Although the focus of this text is on the price effects of tariffs, that might be seen as unfair as that is just looking at the direct negative effect of tariffs (domestic prices rise).
There’s probably a third reason for tariffs, which is likely the actual reason in this case - to reduce the amount the FX nation is financially saving in your denomination.
IMO the main event is the 10% global tariff. Everything else is a negotiating position.
Under a floating exchange rate system the net effect of this tariff should be to move financial saving from abroad to onshore as there is no reason for, say, Canadian lumber to exchange for, say, more or less US plastic than it did before. Trade between currency areas being ultimately a productivity play, not a financial one. (That's not to say that the prices and wage rates won't shift and change the individual distribution).
Real exports exchange for real imports, directly or indirectly, at 'world prices' even if you don't have a currency at all.
Because the U.S. federal government is Monetarily Sovereign, it neither needs nor even uses revenue. It destroys every dollar it receives and pays its bills with newly created dollars ad hoc. Even if the federal government collected $0 in taxes and other revenue, it could continue spending forever. That is the fundamental difference between federal government financing and state/local government financing. The former is Monetarily Sovereign. The latter is monetarily non-sovereign.
Sure, they could eliminate sources of revenue and keep spending at the same level without defaulting. However, that would cause something similar to a hyperinflation.
The classic example is the Zimbabwe hyperinflation that was caused by a shortage of food. The government's response -- printing currency-- gave the illusion that money creation caused the inflation. But money creation could have cured the inflation if the money had been directed at increasing the food supply.
The above-mentioned article details how every inflation has been caused by shortages (most often oil or food) and cured by money spent to eliminate those shortages. Federal spending doesn't cause shortages, but it can cure shortages.
I wrote “something like a hyperinflation.” No country has ever tried doing what you suggest (stop taxing entirely), so there’s no historical precedent to turn to.
Actually, I have not suggested that the U.S. stop taxing entirely. I said it COULD do so, and still pay its bills. I suggest the concerns about federal deficits are misplaced and that the economy needs the government to run deficits. They supply the economy with growth dollars, and when deficits are not high enough, we have recessions or depressions. Would you like to see the proof of that?
If governments need to have taxes to control inflation, you are making a semantic point that has no relevance to what I am discussing. Nobody in the real world cares about the theoretical point that the US government could pay off its debt with worthless dollars - no political party has support to undertake such a policy. No serious MMT academic says that abolishing taxes is a sensible policy. And if taxes *must* remain to avoid an inflationary disaster, we can then debate what form the taxes will take.
The only plausible way to see whether tariffs could replace income taxes is looking at the revenue raised, since we have no other plausible way of weighing the relative effects of the taxes. Given that potential tariff revenues are an order of magnitude too small to provide the necessary dampening force, there is no need to waste time with pointless semantic arguments about the political significance of the word “revenue.”
Without the tax demand would the government be able to attract people who want to sell it things for the currency it offers? Think about Mosler's business card example. Without the the tax demand who in the audience would do chores to collect his business cards?
I think there would be some demand for $s, as people who have loan payments to make denominated in USD. The government would have to complete against USD holders who likely desperately want to get out of their USD positions, causing the govt to have to dramatically increase the amount of USD it pays for the services it requires for operation - which by definition is inflationary.
As I have often said, there are two reasons for federal taxes, and neither has anything to do with the government's spending needs.
1. Taxes allow the government to control the economy by taxing what the government wishes to discourage and by giving tax breaks to what the government wishes to reward.
2. Taxes provide demand for the dollar, because taxes must be paid in dollars.
(State and local taxes do fund state and local spending. It is important to understand that state and local government financing is totally different from federal financing.)
That said, all of the Libertarian/right-wing concerns about deficits are based on ignorance of national finance. Without federal deficits, we would have recessions and depressions.
I have known Warren for 20+ years, and he is completely on board with the idea that federal taxes do not fund federal spending.
Did you know that every depression in U.S. history has been immediately preceded by federal surpluses?
Finally, all inflation is supply-oriented, not demand-oriented. Inflation is a GENERAL and WIDESPREAD increase in prices. Federal spending does not cause and general and widespread increase in prices. A shortage of oil and food would.
The last inflation (current, perhaps) was COVID-related and was caused by shortages of oil, food, transportation, metals, lumber, computer chips, labor, and other needs.
It has been cured (or moderated) by federal spending to increase the supply of those scarce needs. Had Biden not spent to improve supply, the inflation would be much worse today, which is what I'm afraid will happen due to tariffs and the fear of deficits.
