suppose that means they good buy all our groceries and pay our rents as well. As long as they’re not just sending us a check, they’re not creating “new money.” Not sure what you call the money that goes to the Universities — old money? Second-hand money? Recycled BPA-free money?
Lesson of the day: baghead has an agenda and it has nothing to do with helping people with education, health care, or the quality of your life. Like most political pundits, right or left, trad or radical, he is selling you a feeling and a set of bad arguments you can throw at people whenever they threaten that feeling. Con cuidado.
Oh my I thought “tax cuts” was to help the Republicans and Jesus freaks have orgasmic pleasure. Boy am I dumb. Best article I have read in ten years. Many thanks for the excellent help right here. Okies do not appear to know about economics. Except for the “everything is a gold mine” business model. Yeehaw! p.s. I have no education so forgive me plus I am one of the hicks I rag about…good times!
Excellent article. It cleared up some things I've wondered about ever since I read Sapiens several years ago. It talked about how our legal system and financial system is basically a house of cards that works because everyone agrees on the system. Now that house of cards is getting shaky.
And I was never able to wrap my head around how the government was able to create money after going off the gold standard. You cleared that up for me.
You have an ability to take complex ideas and make them understandable for us average minds. That's a rare talent.
"It doesn’t go into a bank account for the US government. There isn’t a bank account for the government at the Fed or the Treasury that the money goes into"
This is simply wrong. Treasury General Account.
Since everything else in the post is based on that incorrect claim, it all ends up being nonsense.
Or just think about it - what you are essentially claiming is that when people pay taxes, banks get free money.
Ah, excellent. The economic illiterates have entered the chat. :P
Let’s clear this up before the stupid spreads:
Yes, the Treasury General Account (TGA) exists. It’s the U.S. government's operating account, maintained at the Federal Reserve. But it’s not a “bank account” in the way normal people or businesses use the term. It’s a settlement account. A ledger entry. A way for the government to move money around after it has already been created.
The U.S. government doesn’t need to “collect” money in order to spend. It creates the currency. That’s how a fiat system works. Taxes don’t fund spending—they delete money from the system to help control inflation and enforce demand for dollars. That’s their actual function.
Now, to the real gem:
“What you're essentially claiming is that when people pay taxes, banks get free money.”
No. Just no. That’s not how reserve accounting works, and it's not how Treasury operations work. When you pay taxes, your bank debits your account, and reserves are transferred from your bank to the Treasury’s account at the Fed. The money doesn’t “go” to your bank—it leaves your bank. That’s the literal opposite of banks getting free money.
If that were true, JPMorgan would beg you to file your taxes early. They could care less. The only one who wants you to file early and often is HR Block (given their commercials.)
But what the hell would I know, right? I only worked on four federal budgets, ran point on $100+ million in contracts, and worked directly with agency comptrollers. Some anonymous guy with one subscriber and a signup date of five minutes ago has cracked the fiscal code.
Right so a government account which receives tax receipt does exist after all! You can call others "illiterates" all you want but when you miss something so basic as that I don't think the problem of ignorance is on this side of the screen.
"The Treasury General Account (TGA) is an account maintained by the United States Department of the Treasury at the Federal Reserve.[1] It receives tax payments and proceeds from the auction of Treasury securities, and disburses government payments to individuals and businesses."
It receives payments and proceeds. It disbursed government payments. It's a fucking account.
And for a guy who supposedly worked on four federal budgets and ran point kn $100+ million contracts (if true, god help us) you have a very hard time understanding a basic argument. When I say "what you are claiming implies x" and you reply is "but x isn't true" all I can say is "exactly". This isn't difficult. Of course paying taxes doesn't mean banks get free money! Thats my whole point. Your ranting claims they do. So when you come back and argue that they don't youre only making yourself look silly.
Look, I don't know which hokey corner of the internet you pulled this nonsense out of (some MMT subreddit?). But it is hokey nonsense.
I feel like you might have missed the whole point of the article. Yes, there is a Treasury General Account, but that’s more of a facilitation process than anything resembling your checking account. The General Account doesn’t need to wait for your taxes as its “payday” in order to pay the electricity bill or buy a billion dollar new bomber. That alone makes it different.
Seems like once that money goes into the treasury general account, all bets are off and the government does as it sees fit. I find this explanation of taxes and spending to manage the economy rational, concise, enlightening, and frightening.
Those who ignore the past are doomed to repeat it.
