ver the past decade, the notion of taxing the rich has become a very popular policy narrative championed by progressive center-left politicians. Taxing the wealthy has understandably become quite popular as inequality continues to get drastically worse in most capitalist countries, while the wages of the majority have been stagnant. It`s getting so bad that inequality levels are reaching Gilded Age levels, and some even argue Ancient Egypt levels. Progressive politicians such as Bernie Sanders and Alexandria Ocasio-Cortez have played an especially big role in giving this idea even more momentum in recent years.

The idea that many social democrats have is to introduce wealth taxes targeted directly at billionaires and multi-millionaires, such as higher capital gains taxes, real estate inheritance taxes, closing tax loopholes, and cracking down on billionaires hiding money in offshore tax havens, as well as a top 70% marginal income tax on all income made after $10 million. However, it is no secret that it is quite hard to actually enforce such taxes. Many billionaires with more power and influence will always be able to find ways of storing money in offshore accounts and taking advantage of different tax laws around the world. This is why economists such as Thomas Piketty have advocated for large wealth taxes that are globally enforced by global institutions, which he argues for in his book Capital in the 21st Century, an overly long book that will probably bore you to death. Seriously, just watch his Netflix documentary.

Here, I`ll argue that there are three big problems with the notion of taxing the rich, both as an argument and as a policy solution:

1. Higher taxes on the rich, or anyone else, are not needed to pay for progressive policies such as a Green New Deal, Medicare for All, federal job guarantee, or basic income.
2. Believing the false assumption that higher taxes are needed to pay for these policies makes it very easy for conservatives to argue against them and block them in government. It heavily convolutes the argument for progressive policies by creating a false sense of dependence on the rich.
3. Taxing the rich is not a sufficient solution for addressing inequality. While taxation can mitigate the symptoms of inequality, it does not address the root cause of inequality, which we`ll get to towards the end of the article. Not only does taxation not address the root causes of inequality, but it also does not change the fundamental dictatorial, undemocratic structure of capitalist workplaces, which are alienating, dehumanizing, and restrict human freedom.

While advocating for more taxation to mitigate wealth disparities is one thing, which economists such as Thomas Piketty argue for, politicians who use taxing the rich as a talking point for how they will pay for their policies is a completely different point – one with a lot of problems. Even though it is an insufficient solution, taxing the rich I can get behind for moral reasons. However, the bigger problem with “tax the rich” discourse is when progressives naively suggest this policy as a way to fund their policies, whether it be Medicare for All, a Green New Deal, a federal jobs guarantee, a universal basic income, or even something as rudimentary as building good infrastructure. Isn`t it funny how nobody asks how China spends trillions of dollars every year on infrastructure without raising taxes.

Let`s take a closer look by examining what exactly happens when you pay your taxes by writing a check. When the federal government receives your check and it`s deposited and clears, all they do is change the number in your checking account downward as they subtract the amount of your check from your bank balance. The government didn`t actually get anything back to distribute to someone else or to fund anything. No gold coin dropped into a bucket at the Fed; they just changed the numbers in the bank accounts. Nothing went anywhere. And what happens if you were to theoretically go over to your local Internal Revenue Service (IRS) office to pay your taxes with actual cash? First, you would hand over your pile of cash to the person on duty as payment. Next, they would count it, give you a receipt, and then, after you, the taxpayer, left the room, they`d take that hard-earned cash that you just forked over and throw it in the shredder or burn it. It gets thrown away, destroyed. But why? Because there`s no further use for it, just like a ticket to the Super Bowl. After you enter the stadium and hand the attendant a ticket that was worth maybe a thousand dollars or so, they then tear it up and discard it. Can you now see why it makes absolutely no sense at all to think that the government has to get money by taxing in order to spend? In no case does it actually get anything that it subsequently uses. So, if the government doesn`t actually get anything when it taxes, then how does it spend? Let`s say you get a Social Security check or a COVID relief payment; how did they pay for it? The Treasury gets the central bank to type numbers into a computer and deposit money in your account that you have with your commercial bank. That`s it. Okay, now you should know the correct answer to the inevitable question, “How are we going to pay for it?” when it comes to progressive policies. And the answer is, we pay for our policies the same way that the government pays for anything. Your commercial bank has an account with the central bank, the government`s bank, the same way that you have a bank account with your commercial bank. To spend, all the government does is get the central bank to type numbers into the necessary accounts. This includes all federal government payments made in dollars, and this includes making interest payments, as well as Social Security and Medicare payments – you name it.

