Paygo, false consciousness and the IRS
John Steinbeck diagnosed an important American pathology in 1966 when he called the US a nation of “temporarily embarrassed capitalists” — people who see themselves as the wealthy-in-waiting and therefore fight policies that reduce the power that comes from wealth.
It’s a restatement of Engels’ idea of “false consciousness,” and it’s the result of a deliberate strategy on the part of wealthy people — many of whom believe that they were literally genetically destined to be wealthy — to convince the rest of us that “anyone can succeed.”
Part of the false consciousness program is the money story that goes like this: the US government takes away “taxpayers’ money” from “makers” to fund “programs,” the bulk of which go to the “lazy takers,” who experience the “moral hazard” of subsidized unemployment.
But of course, that’s not how money works. Money originates with the federal government (and its fiscal agents, the banks). In order for the public to have money to pay off its tax liabilities, the government must first spend that money into existence.
The IRS doesn’t take our tax dollars, pile them up, and give them to Congress to spend on programs. When the IRS taxes our money, they annihilate it, removing it from circulation. When Congress spends, new money comes into existence.
The US government can’t run out of money any more than Apple can run out of Itunes gift cards. It can spend too much money — so much that prices go up because too many dollars are chasing too few goods — but it can’t run out of money.
Fed spending is constrained by resources (what’s for sale in dollars) not money (how many dollars there are). If the ratio of dollars to resources gets out of whack, there’s a risk of inflation.
There are many ways to fix this ratio. For example, the government usually issues T-bills (savings bonds) whenever it spends more than it taxes. When you buy a T-bill, you take dollars that might circulate around the economy, chasing goods and labor, and you sequester them.
A T-bill is just a dollar you’re not allowed to spend. In exchange for surrendering the right to spend your dollars for 1, 5, 10 or more years, the government offers you interest, trickling out that money over a long period.
That way the government can buy things today without bidding against your dollars.
But that’s not the only way to fight inflation while spending new money into existence. The other major way is taxation: simply removing money from the economy and annihilating it.
Taxation fights inflation. When the government runs a deficit, that means that it created more money this year via spending than it destroyed via taxes. The “government deficit” is the “public surplus” — the money left in the economy for all of us to spend on stuff.
Likewise, when the government runs a “surplus” that means it taxes more money out of existence than it spends into existence. In a year where the government runs a surplus, it means that the power of the private sector — you and me — to buy stuff has decreased overall.
This is fine if there was too much money to begin with — if inflation was kicking off — but if there’s not enough money in circulation (e.g. if there’s a recession), it just makes things worse…but not for everyone.
When the economy is starved of money, banks go to work creating new money through loans. These loans pay interest (to rich people like bank shareholders and people who securitize and buy debt).
That’s the one-two punch of spending cuts during a downturn:
I. The real economy is starved of the capital it needs to pay workers and make things for workers to buy;
II. The financial economy grows as desperate real-economy firms borrow from banks to keep the lights on.
Despite all their talk of “spending taxpayers’ money,” the wealthy understand how money works. That’s why they were totally indifferent to the running $1t/year deficits created by the Trump tax-cuts (and likewise about the Obama finance bailouts).
Giving money to rich people causes asset-bubbles (driving up the prices of houses), but not inflation (a sustained rise in the price of all goods). That’s because rich people can’t buy enough stuff (fridges, cars, oranges) to drive up prices.
After you’ve bought three houses and three SubZero fridges and filled them with the beef of three Kobe cows and three cases of Moet, there’s still a LOT left over (even if you’re Jeff Bezos and buy a superyacht with its own, smaller superyacht).
Those leftovers go to socially useless things, like buying houses to turn into rent-generating slums (Wall Street is fast becoming America’s biggest landlord, and single-family homes are sold for cash to investment funds instead of families).
And they go to influence campaigns designed to make regular people defend massive cuts to the IRS and opposition to public spending on infrastructure, education, health, and other necessities.
This isn’t just about Republicans. For years, the Democratic leadership has supported “balanced budgets” (spending so little that no new money is left in the economy after all taxes are paid).
The “paygo” rule (which requires all new spending to be matched with cuts or tax hikes) is religion for the likes of Pelosi and Schumer. That’s why the Democratic caucus is mired in stupid arguments about “how we will pay for the stimulus.”
As bad as the paygo rule is, though, Republicans have made it worse, by demonizing and starving the IRS. Paygo means that the US government operates under the artificial constraint of only spending if it can make cuts or raise taxes.
Raises taxes is really unpopular, for obvious reasons.
Now, raising taxes on the 1% — who have a lot of excess money that’s fueling political corruption and asset bubbles — is one way around this.
Theoretically, taxing the 1% should have a 99% approval rating.
But canny Republicans have figured out how to exorcise temporarily embarrassed capitalists about the “unfairness” of taxing their bosses, in part by just flat-out lying about who new taxes would implicate.
