In social democratic quarters of American political debate, it’s common to argue that we need to impose broad-based taxes. The social democracies of Europe not only tax a greater fraction of their GDPs than the United States, but they also rely more on taxes that hit middle-class and even poor households, like a value-added tax (VAT). If you promise, as both Joe Biden and Hillary Clinton did, not to raise taxes on anyone earning less than some high-ish income threshold, you won’t be able to finance really transformative programs like Medicare For All. You can think of that in conventional terms: You can’t tax enough dollars only from the top few percent of the population to cover the cost of generous benefits for everyone. Less conventionally and more accurately, you can point out that you’d have to tax the rich much more than the cost of benefits in order to make room for the increase in demand egalitarian benefits would provoke, because the top few percent weren’t spending their marginal dollars anyway (so taxing them away doesn’t change what they spend), but benefits distributed to the non-rich will quickly be spent, either by the state as benefits provider, or by recipients of cash benefits. You can’t “finance” — in the sense of neutralizing the pressure on real resources, and then inflation and interest rates — broad based benefits without broad based taxes.

That argument is true enough. But if we’re thinking in these terms, we should think a little bit about our definition of “taxes”. To the degree our goal in taxation is to make room for noninflationary expenditure by the state, what we are really after is what old-school Keynesians called leakages. One person’s spending is another person’s income, funds move in one direction, goods and services in the other, forming the famous “circular flow” of economics. A fixed aliquot of purchasing power might turn an economy forever, with stable prices, if all income was promptly spent. But in reality there are injections and leakages. Holding constant the productive capacity of the economy, if the state spends, that adds new money chasing the same goods and services, generating inflation. To counter that injection, the state can tax, which becomes a leakage of purchasing power, stabilizing prices.

However, another source of leakage is financial saving. If a person holds cash rather than spending it into another’s income, that will be disinflationary, or even deflationary, like a tax. (Depending on our definitions this “saving” might constitute “investment” in accounting terms, but it will not contribute to demand for either capital or consumer goods in the economy.) This effect underlies the main technique we use to fine-tune inflation. When the state wants to restrain prices, it intervenes to ensures that interest rates are high for financial savers, or equivalently that opportunity costs are high for spenders, which persuades actors in the economy to save more and spend less, calming the bid for real goods and services.

If we want to finance a large benefits program but offset the pressure it puts on prices and therefore the risk of inflation, one way we can do that is to not tax at all, but raise interest rates. It’s pretty clear that this can work in the short-term, but it’s a conceptually messy business, since high interest rates are usually bundled with injections of cash (from interest payments on government debt), which might contribute to pressure on prices over a longer term. Plus, there are financial complications, as real estate and longer-term financial assets reprice with interest rates, in ways that may be distributionally unjust when rates go down and destabilizing financially should rates go up too fast.

However, holding interest rates constant, there is another regularity we should understand about financial saving: People with big incomes do lots, lots more of it than people with small incomes. If you give Jeff Bezos an additional million dollars, that results in approximately zero new direct spending on consumption or capital goods by Jeff. Instead, he’ll devote the income to purchases of financial assets like stocks and bonds. The relationship between financial asset purchases and real expenditures by issuers or sellers of those assets is weak. Jeff’s stock buys may contribute to asset price appreciation, but they don’t much inspire investments that companies otherwise wouldn’t have made. Income to Jeff is a leakage, in an old-school Keynesian sense.

What we want from taxes, if what we are interested is financing programs without putting pressure on prices, is leakage. But the money that we pay to Jeff Bezos can deliver leakage pretty much as well as money taken by the tax man. In terms of financing programs, money we pay to Jeff is a near-perfect substitute for money we pay to the state. We can finance a social democratic benefits state from broad-based formal taxation, or we can just as well finance it via broad-based rent extraction by plutocrats. Call that the American VAT.

On the face of it, the United States collects taxes equal to just under a quarter of its GDP, while social democracies like Denmark or Norway collect taxes that amount to 40% to 50% of GDP. But how much do Americans pay once the plutocracy tax is taken into account? A recent study by Carter C. Price and Kathryn A. Edwards suggests that between 1975 and 2018, the share of taxable income paid to the top 1% grew by 13 percentage points, from 8% to 22%. Treating that additional income as our plutocracy tax, and naively summing it with the overt tax share of GDP, we get a total tax share of 38%, within spitting distance of Norway.