Reaganomics... tax cuts for the wealthy will trickle down to the middle class. That was the supernova of America's homeless problem. Heaven protect us from the coming cataclysm. May the GOP wake up before it's too late.
The budget ultimately decides where things go. But the nature of budgeting and the authorizations are subject to what's called the Administrative Procedures Act. This is why when OMB decided "no soup for you!" and shut off money willy nilly, everyone had a nervous breakdown.
While the money is fungible, the authority to spend it (issuing those warrants) are not.
However you found it, it's wrong. The only grain of truth here is that the taxes you pay aren't earmarked for anything specific but rather are just that part of spending that doesn't have to be financed by bonds.
Hello. I haven't finished the whole article yet but I'm confused by this sentence : "Unlike, say, corporate taxes that fund infrastructure or public investments". Isn't that contrary to your initial argument that taxes don't pay for anything ? Just trying to understand and learn. Sorry for being illiterate.
That's funny, you're right that it's confusing and it's a good example of what makes a lot of this counterintuitive.
Probably a better way to say it, to fit it into the thesis of the piece, would be "the money destroyed by corporate taxes offsets the money created by spending on infrastructure and public investments."
But, as I try to explain it, I guess I share some of your confusion. Student loan payments aren't literally a tax. But it does seem like forgiving the loans - assuming that the DOE currently destroys money when it is received, like when the government receives tax revenue - would increase the money supply, so I'm not sure how much they are categorically distinct from corporate taxes, rather than just a really inefficient way to remove money from the economy.
I'm sure William could provide some further explanation...
Up until about six months ago, I was a pull yourself up by your bootstraps libertarian. Nine years before that I was a foaming at the mouth Democratic Socialist. Now I am just confused and angry, and this post helped the confusion, but also increased the anger. I was wrong for the last nine years, and I did not even know the actual socialist literature either, so I always just shared sound bites. Not a socialist, definitely not a libertarian, but I am rabid. Just trying to get my bearings
I think we should try to fight the impulse to be angry. As somebody who has struggled with anger in my personal life I don't consider it to be the best vector to approach problems at a societal level, either. I have also had long spells of depression, and the collective depressive systems of our society, particularly the non-MAGA coalition, are palpable. We need therapy as a nation, or a species.
I was never a libertarian, but I was a leftist and I'm not anymore. And I'm something of a mainstream Democrat, but right now can't really stand broad swathes of my party - the leadership kind of sucks, but I think the people who incessantly, uselessly complain about them REALLY suck. So I share your feeling of political homelessness, despite having what I think is a pretty mainstream vision of what society should look like.
One question I’ve always had about the concern re: inflation. If the US Dollar is the world’s reserve currency, doesn’t this leave a lot of latitude for inflationary pressures by creating more dollars?
Another website says there is 8.27 trillion dollars currently in circulation.
I do not claim economic expertise so of course you can block me for that—but this post helps me understand these theories like MMT better than anything I’ve yet read.
I’ve been curious about the net effect of dollars scattered hither and yon ever since the pallets of cash went missing in Iraq oh-so-many years ago. It seems like it would be negligible—just enter the dollars into other local economies, without much effect on the dollar. This seems another benefit of having one’s currency go international in this way.
I’m curious to know what will happen when the dollar stops being the world’s reserve currency. I guess I may get a chance to find out.
Great long form explanation - this is an idea people I know have a terrible time understanding or believing. I suppose part of it is it's hard for people to accept that the government really doesn't have the welfare of "the people" in mind. One would think the stark contrast in health care between the US and other countries would be ample evidence of that, but like any abusive relationship it can be hard to accept what is going on.
The premature loss of David Graeber is lamentable. His book 'Debt: The First 5,000 Years' goes deeper into this subject, talking about the nature of money. Turns out it's a matter of, well, trust.
[While I understood the ideas of a fiat currency, I didn't realize tax transfers weren't accounted for in some inconsequential way. Is there a BIC that is the equivalent of /dev/null?]
I'll also add the reduced stress from not worrying about health costs and student loan costs in other countries is well worth the extra taxation. Ive lived out of the US for 7 years now, first in the UK and now Spain. I havent worried about a medical issue/bill in 7 years essentially. We pay for private health insurance anyway because we want to for convenience, not because we are forced to. And my wife and most her family and friends have no or tiny student loans, while I still have a good amount from the US. So yea, maybe some more taxes but costs end up being less for most things, especially if the city you live is also less expensive.
The Europeans... and maybe I should write about this... go about their taxation policy completely differently than the U.S. does. But they face the same constraints on trust and inflation.