The Deficit Myth

We shouldn`t be using “taxing the rich” as a response to “how we pay for it.” The real question we should be asking is, “How will we resource it?” The physical resources and productive capacity are what actually matter. Money is just a way for the government to get people to do stuff, which other people then pay to other people to do stuff, and the cycle goes on – we have an economy. And when you pay money to get people to build roads, cities, trains, or whatever it is, inflation doesn`t automatically happen. Inflation is when prices rapidly go up continuously, and there are many factors that can cause or prevent that. It`s honestly quite funny because Franklin Roosevelt didn`t ask, “How are we going to pay for it?” when implementing the New Deal, which created Social Security, Medicare, Medicaid, and a federal jobs program. And the amount of money being deleted by taxes was far less compared to what was being spent. Interestingly enough, taxes were actually cut over time while spending increased, especially in the Kennedy years, yet the New Deal programs were maintained and even expanded in the Lyndon B. Johnson years. All the while, the US was spending even more on its military, science, and space exploration to compete with the USSR. The fact that taxes don`t drive government spending was already known by some government insiders before the world went off the gold standard, such as Beardsley Ruml, who served as chairman of the Federal Reserve in the 1940s during the New Deal era. Chairman Ruml actually wrote a paper in 1946 titled “Taxes for Revenue are Obsolete,” which you can find in the description. Now you can see that the evidence is clear, and this isn`t really a debatable fact once you actually find out about it.

So why do Politicians Perpetuate the Myth?

So, why do progressive politicians always claim they will pay for things by taxing the rich? The problem is that the vast majority of people have a medieval understanding of economics and are unaware of how the monetary system works. Economic illiteracy is widespread, even among the left. Many politicians either have no idea how the monetary system works or know but pretend they don`t, such as Bernie Sanders and Alexandria Ocasio-Cortez (AOC). When the media confronts politicians like Sanders and AOC, asking how they will fund their progressive policies, they often fear telling the truth, worried about potential backlash from the media and the misinformed masses. If they were to reveal the truth and say that policies would be paid for by having the treasury instruct the central bank to create the money and deposit it in the appropriate accounts, they risk public backlash and accusations of promoting a “magic money tree” or causing hyperinflation.

As a result, instead of being honest, AOC and Bernie Sanders appeal to people`s basic, elementary understanding of economics. They claim that the money will come from the rich, and if that`s not enough, they`ll cut military spending and raise taxes, even on the middle class if necessary. While this may be an understandable rhetorical strategy to avoid short-term political backlash, it has detrimental long-term effects by reinforcing economic illiteracy. It`s frustrating because Sanders and AOC are aware of Modern Monetary Theory (MMT). Stephanie Kelton, a known MMT economist and author of “The Deficit Myth,” was Bernie Sanders` chief economic advisor, and AOC has previously admitted to studying MMT. However, they use their tax policies as a justification to tax the rich because they believe the Robin Hood narrative plays well to people`s common sense.

Why the “Taxpayer Money” Myth Backfires

Capitulating to economic illiteracy has a corrosive impact on political discourse and ultimately harms the progressive movement. It is already difficult to pass legislation like Medicare for All or a Green New Deal through the government, and by claiming that we need to tax X, Y, and Z to fund them, the argument for these policies becomes more convoluted, adding unnecessary obstacles. When progressives link taxing the rich to social programs, they inadvertently limit what is possible to whatever they can tax from the wealthy. By perpetuating this myth, progressives give the rich a false sense of benevolence and control over the government`s capacity to provide social programs. Even if unintentional, the “tax the rich” narrative perpetuates the view that without the wealthy, we can`t have nice things, which is simply untrue. Workers make things, and people`s labor is the real source of value produced in the world. Any policy can be implemented if there are sufficient physical resources, such as labor and natural resources.