But there’s yet another way to satisfy paygo’s artificial constraint, without changing a single word in the tax-code: simply fund the IRS so that it can collect the trillions that the ultra-wealthy illegally avoid in tax-payments every year.
But this strategy is also a bust. The GOP campaign to destroy the IRS has been too successful.
It’s a long-running campaign, but it achieved liftoff in 2013 when the Tea Party baselessly accused the IRS of discriminating against conservative groups seeking nonprofit status.
The work-the-ref strategy paid off, providing political cover for deep cuts to the IRS and putting IRS staffers on notice so they green lit every dark money group that applied for nonprofit status, no matter how obviously corrupt they were.
After the cuts, the IRS grew easier to discredit. Understaffed and under siege, the agency’s behavior grew erratic, then indefensible. There were runaway automated processes that sent out erroneous property-seizure notices that no one could rescind:
Then there was the aftermath of the Equifax breach, where the IRS first told Americans that it didn’t matter because they’d already been doxed by other bad companies:
Then came news that the IRS couldn’t cancel Equifax’s no-bid, $7.5m anti-fraud contract because it didn’t have the resources to do its own fraud prevention (Equifax eventually lost the contract because it served malware from its anti-fraud site).
The rich waged a successful all-out war on the IRS. Take the Global High Wealth unit. For every hour an auditor from GHW worked, they brought in $4500 in taxes the super-rich had dodged. Even by the topsy-turvy logic of “government as a business,” this was good business.
After a concerted harassment and political influence campaign, the GHW abandoned the super-rich and switched to the merely wealthy, bringing in less money and pissing off a lot more people.
The other shoe dropped in 2019, when the IRS admitted it had switched to preferentially auditing poor people because it was too politically and legally fraught to audit rich people, even the most flagrant cheaters.
That was the first year that America’s 400 highest earners paid a lower tax rate than the average American worker:
The IRS’s transformation into a facilitator of illegal wealth retention by the super-rich and petty harassment of the rest of Americans made them very easy to hate.
To that, add the concerted corporate campaigns to use the IRS to rip off workers.
For example, for 20 years, Intuit lobbied the IRS not to make tax-filing automatic, painless and free, ensuring that Americans would continue to pay billions to send data to the IRS that it already had:
Reading the IRS’s internal emails from this battle reveals an agency in retreat, where demoralized and ineffectual government employees simply rolled over for one of the greatest ripoffs in American history:
Intuit wanted to rip us off with taxes. Microsoft, by contrast, just wanted to break the law. Working with KPMG, the convicted monopolist created a “transfer” scheme of breathtaking illegality, using its tax-savings to bankroll its war on the IRS:
Which brings us to today, where Democrats are held hostage to the “payfor” rule and trying to figure out how to mobilize the trillions Biden has pledged for infrastructure, health, and care.
Republicans — pushing the big lie of “taxpayer money” — are dogwhistling hard. Senator John Thune, responding to Biden’s proposal for $80b for the IRS, says any tax enforcement efforts “must strike an appropriate balance between taxpayer responsibilities and taxpayer rights.”
Meanwhile Senator Chuck Grassley takes the nonsensical position that funding the IRS won’t help it do its job (“simply throwing money at a problem doesn’t necessarily yield a solution”).
Then there’s Rep Kevin Brady, warning that a fully funded IRS would “unleash tens of thousands of new IRS agents on families, farms and businesses.”
But the Democrats own the paygo rule, not the Republicans, and their leadership have added their own special touch to make funding the IRS impossible.
According to the rules Congress gives to the Congressional Budget Office (which calculates the cost of government programs), the CBO isn’t allowed to factor in the projected additional revenue from funding the IRS, only the cost of doing so (!).
Which means that they must factor in the salaries that IRS Global High Wealth auditors will draw — but they are forbidden from counting the $4500/hour they generate when they puncture the tissue-thin financial lies of the super-rich.
The payfor and “taxpayer money” are lies.
It’s a shuck sold to the rubes, not economics. Because it’s a shuck, it doesn’t have to make any sense — and it doesn’t. We shouldn’t run government like a business, but if we must, let’s at least count revenues as well as costs.
Cory Doctorow (craphound.com) is a science fiction author, activist, and blogger. He has a podcast, a newsletter, a Twitter feed, a Mastodon feed, and a Tumblr feed. He was born in Canada, became a British citizen and now lives in Burbank, California. His latest nonfiction book is How to Destroy Surveillance Capitalism. His latest novel for adults is Attack Surface. His latest short story collection is Radicalized. His latest picture book is Poesy the Monster Slayer. His latest YA novel is Pirate Cinema. His latest graphic novel is In Real Life. His forthcoming books include The Shakedown (with Rebecca Giblin), a book about artistic labor market and excessive buyer power; Red Team Blues, a noir thriller about cryptocurrency, corruption and money-laundering; and The Lost Cause, a utopian post-GND novel about truth and reconciliation with white nationalist militias.