In the Euro zone you have two countries who have been willing to be "good faith players" in managing their money... Germany and France. As a consequence, they were the ones that ultimately set up the Euro zone and are largely responsible for Euro monetary and fiscal policies.
I've decided to block the illiterates.
Bottom line is this... what I've written is grounded in two theories of economics, one is called MMT - Modern Monetary Theory, the other is called HPM, High-powered Money theory.
The peculiar nature of how the government pays for things is complicated. Admittedly, I've simplified the hell out of it so that it's digestable.
But the basic premise about control, inflation, demand for currency, and the ability of the US government to issue currency, is how this works.
If you needed demonstration that ultimately it's about "trust," Trump tanking the economy last week and the US bond market going into the dumper should have been a lesson.
When it comes time for us to issue more debt, it's going to be considerably harder. The ability of the Republicans to push a tax cut now without it being inflationary is zero. The tariffs, the tax cut, and the lack of confidence in the U.S. economy, are all going to drive inflation through the roof.
That said, I assure you, the government will not run out of money... even with the fact that apparently tax compliance this year is expected to drop to an all time low.
I suppose that happens when you fire half the IRS, explicitly the tax compliance divisions. LOL!
The government can never run out of money. It literally has a printing press located on the National Mall in Washington DC. It's very nice...I've seen it. Once you understand that, then everything Finnegan says should begin to make sense. He is 100% correct.
So much is in this one post! It would be worth splitting out the healthcare section into a separate post. Would you consider doing that? It debunks and demystifies so many false narratives about healthcare that are out there. Many that I believed, and as you clearly explain, are not valid. You do good work.
I have, actually, written it in several articles. I could do a specific article on Health Care... why it doesn't work here... and why it works in Europe, etc.
That was a really excellent article William. I didn't realize several of those items.
You should go work for bernie, and try to sell this to the country.
He has tried forever and it's not worked
Excellent piece! I’ve been arguing those exact points about healthcare and student loans for years. I did the math comparison to a paycheck in Canada and in some nordic countries and came up with the same result you did - for the same income, the take home pay was the same or more in Canada and the European countries, but you got more for it and saved a ton in out of pocket expenses, including healthcare but also in other realms.
What the US has focused on and regulated for across many industries is the creation of third party rent seekers that do nothing but collect money and siphon it away from the economy.
Wow. The failure of logic here is stunning. Proof that you can be highly literate and highly stupid.
“Canceling debt doesn’t inject new money into the economy – Unlike stimulus checks or tax cuts, which add new spending power, canceling student loans simply removes an existing drain. It’s not new money—it’s just stopping unnecessary money extraction.”
I laugh every time reread this.
If I was going to take money from you, but then decide not to, I’m not giving you more spending power, in just “stopping unnecessary money extraction.”
I can’t stop the giggles because the context is so serious, finger wagging, and faux-insightful in tone. If it was a random Facebook comment, I would just roll my eyes.
If you read this article and didn’t trip over the poorly disguised logical errors, consider how much else you’re being fed every day.
Of course, baghead cites plenty of true things. You need lots os true or mostly-true ingredients to make schizo soup.
But the central “ackchyually” premise is so silly. The government creates spending packages, and approves actual spending, with an understanding of how much in taxes being collected. If they collected no taxes, they would not make the same spending options.
You can reframe them situation in any number of ways, but the baghead’s framing is a tool to make his wrong arguments about student debt slide down the reader’s gullet easier. It is masterfully written, in that sense of manipulative utility.
By baghead’s logic, the government can simply “print” money to cover all of public education for everyone and this wouldn’t impact inflation. I suppose that means they good buy all our groceries and pay our rents as well. As long as they’re not just sending us a check, they’re not creating “new money.” Not sure what you call the money that goes to the Universities — old money? Second-hand money? Recycled BPA-free money?
Lesson of the day: baghead has an agenda and it has nothing to do with helping people with education, health care, or the quality of your life. Like most political pundits, right or left, trad or radical, he is selling you a feeling and a set of bad arguments you can throw at people whenever they threaten that feeling. Con cuidado.
Oh my I thought “tax cuts” was to help the Republicans and Jesus freaks have orgasmic pleasure. Boy am I dumb. Best article I have read in ten years. Many thanks for the excellent help right here. Okies do not appear to know about economics. Except for the “everything is a gold mine” business model. Yeehaw! p.s. I have no education so forgive me plus I am one of the hicks I rag about…good times!
Well, what you feel at an intuitive level is explainable at an intellectual level.
