Do Federal Taxes 'Raise Enough Money' for the Government?

February 14th, 2014
in Op Ed

Are federal taxes destroyed upon receipt? The shorter and longer answers

by Rodger Malcolm Mitchell,


Follow up:

Reader tetrahedron720 asked,

"How would you go about explaining the decision to destroy money upon receipt as compared to not destroying it as is the case with state and local government, i.e., is there a url or source that shows a balance sheet of local government vs. the balance sheet of the federal government that would by comparison isolate the difference clearly?"


The shorter answer is: Federal balance sheet accounts are not part of the money supply. All of the money supply is in banks or other private hands. All state and local money is in banks or other private hands.

Here's a longer, I hope better, answer:

Semantics. That is the real problem. We all do this: We say we take, send or give dollars to anyone. But, we really take, send or give instructions, not dollars.

Readers of Why a dollar bill is not a dollar, and other economic craziness know that a dollar has no physical existence. You cannot see, touch, hear, feel, smell or give a dollar.

That dollar bill in your wallet is not a dollar. It represents a dollar, just as a title represents a car or a note represents a loan. That dollar bill is a bearer bond, telling the world that the bearer of that note is owed $1 by the U.S. federal government.

By way of analogy, consider numbers. Numbers too, have no physical existence. You cannot see, touch, hear, feel, smell or give the number seven. You can see representations like "7″ and "VII" and "SEVEN," but you cannot see the number itself.

You can give me seven bats, 7 balls or VII brooms, but you cannot send me the number seven. Similarly, and contrary to intuition, you cannot send me a dollar, although we use that phrasing all the time.

You can send me a dollar bill, a piece of paper that represents a dollar. Or you can give me your $1 check, which is nothing more than a set of instructions, telling my bank to increase the number in my checking account by 1 (and to decrease the number in your checking account).

All money measures have one thing in common: All money exists in the private sector.

The federal government has no money. Why would it? It creates its sovereign currency, the dollar, ad hoc, when it pays bills. Whenever the federal government sends a check, in payment of a bill, that check is not money. The federal government, not having money, can send no money.

You never will see a number showing how much money the federal government owns, but you always will see how much the federal government supposedly owes.

When John Boehner famously lied, "Let's be honest. We're broke," he was referring to the fact that the government supposedly owes trillions, but has no money. In fact, that always is the case for a Monetarily Sovereign nation. It creates its sovereign currency ad hoc, so at any moment in time, its debts far exceed its holdings of money. It has no holdings of money.

A federal government check merely instructs a creditor's bank to increase the number in the creditor's checking account. It does not deliver dollars, since dollars, having no physical existence, cannot be delivered.

At the same time the bank increases the number in the creditor's account, corresponding federal accounts are decreased, but none of those accounts are part of the money supply. So when you send tax money to the government - or more properly, send your instructions in the form of a check or wire - the dollars that existed only as numbers in your checking account are destroyed. They cease to be part of the money supply.

What about state and local tax dollars? When you send your checks to your state and local governments, the numbers in your checking account are reduced. But, contrary to what the federal government does, the state government deposits its tax receipts in private banks. Those dollars are part of the money supply.

The process is like this:
1. You write a set of instructions (a check). [You still own the dollars.]
2. You mail the instructions. [You still own the dollars.]
3. Your state receives your instructions. [You still own the dollars.]
4. Your state mails your instructions to its bank. [You still own the dollars.]
5. The state's bank follows your instructions, increases the number in the state's account and tells your bank to reduce the number in your account. [At that instant, dollars have been "transferred" from your account to the state's account. The tax dollars remain in the money supply.]

Bottom line: When you pay taxes, you actually send instructions, not dollars, to various governments.

When state and local governments follow your instructions, the nation's money supply remains the same. When the federal government follows your instructions, the nation's money supply falls.

The difference: The federal government is Monetarily Sovereign. State and local governments are monetarily non-sovereign. A Monetarily Sovereign government has the unlimited ability to create its sovereign currency, in any amount at any time, for any reason it wishes.

So it would make no sense to ask how much money the federal government has. It would be like asking (as Warren Moseley might say) how many points a scoreboard has. The answer in both cases: "As much as it needs at any moment in time; it creates them ad hoc."

As for you and me and state and local governments and euro-using nations, none of us has a sovereign currency. We cannot create unlimited amounts of money instantly, so it's reasonable to ask how much money we have - and that is the Money Supply.

And that is the longer answer.

I hope it helps.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

Mitchell's laws:
●The more federal budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government's method for widening the gap between rich and poor,
which ultimately leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The penalty for ignorance is slavery.
●Everything in economics devolves to motive.

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