Modern Monetary Theory (MMT) effectively teaches that taxes drive demand for currency, and because Congress is our sovereign money-creator, taxes are no longer needed to fund government.

The MMT mantra is that “taxes don’t fund spending,” which essentially means that Congress has greater capacity to fund government services than most people realize. In other words, services can simply become a way for Congress to inject money into the economy simply by paying people to provide health, education, retirement benefits, military services, infrastructure repair and maintenance, etc.

I don’t entirely endorse MMT as it’s currently being advanced, but here I’d just like to show why MMT has became especially important as an economic theory after the U.S. stopped using precious metals in the production of its coins, and this great transition away from precious metal coins happened under the Coinage Act of 1965 (hereafter “the Act”). The Act dramatically changed the nature of taxation, especially from a Georgist perspective.

Before the Act, when only gold or silver coins were considered to be “real money,” the only power Congress had to wrestle the coins from the population was through taxation, so in other words, prior to the Act, taxes really were needed to fund government operations.

It was known, early in the 1900’s, that taxes drove a demand for currency, but it was under-estimated how badly the use of precious metal coins subjected the U.S. monetary system to manipulation by hoarders and speculators of those metals.

Now to the point: If taxes no longer fund government operations after the Coinage Act of 1965, why are taxes still necessary?

First, to a relatively minor degree, taxes can help Congress distribute currency (i.e., claims on wealth) to meet certain socio-economic goals. For example, by taxing certain forms of income more than others, Congress can achieve the currency distribution it wants, depending on the political persuasion of the time.

However, from a scientific viewpoint, the more important purpose of taxes after the Act is to cancel or remove stagnating currency from the economy (so that the offending currency stops making claims on property when it’s not supposed to).

Stated differently, and from a Georgist view, after the Act of 1965, taxes on economic rent/surplus/waste (i.e., taxes on unearned income) are no longer needed to fund government, but to cancel or remove waste from the monetary/economic system.

As I’ve said in a prior post, if Congress neglects its duty to remove waste from the system (by heavily taxing unearned income and large estates), we’re essentially stuck living in a polluted economic environment. It would be as though garbage, sewer and waste management employees quit or went on strike, and Congress didn’t intervene.

"What you have today is the economy imagines that the financial sector and the Donald Trumps of the world, the real estate speculators, are part of the economy and part of GDP instead of being an overhead, a tumor." ~ Michael Hudson