"...all of the Libertarian/right-wing concerns about deficits are based on ignorance of national finance. Without federal deficits, we would have recessions and depressions..."
This is a very timely contribution to the national dialogue, currently being argued in Congress. The "deficit hawks" and "austerity now!" types seem to think they are very righteous and responsible. Instead of emulating Robin Hood, who robbed the rich to give to the poor, the conservatives in the House are robbing the poor to give to the rich. (Substitute "taxing" in place of "robbing". Taxing is not theft!)
The last time I checked, about 11.X % of Americans are living at or below the poverty level, something like 36 million of us. If various aid programs, such as SNAP, are cut in this spending bill, the number of people living in poverty will rise. And if they curtail other spending programs, GDP will shrink further. The Speaker and the other "bright lights" on the conservative side appear to believe that spending relies entirely on revenue. Alternatively, sometimes it appears that the righteous-sounding blather about fiscal responsibility is merely a smoke-screen for blatant discrimination against "the Poors". I can't recall Professor Stephanie Kelton's exact words, but my impression from years ago is that the interest on the "debt" resembles an accounting notation with no impact on the economy -- please correct me.
From the standpoint of the Monetarily Sovereign federal government, interest on the so-called "debt" is just an accounting notation. It's not real debt because the government doesn't owe it.
Those T-bills, T-notes, and T-bonds are dollars deposited in Treasury Security Accounts. The government never touches those dollars, so they are not owed. Think of the accounts as similar to bank safe-deposit boxes. The contents are held for safety, but are not debt.
The misnamed "debt" is the total of deficits -- growth dollars sent into the economy in excess of the tax dollars taken out of the economy. Without those growth dollars, we would have recessions and depressions.
Bottom line: Federal deficits are necessary for economic growth, the more the better. They are not a burden on the Monetarily Sovereign federal government or on taxpayers.
While state and local taxes fund state and local spending, federal taxes do not fund federal spending.
Those who do not understand the difference between Monetary Sovereignty (federal government) vs. monetary non-sovereignty (state/local governments) do not understand even the basics of economics.
I was responding to your comment "Even if the federal government collected $0 in taxes and other revenue, it could continue spending forever." which is true, however that government spending would be unlikely to solicit people willing to supply the government with resources/labour if there were no tax to pay. Yes, taxes don't fund federal spending, however without the tax there is no demand for the government's useless currency. As you state "Taxes provide demand for the dollar, because taxes must be paid in dollars."
So yes, government could continue to spend in the now valueless (lack of demand for the dollar) dollars, and they could decide to not increase the amount of dollars they spend on a specific item - 1 hr of labour was $40, now it's still $40 but they get nobody showing up to offer their 1hr of labour for dollars that they don't need.
There would be no "inflation" in this case as the government hasn't changed the amount it pays, however the government cannot attract anyone who wishes to provide work for the government dollars.
You say "I said it COULD (stop taxing entirely) do so, and still pay its bills.", which is true, however it would soon not have any bills to pay as nobody would enter into a contract with the govt where they collect now useless dollars. By eliminating the taxes entirely they would redefine the value of the dollar to 0
As I had asked:
Without the tax demand would the government be able to attract people who want to sell it things for the currency it offers?
Think about Mosler's business card example. Without the the tax demand who in the audience would do chores to collect his business cards?
How would you answer these given the scenario "I said it COULD (stop taxing entirely) do so, and still pay its bills." or does your analysis stop at only the outstanding bills?
"Even if federal tax collections fell to $0, the government could continue spending forever." and then "Taxes provide demand for the dollar, because taxes must be paid in dollars."
Given that logic, if tax collections fell to $0 then doesn't that eliminate the ability for government to create demand for the dollar?
I think you want to discuss the ability of the government to increase spending and/or reduce taxation which I would likely agree with, for example increasing the spending to allow for Medicare 4 All would probably need other spending increases/tax cuts to allow the economy to absorb all the people whose roles in the insurance companies are eliminated - as Warren often says. I am not really getting into that as we mostly agree on this topic.
My point is only that "Even if federal tax collections fell to $0, the government could continue spending forever." is not a helpful statement. I can offer my "Skye Bucks" and I can spend them forever without ever collecting "Skye Bucks" in revenue returned to me. This is true. Would you like to do some work for me in Skye Bucks? Why not?
There’s probably a third reason for tariffs, which is likely the actual reason in this case - to reduce the amount the FX nation is financially saving in your denomination.
