Wednesday, January 8, 2014

Positive Taxation as a Method of Measuring Monetary Stimulus

Taxation is (almost) universally looked upon as a negative economic force.  I think every tax payer must have looked at his tax bill and thought how nice it would be if I was not required to pay tax!

It is easy to see how much tax the nation pays the Federal Government.  Simply look at Federal Receipts. Then, we can relate receipts to the GDP and find that Federal Receipts are a very large part of GDP.  This can not be good!

But then we can look at Federal Expenditures and see that, for the last 60 years or more, Federal Expenditures are MORE than Federal Receipts.    Whoa, the Federal Government is spending more than it receives; the Federal Government must be actually practicing a POSITIVE TAX policy!  Yes, the Federal Government is actually a stimulation to the economy, not a drag as would occur if the Federal Government was actually collecting taxes ON THE AVERAGE.

From a mechanical economic standpoint, it seems logical that economist would utilize the positive tax as a measure of monetary stimulation received by an economy.  After all, an increased money supply is widely assumed to be stimulative to the economy, whether the result of increased loans from banks or increased spending by government.  Rather than speculate on why economist do not make wide use of positive taxation as a stimulus measure, this post will show the resulting chart and add two traces that show stimulus added by bank loans.

Positive taxation calculated in three ways.
The bottom heavy blue line is Federal Expenses less Federal Receipts expressed as a ratio to GDP.  Simply stated, this is the positive tax rate contributed by the Federal Government to the economy each year.  The reader can see that in about 2008 and 2009, the stimulation from positive taxation reached nearly 9 percent of GDP.  

Economist certainly do not agree on what constitutes money supply but here at Dissecting Money, a favorite description of money supply is the Government Provided Money Supply.  If we assume that only government and banks can create money supply, we can make an estimate of how much stimulation comes from bank loan activity.  Loan activity acts the same as positive taxation toward increasing money supply.

Due to the complexity of bank activities, in this post we will estimate money creation by lending activity in two ways: (1) Directly use the Federal Reserve data series TOTLL and (2) as a check, assume that loans create deposits, which can be hidden with further lending.

The chart red line highlighted with diamond point is the stimulus obtained by adding the change in loan levels to annual Federal expenses.  The reader can see that the sum of Federal and Loan stimulus was greater than about 6% annually going into the 2007-8 recession.

The light green line is the check line.  To create this line, assume that loans create bank deposits.  This is true whether the loan is to government or to non-government entities.  Bank deposits from loans need not remain in the bank; deposits are often exchanged for government bonds (or corporate bonds) and thus are recycled into the dynamic money supply where deposits generate GDP activity before again becoming static.  To account for these 'hidden' deposits, we add Federal Reserve data series FDHBPIN which is Federal Debt Held By Private Investors, using only the annual change.  The annual change in bank deposits is tracked with Federal Reserve data series DPSACBW027BOG.  To these two series is added Federal Receipts which are all re-spent.

While lines two and three track well together, they are not a perfect fit which indicates that additional factors, not considered here, are in play. 

One additional factor included in the check line (but not in the loan line) is changes in depositor spending habits.  For example, during the last 40 years, deposits sourced from loans have become an ever larger portion of bank assets as depositors drew down bank savings accounts.

The technique of calculating a rate of positive taxation results in a chart showing high monetary stimulation for much of the last 40 years.  This chart and the line slopes, as related to recession periods, will be the subject of future posts.  The relative stimulation from loan activity and government activity will also be discussed in future posts.


  1. Federal Government for most of its time must be in deficit (i.e. spend more than it taxes) for the economy to grow. The funds to pay taxes and to buy Federal Government bonds must first come from Federal spending, not the other way around. In one sense the US dollar is a simple ‘tax credit’ as its only ultimate use is to pay taxes.
    The govt. allows those unused tax credits to be held in three forms- as actual cash, as cash balances at the reserve bank, or as balances in securities accounts at the reserve bank called Treasury securities.
    The total of the three is the national debt.
    The national debt is simply the total tax credits spent but not yet used to pay taxes.
    So why does the economy need a deficit (tax credits spent and not yet used to pay taxes)? - to accommodate the desire of the private sector to net save.

    bottom line- unemployment is always and necessarily the evidence that the govt hasn’t spent enough to cover the need to pay taxes and the desire to save.

    1. netbacker

      While I agree with the MMT mechanics (which you have described), I am unable to bring myself to embrace the MMT emphasis on taxes and unemployment. Why might that be?

      First unemployment. I will use the example of Japan. In a post found at, author Brian Romanchuk reports that the Japanese own $1,113 billion in American Treasury securities. The Japanese worked hard to earn those dollars, providing America with well made cars, TV's and many other products. Our American deficit made that possible, putting many Japanese to work.

      My conclusion: Yes, the deficit puts people to work BUT the workers may not be American. Running an American deficit does not, by itself, result in a reduction of American unemployment.

      Turning to the MMT emphasis on taxation, it seems to me like the mechanics are correct but the nuance that all-workers-work-for-money so-that-they-can-pay-taxes is very disturbing to me. There is much more to life than just paying taxes!

      I have a post entitled "Government Provided Money Supply" found at In this post, I examine money supply as a product provided by government. In my view, a good government would provide a "good" money supply.

      In a democracy, we would define "good" in political terms.

      BTW, your blog post prompted me to use Japan as an example.


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