Taxes are ultimately about control, not revenue. You already figured that part out. :D
Excellent article. It cleared up some things I've wondered about ever since I read Sapiens several years ago. It talked about how our legal system and financial system is basically a house of cards that works because everyone agrees on the system. Now that house of cards is getting shaky.
And I was never able to wrap my head around how the government was able to create money after going off the gold standard. You cleared that up for me.
You have an ability to take complex ideas and make them understandable for us average minds. That's a rare talent.
"It doesn’t go into a bank account for the US government. There isn’t a bank account for the government at the Fed or the Treasury that the money goes into"
This is simply wrong. Treasury General Account.
Since everything else in the post is based on that incorrect claim, it all ends up being nonsense.
Or just think about it - what you are essentially claiming is that when people pay taxes, banks get free money.
Ah, excellent. The economic illiterates have entered the chat. :P
Let’s clear this up before the stupid spreads:
Yes, the Treasury General Account (TGA) exists. It’s the U.S. government's operating account, maintained at the Federal Reserve. But it’s not a “bank account” in the way normal people or businesses use the term. It’s a settlement account. A ledger entry. A way for the government to move money around after it has already been created.
The U.S. government doesn’t need to “collect” money in order to spend. It creates the currency. That’s how a fiat system works. Taxes don’t fund spending—they delete money from the system to help control inflation and enforce demand for dollars. That’s their actual function.
Now, to the real gem:
“What you're essentially claiming is that when people pay taxes, banks get free money.”
No. Just no. That’s not how reserve accounting works, and it's not how Treasury operations work. When you pay taxes, your bank debits your account, and reserves are transferred from your bank to the Treasury’s account at the Fed. The money doesn’t “go” to your bank—it leaves your bank. That’s the literal opposite of banks getting free money.
If that were true, JPMorgan would beg you to file your taxes early. They could care less. The only one who wants you to file early and often is HR Block (given their commercials.)
But what the hell would I know, right? I only worked on four federal budgets, ran point on $100+ million in contracts, and worked directly with agency comptrollers. Some anonymous guy with one subscriber and a signup date of five minutes ago has cracked the fiscal code.
Right so a government account which receives tax receipt does exist after all! You can call others "illiterates" all you want but when you miss something so basic as that I don't think the problem of ignorance is on this side of the screen.
"The Treasury General Account (TGA) is an account maintained by the United States Department of the Treasury at the Federal Reserve.[1] It receives tax payments and proceeds from the auction of Treasury securities, and disburses government payments to individuals and businesses."
It receives payments and proceeds. It disbursed government payments. It's a fucking account.
And for a guy who supposedly worked on four federal budgets and ran point kn $100+ million contracts (if true, god help us) you have a very hard time understanding a basic argument. When I say "what you are claiming implies x" and you reply is "but x isn't true" all I can say is "exactly". This isn't difficult. Of course paying taxes doesn't mean banks get free money! Thats my whole point. Your ranting claims they do. So when you come back and argue that they don't youre only making yourself look silly.
Look, I don't know which hokey corner of the internet you pulled this nonsense out of (some MMT subreddit?). But it is hokey nonsense.
Haaa everybody's a financial genius. NOT
I feel like you might have missed the whole point of the article. Yes, there is a Treasury General Account, but that’s more of a facilitation process than anything resembling your checking account. The General Account doesn’t need to wait for your taxes as its “payday” in order to pay the electricity bill or buy a billion dollar new bomber. That alone makes it different.
Seems like once that money goes into the treasury general account, all bets are off and the government does as it sees fit. I find this explanation of taxes and spending to manage the economy rational, concise, enlightening, and frightening.
Those who ignore the past are doomed to repeat it.
Reaganomics... tax cuts for the wealthy will trickle down to the middle class. That was the supernova of America's homeless problem. Heaven protect us from the coming cataclysm. May the GOP wake up before it's too late.
The budget ultimately decides where things go. But the nature of budgeting and the authorizations are subject to what's called the Administrative Procedures Act. This is why when OMB decided "no soup for you!" and shut off money willy nilly, everyone had a nervous breakdown.
While the money is fungible, the authority to spend it (issuing those warrants) are not.
However you found it, it's wrong. The only grain of truth here is that the taxes you pay aren't earmarked for anything specific but rather are just that part of spending that doesn't have to be financed by bonds.
Came here to say this!!
