Re: Liberals move forward on promised income tax cut, with first phase to start in January, Brian Platt, December 9, 2019
How is it that despite the supposed crushing nature of growing public debt, the largest in Canadian history, both Liberals and Conservatives can run on platforms that offers tax reductions to millions? It is because the main purpose of federal taxes is to reduce private sector purchasing power and thereby prevent inflation which is not a major issue today. Tax reductions put more money into the economy where it is needed as fiscal stimulus.
Nor are taxes required to fund the federal government. Base money is created when government spends and injects reserves into the commercial banking system, reserves that can be exchanged for government currency. If you demand your money at a bank, you will be satisfied only with government bills issued by the Bank of Canada.
The federal government must first spend the funds that Canadians later give back as taxes. The federal government is not like a household; it is a monetary sovereign and can spend either too much overheating the economy or too little tolerating mass unemployment (as is the case today), but can never run out of Canadian dollars which are manufactured at will.
Footnotes:
1. Taxes and the Public Purpose
L. Randall Wray is a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College, NY
http://neweconomicperspectives.org/2014/05/taxes-public-purpose.html
"....taxes do not “pay for” government spending. Indeed, no taxes can be
collected until government has spent. Taxes create a demand for the
government’s spending and logically precede that spending.
As we’ve argued, it is neither correct nor politically sensible to
link “give to the poor” policy to “tax the rich” policy. The purpose of
the tax is to free up resources to pursue the public purpose—including
anti-poverty programs.
But our tax system is already doing a HECKUV A JOB creating
unemployed resources. We can spend on the poor (and on a full range of
other public policies) and thereby mobilize those unemployed resources....
2. A Primer on the Operational Realities of the Monetary System
Scott T. Fullwiler, Wartburg College; Bard College - The Levy Economics Institute
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198
"the very act of paying taxes (when the taxpayer’s bank settles with the Treasury) or purchasing a Treasury security is also the “destruction” of reserve balances, while (6) the act of government spending is the creation of reserve balances."
3. BoC Annual Report 2011
https://www.bankofcanada.ca/wp-content/uploads/2012/04/annualreport2011....
Page 31
Liquidity
Given the Bank’s ability to create virtually unlimited quantities of
settlement balances ..... its operations are not constrained by its cash flow
or by its holdings of liquid assets.....
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Modern Monetary Theory in Canada
http://mmtincanada.jimdo.com/
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