The myth of taxpayer money generally creates resentment among working-class individuals, as some mistakenly believe their tax dollars fund welfare programs for the “lazy poor.” This narrative is particularly prevalent in America, with people questioning why their hard-earned tax dollars should fund healthcare and welfare for others. Dispelling the myth that taxes fund government spending could help eliminate this false narrative. Connecting taxing the rich to progressive legislation also complicates passing laws through the government. If taken literally, the rich must be taxed first before implementing progressive policies, which is especially difficult in a corporately managed democracy like the United States. Affordable housing, universal healthcare, and education don`t require taxing the rich; instead, they need the real resources available to carry them out. When discussing taxation, the focus should shift from funding things to deterring behaviors that society deems socially damaging. Taxes can help reduce inequality, but this depends on the type of taxes, and even the taxes that do reduce inequality don`t address the root cause of it. In fact, some taxes perceived as progressive can be regressive, such as corporate taxes, which often result in wage cuts and price hikes for workers and consumers. Raising taxes on the top 1% won`t automatically improve the lives of the 99%. No matter how high the top marginal tax rates are, capitalists will still control the means of production, people`s working lives, wages, and prices. Workers need to own the means of production, and the country`s natural resources and services must be collectively owned.

The Root Cause of Inequality and Real Solutions

To address the root cause of inequality, which is private property, we need to decommodify real estate by capping the number of properties a person can own and implementing ambitious public housing programs. This would lower property values in the real estate market and the amount of rent landlords can charge. Reducing inequality requires more than just taxing; it involves imposing strict limits on property ownership and resource distribution. In conclusion, we should stop using the argument that we need to tax the rich to fund social programs. Whenever you hear someone use economically illiterate arguments about taxes, remind them that what truly matters are the physical resources and productive capacity of society. The focus should be on collective ownership, decommodification of resources, and addressing the root causes of inequality.

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Appendix & Sources: Further Reading on Taxation, Economic Policy, and Inequality

For readers interested in the topic the following books, which were used as a source material of this blog post, offer analyses and critical perspectives:

• "Capital in the 21st Century" by Thomas Piketty
  • Short Description: Piketty's seminal work examines the historical evolution of wealth and income inequality and proposes policy solutions, including a global wealth tax, to address these disparities.
  • Source: Piketty, Thomas. Capital in the 21st Century. Harvard University Press, 2014.
• "The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy" by Stephanie Kelton
  • Short Description: Kelton challenges conventional economic thinking and explains Modern Monetary Theory (MMT), advocating for a new approach to government spending and taxation.
  • Source: Kelton, Stephanie. The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. PublicAffairs, 2020.
• "Winners Take All: The Elite Charade of Changing the World" by Anand Giridharadas
  • Short Description: Giridharadas critiques the role of philanthropy in perpetuating inequality and challenges the idea that the wealthy can solve societal problems through charitable giving.
  • Source: Giridharadas, Anand. Winners Take All: The Elite Charade of Changing the World. Vintage, 2019.
• "The Price of Inequality: How Today's Divided Society Endangers Our Future" by Joseph E. Stiglitz
  • Short Description: Stiglitz explores the social and economic consequences of inequality and offers policy recommendations to promote a more equitable society.
  • Source: Stiglitz, Joseph E. The Price of Inequality: How Today's Divided Society Endangers Our Future. W. W. Norton & Company, 2013.
• "The Deficit Myth: Exposing the Myths about Government Spending and Economic Prosperity" by Richard Murphy
  • Short Description: Murphy challenges common misconceptions about government deficits and offers a new perspective on fiscal policy and public spending.
  • Source: Murphy, Richard. The Deficit Myth: Exposing the Myths about Government Spending and Economic Prosperity. The Print Edition, 2019.
• "The Case for the Green New Deal" by Ann Pettifor
  • Short Description: Pettifor makes the case for a Green New Deal as a comprehensive solution to climate change, economic inequality, and social injustice.
  • Source: Pettifor, Ann. The Case for the Green New Deal. Verso, 2019.

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