Redistribution via federal taxation can only be *indirect*

This post uses the analogy of audio compression to demonstrate why taxing the rich is (a) important but not nearly enough, (b) does redistribute wealth, but not in the way you think, and (c) addresses only wealth inequality (which is definitely not the only problem). It is also critical to understand that taxing the rich in order to “get their money” in order to help the poor, is both (1) not possible, and (2) a distraction from the only real solution, which is to directly help the poor.

[GO BACK TO THE TABLE OF CONTENTS]

These resources were created by Activist #MMT, the podcast (Twitter, Facebook, web, please consider becoming a monthly patron). This post was last updated September 7, 2020.

Disclaimer: I am a layperson who has studied MMT since February of 2018. I’m not an economist or academic and I don’t speak for MMT. The information in this post is my best understanding but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.

In November, 2018, my friend Esha Krishnaswamy sent me an audio file from a (then) not-yet-released episode from her podcast, Historic-ly. (It’s a great podcast and you should become a monthly patron. I’ve since recorded eight interviews for them.)

Here’s a ten second clip (it’s a recorded phone call):


(It comes from an excellent interview with Modern Money Network president Rohan Grey, on the subject of MMT and the history of money. Here’s the full (properly-compressed!) interview.)

The quiet (skinny) part is Esha, the loud part is her guest Rohan. (It’s a recorded phone call.) So as you listen to this, every few seconds, you have to jump at the volume knob, up for Esha, down for Rohan, up for Esha, down for Rohan. It’s unpleasant and quickly intolerable.

The problem is not that the soft parts are too soft, or the loud parts too loud. The problem is that the difference between the two – its inequality – is so great. The possible solutions are to:

  1. turn the loud parts down
  2. turn the soft parts up, or
  3. some combination of the two.

I decide on option one: I want to pull all the loud spots down. I could do this manually, but for an hour-long podcast interview, that’s a tedious process.

Downward audio compression

In audio engineering, the three options above are called dynamic range compression, or more simply, compression. Decreasing the loud parts only is called “downward” compression. From the wiki page:

Dynamic range compression (DRC) or simply compression is an audio signal processing operation that reduces the volume of loud sounds or amplifies quiet sounds thus reducing or compressing an audio signal’s dynamic range. Compression is commonly used in sound recording and reproduction, broadcasting, live sound reinforcement and in some instrument amplifiers.

A dedicated electronic hardware unit or audio software that applies compression is called a compressor. In the 2000s, compressors became available as software plugins that run in digital audio workstation software. In recorded and live music, compression parameters may be adjusted to change the way they affect sounds. Compression and limiting are identical in process but different in degree and perceived effect. A limiter is a compressor with a high ratio and, generally, a short attack time.


Reducing the overly-loud parts doesn’t “move” the excess sound from the loud parts down to the soft parts. (Think about how nonsensical that is.) It doesn’t increase the soft, It only reduces the loud so they no longer blast your speakers.


Reducing the loud parts reveals the softer parts. To put it another way, it brings the loud and soft parts much closer together.


For the curious, here’s the compression dialog in Audacity (the only setting I change is “ratio”…I have more to learn):

The result

Here’s the clip, before and after compression. Although the loud parts are still louder, they’re no longer orders of magnitude louder. Again, only the loud parts have been reduced. The soft parts are almost exactly the same.

You no longer need your hand on the volume knob the entire time while listening.



Inequality

Now, back to economics.

Inequality is primarily a problem of the rich having waaaaay too much.

Link to video

But more than that, inequality is a problem of the rich having way too much income. Yes, they shouldn’t be obscenely wealthy, but they should never have been allowed to get that way in the first place. So although our problem in the moment is wealth inequality, the ongoing problem is income inequality: the rich have a firehose of income, and the rest of us hardly any.

(Yet who does all the work? As an example, we pay and treat nurses terribly in normal times, but then in a global pandemic, we expect them to save us all. [This comes from the first minute-thirty of part one of episode 25 of Activist #MMT, with James Feal-Martinez.])