IMO the main event is the 10% global tariff. Everything else is a negotiating position.
Under a floating exchange rate system the net effect of this tariff should be to move financial saving from abroad to onshore as there is no reason for, say, Canadian lumber to exchange for, say, more or less US plastic than it did before. Trade between currency areas being ultimately a productivity play, not a financial one. (That's not to say that the prices and wage rates won't shift and change the individual distribution).
Real exports exchange for real imports, directly or indirectly, at 'world prices' even if you don't have a currency at all.
I’d lump that consideration under the “industrial policy” motivation, which is the next article.
Because the U.S. federal government is Monetarily Sovereign, it neither needs nor even uses revenue. It destroys every dollar it receives and pays its bills with newly created dollars ad hoc. Even if the federal government collected $0 in taxes and other revenue, it could continue spending forever. That is the fundamental difference between federal government financing and state/local government financing. The former is Monetarily Sovereign. The latter is monetarily non-sovereign.
Sure, they could eliminate sources of revenue and keep spending at the same level without defaulting. However, that would cause something similar to a hyperinflation.
Actually, Brian, all inflations are supply-based, not demand-based. See: "At Long Last, Let's Put This Inflation Question To Bed" (https://mythfighter.com/2025/04/08/at-long-last-lets-put-this-inflation-question-to-bed/)
The classic example is the Zimbabwe hyperinflation that was caused by a shortage of food. The government's response -- printing currency-- gave the illusion that money creation caused the inflation. But money creation could have cured the inflation if the money had been directed at increasing the food supply.
The above-mentioned article details how every inflation has been caused by shortages (most often oil or food) and cured by money spent to eliminate those shortages. Federal spending doesn't cause shortages, but it can cure shortages.
I wrote “something like a hyperinflation.” No country has ever tried doing what you suggest (stop taxing entirely), so there’s no historical precedent to turn to.
Actually, I have not suggested that the U.S. stop taxing entirely. I said it COULD do so, and still pay its bills. I suggest the concerns about federal deficits are misplaced and that the economy needs the government to run deficits. They supply the economy with growth dollars, and when deficits are not high enough, we have recessions or depressions. Would you like to see the proof of that?
If governments need to have taxes to control inflation, you are making a semantic point that has no relevance to what I am discussing. Nobody in the real world cares about the theoretical point that the US government could pay off its debt with worthless dollars - no political party has support to undertake such a policy. No serious MMT academic says that abolishing taxes is a sensible policy. And if taxes *must* remain to avoid an inflationary disaster, we can then debate what form the taxes will take.
The only plausible way to see whether tariffs could replace income taxes is looking at the revenue raised, since we have no other plausible way of weighing the relative effects of the taxes. Given that potential tariff revenues are an order of magnitude too small to provide the necessary dampening force, there is no need to waste time with pointless semantic arguments about the political significance of the word “revenue.”
Without the tax demand would the government be able to attract people who want to sell it things for the currency it offers? Think about Mosler's business card example. Without the the tax demand who in the audience would do chores to collect his business cards?
I think there would be some demand for $s, as people who have loan payments to make denominated in USD. The government would have to complete against USD holders who likely desperately want to get out of their USD positions, causing the govt to have to dramatically increase the amount of USD it pays for the services it requires for operation - which by definition is inflationary.
As I have often said, there are two reasons for federal taxes, and neither has anything to do with the government's spending needs.
1. Taxes allow the government to control the economy by taxing what the government wishes to discourage and by giving tax breaks to what the government wishes to reward.
2. Taxes provide demand for the dollar, because taxes must be paid in dollars.
(State and local taxes do fund state and local spending. It is important to understand that state and local government financing is totally different from federal financing.)
That said, all of the Libertarian/right-wing concerns about deficits are based on ignorance of national finance. Without federal deficits, we would have recessions and depressions.
I have known Warren for 20+ years, and he is completely on board with the idea that federal taxes do not fund federal spending.
Did you know that every depression in U.S. history has been immediately preceded by federal surpluses?
Finally, all inflation is supply-oriented, not demand-oriented. Inflation is a GENERAL and WIDESPREAD increase in prices. Federal spending does not cause and general and widespread increase in prices. A shortage of oil and food would.
The last inflation (current, perhaps) was COVID-related and was caused by shortages of oil, food, transportation, metals, lumber, computer chips, labor, and other needs.
