NB: This post is part of the “Piercing the Monetary Veil” symposium. Other contributions can be found here.
Basic legal ideas about taxation stand in the way of proposals for ambitious fiscal policies to address pervasive economic insecurity among both middle class and lower income households.
The conventional legal framework posits two primary functions for taxation. First, taxes raise revenue to finance government goods and services. Second, taxes redistribute resources, transferring money from some private interests to others based on ideas about distributional equity. Taxes also regulate private economic behavior, but this third function is generally treated as supplementary and subordinate, with economic ordering mainly directed by basic legal rules and the administrative state.
In orthodox law and economics, “optimal” tax policy achieves the two primary goals with the least “distortion” of private value-maximizing decisions in a presumed efficient and equitable market unsullied by taxes. This optimal tax theory aims to replicate a mythical market where money passively realizes and measures an underlying value fixed by barter-like exchanges of real goods, and services.
This seemingly benign conceptual frame implicitly locates economic productivity in a distinct and underlying private market sphere, with government taxing and spending cast as taking value from those who have created it. From this starting point, households can receive public support either as beneficiaries of forced public charity or as responsible consumers willing and able to pay an equivalent amount in taxes. If progressive taxing and spending programs are construed as involuntary, inherently inefficient, transfers of money from productive market winners to support less capable market losers, then that public support will tend to appear to generally inscribe rather than relieve conditions of precarity and powerlessness.
This conventional frame obscures how taxation creates money as a means for generating and distributing economic power and insecurity. Tax theory tends to ignore how law constructs and governs money, treating money as a neutral measure of social contribution.
Instead, the fact that taxes are paid in money is fundamental to the productive potential and regulatory purpose of taxation. When a government levies taxes in the money that it issues, it creates a demand for its currency by effectively imposing a debt that helps generate societal dependence on paid work and on financial capital. As Linda Sugin analyzes, by treating monetary gain as a neutral measure of productivity, tax theory obscures the fact that much non-monetized labor is highly valuable, such as family care, subsistence farming, and volunteer work. Taxation induces a shift in productive labor toward market earnings. Beyond the individual level, this monetized tax obligation functions more generally to produce and sustain a market with a broadly accepted currency as the fundamental measure of value for public and private legal and economic obligations more generally.
Combined with taxing and spending, monetary policies of currency-issuing governments like the United States give private financial systems substantial power and liquidity protection, effectively subsidizing private power to gain from controlling broader access to money for production. This public support for private power to generate and distribute money for profit has resulted in a system of social valuation skewed toward unequal short-term private gain from resource extraction, instability and inequality.
This view provides a better understanding of how currency-issuing governments can legitimately use fiscal policies to re-order the power to determine what gains, for whom, deserve value. Ambitious public spending on public jobs and social programs would reduce and equalize the risks of societal dependence on money income. Fiscal policies should also correct the unequal access to financial capital induced by monetary design. As Sugin discusses, unequal ability to pay taxes arises less from differences in fixed human qualities and more from differences in access to financial resources for generating, sustaining and protecting the human capacity to earn and save.
The misleading idea of taxes as neutral market consumption has helped rationalize a shift in fiscal policy over recent decades toward supporting basic human needs with tax credits or deductions for individual savings rather than through public services or social insurance. Tax breaks for individual savings accounts dedicated to retirement or education may appear to foster private individual choice and personal responsibility for basic hallmarks of economic security. But without meaningful public power to control the terms of earning and saving, individual discipline will not be a reliable route to middle-class self-determination.
Most households cannot reasonably expect that ordinary individual discipline and skill will be sufficient to secure higher education, health care, family care, housing, retirement, in a stable and safe environment. Most will face tough tradeoffs among these markers of middle-class success, and each tradeoff will be fraught with high risks beyond individual control.
Without substantial family wealth or public funding, individuals will depend on scarce, private and risky capital for economic survival and opportunity throughout their lives. In this system, the precarious income and savings of students, workers and families will tend to become resources to be captured and mined for short-term profits, in a competition to inflate the human and social price of participation in the neoliberal economy.
Another recent major shift in tax policy further shows how the conventional conceptual frame normalizes policies designed to promote rather than relieve conditions of growing economic insecurity for struggling communities. In the U.S., state and local governments faced with declining federal funding and deindustrialization have become locked in a competition to offer increasingly lavish tax incentives to attract major corporations for local economic development. Rather than securing good jobs and steady revenue for distressed communities, however, these policies often operate as a system of negative investment. State and local government fiscal and monetary constraints mean that these economic development subsidies tend to lead to cuts in spending on education, infrastructure, social services and public health, along with increased taxes on households and small businesses.
Despite frequent criticism of this upwardly redistributive “corporate welfare,” the standard conceptual frame helps to normalize these costly policies as the market price of high consumer demand for economic development in an increasingly competitive global market for scarce and costly capital. In reality, these tax incentives and subsidies are more like extortion or tribute than idealized market exchanges for voluntary mutual gain. The one-sided deals typically lack meaningful government monitoring or enforcement of corporate promises for jobs or development, and the resulting development often leads to low-wage work, environmental harm, and stress on local infrastructure. Though tougher oversight and clawbacks might improve some deals, a more effective solution would be to break the cycle of dependency on private capital for development by using the federal government’s currency power to provide ample and accountable public funding for local economic development.
Financial support for developing and sustaining human, environmental and social capacities is not naturally or necessarily scarce or costly. The reasonableness of ambitious public spending does not simply depend on first trading in an equivalent amount in taxes, but rather on contingent, complex, and contested political economic judgments about what financial investments and protections, on what terms, for whom, will bring stable and sustainable value in the long run.
With a new and more accurate tax story, ordinary individuals struggling with insecurity can be better cast as citizens in a democracy who deserve to reclaim public fiscal power to transform the economy, not just to participate in a market structured to make insecurity profitable and pervasive.
Note: This blog post draws on an earlier article, Martha T. McCluskey, Framing Middle Class Insecurity: Tax and the Ideology of Unequal Economic Growth, 84 Fordham L. Rev. 2699 (2016), for the Fordham Law Review symposium We Are What We Tax, organized by Mary Louise Fellows, Grace Heinecke and Linda Sugin.