Hello. I haven't finished the whole article yet but I'm confused by this sentence : "Unlike, say, corporate taxes that fund infrastructure or public investments". Isn't that contrary to your initial argument that taxes don't pay for anything ? Just trying to understand and learn. Sorry for being illiterate.
That's funny, you're right that it's confusing and it's a good example of what makes a lot of this counterintuitive.
Probably a better way to say it, to fit it into the thesis of the piece, would be "the money destroyed by corporate taxes offsets the money created by spending on infrastructure and public investments."
But, as I try to explain it, I guess I share some of your confusion. Student loan payments aren't literally a tax. But it does seem like forgiving the loans - assuming that the DOE currently destroys money when it is received, like when the government receives tax revenue - would increase the money supply, so I'm not sure how much they are categorically distinct from corporate taxes, rather than just a really inefficient way to remove money from the economy.
I'm sure William could provide some further explanation...
Up until about six months ago, I was a pull yourself up by your bootstraps libertarian. Nine years before that I was a foaming at the mouth Democratic Socialist. Now I am just confused and angry, and this post helped the confusion, but also increased the anger. I was wrong for the last nine years, and I did not even know the actual socialist literature either, so I always just shared sound bites. Not a socialist, definitely not a libertarian, but I am rabid. Just trying to get my bearings
I think we should try to fight the impulse to be angry. As somebody who has struggled with anger in my personal life I don't consider it to be the best vector to approach problems at a societal level, either. I have also had long spells of depression, and the collective depressive systems of our society, particularly the non-MAGA coalition, are palpable. We need therapy as a nation, or a species.
I was never a libertarian, but I was a leftist and I'm not anymore. And I'm something of a mainstream Democrat, but right now can't really stand broad swathes of my party - the leadership kind of sucks, but I think the people who incessantly, uselessly complain about them REALLY suck. So I share your feeling of political homelessness, despite having what I think is a pretty mainstream vision of what society should look like.
Anyway... welcome to the radical center. 😉
One question I’ve always had about the concern re: inflation. If the US Dollar is the world’s reserve currency, doesn’t this leave a lot of latitude for inflationary pressures by creating more dollars?
There’s this. https://fred.stlouisfed.org/series/CURRCIR
Another website says there is 8.27 trillion dollars currently in circulation.
I do not claim economic expertise so of course you can block me for that—but this post helps me understand these theories like MMT better than anything I’ve yet read.
I’ve been curious about the net effect of dollars scattered hither and yon ever since the pallets of cash went missing in Iraq oh-so-many years ago. It seems like it would be negligible—just enter the dollars into other local economies, without much effect on the dollar. This seems another benefit of having one’s currency go international in this way.
I’m curious to know what will happen when the dollar stops being the world’s reserve currency. I guess I may get a chance to find out.
Great long form explanation - this is an idea people I know have a terrible time understanding or believing. I suppose part of it is it's hard for people to accept that the government really doesn't have the welfare of "the people" in mind. One would think the stark contrast in health care between the US and other countries would be ample evidence of that, but like any abusive relationship it can be hard to accept what is going on.
The premature loss of David Graeber is lamentable. His book 'Debt: The First 5,000 Years' goes deeper into this subject, talking about the nature of money. Turns out it's a matter of, well, trust.
[While I understood the ideas of a fiat currency, I didn't realize tax transfers weren't accounted for in some inconsequential way. Is there a BIC that is the equivalent of /dev/null?]
I'll also add the reduced stress from not worrying about health costs and student loan costs in other countries is well worth the extra taxation. Ive lived out of the US for 7 years now, first in the UK and now Spain. I havent worried about a medical issue/bill in 7 years essentially. We pay for private health insurance anyway because we want to for convenience, not because we are forced to. And my wife and most her family and friends have no or tiny student loans, while I still have a good amount from the US. So yea, maybe some more taxes but costs end up being less for most things, especially if the city you live is also less expensive.
Thank You very much for this excelent piece.
Do I understand correctly that this does not apply to the Euro Zone in the European Union?
No. it's true in ALL fiat currency market areas.
The Europeans... and maybe I should write about this... go about their taxation policy completely differently than the U.S. does. But they face the same constraints on trust and inflation.
In the Euro zone you have two countries who have been willing to be "good faith players" in managing their money... Germany and France. As a consequence, they were the ones that ultimately set up the Euro zone and are largely responsible for Euro monetary and fiscal policies.
This is a long read, full of complex ideas, some of which are a bit mind-blowing for me. But it's worth taking the time to try to process it!
Great read. Does the system you described work similarly in other countries? Eg. Finland?