It has been cured (or moderated) by federal spending to increase the supply of those scarce needs. Had Biden not spent to improve supply, the inflation would be much worse today, which is what I'm afraid will happen due to tariffs and the fear of deficits.
"...all of the Libertarian/right-wing concerns about deficits are based on ignorance of national finance. Without federal deficits, we would have recessions and depressions..."
This is a very timely contribution to the national dialogue, currently being argued in Congress. The "deficit hawks" and "austerity now!" types seem to think they are very righteous and responsible. Instead of emulating Robin Hood, who robbed the rich to give to the poor, the conservatives in the House are robbing the poor to give to the rich. (Substitute "taxing" in place of "robbing". Taxing is not theft!)
The last time I checked, about 11.X % of Americans are living at or below the poverty level, something like 36 million of us. If various aid programs, such as SNAP, are cut in this spending bill, the number of people living in poverty will rise. And if they curtail other spending programs, GDP will shrink further. The Speaker and the other "bright lights" on the conservative side appear to believe that spending relies entirely on revenue. Alternatively, sometimes it appears that the righteous-sounding blather about fiscal responsibility is merely a smoke-screen for blatant discrimination against "the Poors". I can't recall Professor Stephanie Kelton's exact words, but my impression from years ago is that the interest on the "debt" resembles an accounting notation with no impact on the economy -- please correct me.
From the standpoint of the Monetarily Sovereign federal government, interest on the so-called "debt" is just an accounting notation. It's not real debt because the government doesn't owe it.
Those T-bills, T-notes, and T-bonds are dollars deposited in Treasury Security Accounts. The government never touches those dollars, so they are not owed. Think of the accounts as similar to bank safe-deposit boxes. The contents are held for safety, but are not debt.
The misnamed "debt" is the total of deficits -- growth dollars sent into the economy in excess of the tax dollars taken out of the economy. Without those growth dollars, we would have recessions and depressions.
Bottom line: Federal deficits are necessary for economic growth, the more the better. They are not a burden on the Monetarily Sovereign federal government or on taxpayers.
While state and local taxes fund state and local spending, federal taxes do not fund federal spending.
Those who do not understand the difference between Monetary Sovereignty (federal government) vs. monetary non-sovereignty (state/local governments) do not understand even the basics of economics.
I was responding to your comment "Even if the federal government collected $0 in taxes and other revenue, it could continue spending forever." which is true, however that government spending would be unlikely to solicit people willing to supply the government with resources/labour if there were no tax to pay. Yes, taxes don't fund federal spending, however without the tax there is no demand for the government's useless currency. As you state "Taxes provide demand for the dollar, because taxes must be paid in dollars."
So yes, government could continue to spend in the now valueless (lack of demand for the dollar) dollars, and they could decide to not increase the amount of dollars they spend on a specific item - 1 hr of labour was $40, now it's still $40 but they get nobody showing up to offer their 1hr of labour for dollars that they don't need.
There would be no "inflation" in this case as the government hasn't changed the amount it pays, however the government cannot attract anyone who wishes to provide work for the government dollars.
You say "I said it COULD (stop taxing entirely) do so, and still pay its bills.", which is true, however it would soon not have any bills to pay as nobody would enter into a contract with the govt where they collect now useless dollars. By eliminating the taxes entirely they would redefine the value of the dollar to 0
As I had asked:
Without the tax demand would the government be able to attract people who want to sell it things for the currency it offers?
Think about Mosler's business card example. Without the the tax demand who in the audience would do chores to collect his business cards?
How would you answer these given the scenario "I said it COULD (stop taxing entirely) do so, and still pay its bills." or does your analysis stop at only the outstanding bills?
The article you linked above says the following:
"Even if federal tax collections fell to $0, the government could continue spending forever." and then "Taxes provide demand for the dollar, because taxes must be paid in dollars."
Given that logic, if tax collections fell to $0 then doesn't that eliminate the ability for government to create demand for the dollar?
I think you want to discuss the ability of the government to increase spending and/or reduce taxation which I would likely agree with, for example increasing the spending to allow for Medicare 4 All would probably need other spending increases/tax cuts to allow the economy to absorb all the people whose roles in the insurance companies are eliminated - as Warren often says. I am not really getting into that as we mostly agree on this topic.
My point is only that "Even if federal tax collections fell to $0, the government could continue spending forever." is not a helpful statement. I can offer my "Skye Bucks" and I can spend them forever without ever collecting "Skye Bucks" in revenue returned to me. This is true. Would you like to do some work for me in Skye Bucks? Why not?