In free-market, capitalistic economies, money is naturally sucked from the poor to the rich. This is the conclusion of a November 2019 report entitled Is Inequality Inevitable? Wealth naturally trickles up in free-market economies, model suggests. (Here‘s a brief summary by progressive video-journalist Graham Elwood.)

To solve inequality, the basic solutions are to:

  1. Take from the rich,
  2. Give to the poor, or
  3. some combination of the two.


It is critical that we take from the rich (basically, by taxing the helllllll out of them). It is critical that we give to the poor (not just money but many things, including jobs, resources, services, and rights). The real solution, of course, is a combination. MMT’s primary solution, to both income and wealth inequality, is its job guarantee.

For the remainder of this post, we will focus only on option one: take from the rich.

Redistribution through taxation can only be indirect.

Just as with audio compression, decreasing the wealth of the many (by taxation) cannot be redistributed to the poor. It is not possible to “take their money” and then “give it to the poor.” (Remember above, regarding audio compression, where I said how nonsensical this is? It’s just as nonsensical here.)

This is because:

All federal spending is money creation.
All federal revenue is money destruction.

This isn’t a choice or option, it’s inherent by its very nature. There is no other way for it to be. [Related post: If federal taxes don’t pay for anything, then why do we pay them?]

By decreasing the wealth of the rich, however, the poor become much wealthier in comparison. Relatively speaking.

The volume knob of our federal “representatives.”

Our federal representatives have turned their volume knobs down to almost zero. If they don’t, their ear drums will be blown out by the excessively-loud voices of their large donors. Since our small donations are so small in comparison, they simply no longer hear our cries. In fact, because of our terrible, no-good, very-bad campaign-finance system, they couldn’t hear us even if it was turned up the whole way.


Even if we could eliminate most of the wealth of the rich, they’d still be much louder than us – but at least we could be heard!

Our representatives need to take the time to turn up the volume and listen to us. They need to tell those who suck up all the oxygen, constantly shout and scream and talk over us, to tone it down.


If the rich can’t or won’t tone it down, then perhaps we should just go ahead and tone it down for them. If our representatives won’t (or don’t want to?) turn the power down of the super wealthy, then maybe we need to replace them with someone who will – or become that someone who will.


The point is this: directly speaking, it is impossible to “redistribute” wealth with federal taxes – and that’s okay. ‪After the taxes are levied and the rich are much less rich, the wealth that remains is much more evenly distributed. We didn’t “steal from Peter and give it to Paul.”‬

But again, taxing (the hellllll out of) the rich only addresses wealth inequality. It is only the cherry on top of the true, long-term solution, which is to solve income inequality.

Redistribution is the ex-post cherry on top. The ex-ante cake is pre-distribution.

It is a problem that the obscenly-rich are obscenely rich. The much bigger problem, however, is that our society allowed them to get that rich in the first place. The MMT-designed job guarantee prevents the majority of inflation. Taxing the rich is (obviously) reactive and it only solves the problem for moment. If we don’t reduce their firehose of income, they’ll become obscenely rich all over again, very quickly.

(The rich can’t stay rich just by “having a lot.” They have to have a lot more than you. The only way the powerful can stay powerful is by actively keeping the powerless powerless. Here’s more on this concept by Rodger Malcom Mitchell in this 2013 post: The Gap, the whole Gap and nothing but the Gap… so help me…..)

In economics, steps taken reactively are called ex-post. Preventative steps is called ex-ante.

Ex-ante means “before the event” or preventatively. This is like ante-ing in a poker game, putting your chips on the table before the cards are dealt. The opposite is ex-post which means reactively. There are equivalents of these concepts with many major issues (ex-post followed by ex-ante):

  • Taxing the rich (redistribution) versus redirecting income more fairly (pre-distribution)
  • Eliminating all existing medical debt and then providing healthcare for all.
  • Eliminating student debt and then providing education for all.
  • Taxing carbon versus banning carbon. (More on this topic from this 2019 article by Justina Calma at Grist.