As a quantitative exercise, this is squishy and a bit bullshit. [*] The point here is not to claim, as a function of data and evidence to which you must defer, that there surely is demand leakage due to income inequality in the United States that creates fiscal space comparable to what the Nordics’ extensive tax systems engender more overtly. I don’t think we have the means to measure that, and would take with boulders of salt any work that claimed to. I make the weaker claim that a social-democracy sized demand leakage is within the plausible range of what contemporary inequality has wrought. We can be confident there is a great deal of slack. Tolerating interest rate rises towards a “normal” 4%-ish, we might be able to fund a full social democratic benefit state in the US without imposing a penny of new middle-class taxes. We don’t need to risk a VAT (which might in practice finance replacement of the progressive income tax, rather than new benefits). We can let weathervane politicians like Joe Biden and Hillary Clinton make their sweet promises without taking them as fatal blows to social democracy. When they ask us how we mean to pay for our programs, we can say we’ve already paid Jeff Bezos, thanks. If you want the money, you can take it from him.

There are a lot of things to hate about this political economy. Having plutocrats, rather than the state, effectively collect much of the tax base creates dormant antidemocratic quasigovernments. All those funds that the rich usually bank can, after all, be mobilized, in ways the real government, accountable however imperfectly to the broad public, would never approve. Proposals like those by Elizabeth Warren and Bernie Sanders for a high-net-worth wealth tax become essential, even though they play little role in “financing expenditure” in the sense of ensuring immediate fiscal space for government action. Over the long term, such taxes reduce the risk that ventures of the ambitious wealthy emerge at so large a scale they override the priorities of the public and force fiscal retrenchment.

Moreover, it’s not so great to have benefits dependent in some sense on continual rent extraction and upward income redistribution. I’d much rather we build a more equal society in which universal benefits are financed from overt, broad-based taxes that we are solidaristically proud to pay. But it may be that you can’t get there from here without some detours. The US mass public really is bearing the burden of a huge plutocracy tax. The dollars we are not paid by monopsony employers, the medical bills we face despite expensive “insurance” (or the care we eschew to avoid those bills), these are burdens on the American public as concrete and real as any new tax would be. A more conventional approach means layering, at least for some period, a social-democratic tax system on top of plutocratic rents an exhausted, precarious public is already supporting. It arguably makes sense to let plutocracy alone finance the benefits at first, then build out the tax side in sync with, and as a means of, tackling plutocracy, when the public understands the good things the taxes help them keep.

Whatever its role in creating fiscal space for social democracy, plutocracy ultimately has to go. In basic economic terms, it is too inefficient compared to straight-up taxation. We worry with income taxes about deadweight costs due to a supposed dampening of incentives to produce. Plutocracy provokes direct incentives to restrain production, because the rents upon which it relies are extracted at bottlenecks, where high prices can be demanded of customers or low prices can be imposed upon suppliers. Insufficient housing production supports real estate assets writ large. Consolidation of hospitals into chains, patent monopolies, and too few doctors all keep medicine lucrative by restricting supply. From chicken farmers to call centers, consolidated buyers impose low prices and terrible conditions on suppliers and workers, “earning” rents that textbooks say should be competed away by new entrants offering better terms.

Efficiency demands either robust competition or public options in order to vouchsafe price-elastic supply of goods and services throughout the economy. But in order to get there from here, we need a muscular, popular state. Plutocracy sews the seeds of its own destruction by creating fiscal space to build one through the very rents that it extracts. Let’s water the fields. ■

Update: Matt Bruenig points out that Norway is a bad comparator for the tax burden of a social democratic welfare state, because Norway’s government collects a great deal of nontax revenue from state-owned enterprises and sovereign wealth funds. This doesn’t much affect the point that its existing “plutocracy tax” could put the US pretty close to contemporary social democracies: Rather than “spitting distance of Norway” (2019 tax/gdp of 39.9%), I might have described 38% as not far from Finland (2019 tax/gdp 42.2%), and more than Iceland (36.1%). It also underscores the core point: there’s nothing special about taxes. To the degree Norway’s state-owned enterprises earn profits from Norway’s public that are then reinvested via social wealth funds in global portfolio assets, that is disinflationary in exactly the same way that private profits almost reinvested in global portfolio assets would be, creating space for (inflationary) social-democratic benefits provision. State ownership of those assets is decidedly better, from a social-democratic perspective, because it avoids both the political and fiscal risks that attend the private sector’s capacity to mobilize dormant wealth in ways that might threaten public goals going forward. But so long as it is not so mobilized (and not thought likely by financial market participants to be so mobilized), the profits extracted create fiscal space, regardless of who holds the resulting paper. The Norwegian state also earns profits from hydrocarbon sales to foreigners, which is disinflationary compared to letting hydrocarbon revenues become private sector domestic income to not only the wealthiest people (the cause of “Dutch Disease”), and by making it easier for Norway to support the exchange rate of its Krone and so restrain import prices.

I broadly favor central-bank digital currencies, or CBDCs. Inspired by cryptographic “monies” like Bitcoin and stablecoins like USDC, governments should offer digital assets which are per se fiat money, rendering unnecessary fragile and corruptible mechanisms to redeem digital assets for cash. The main case against CBDC, argued for example by Stephen Cecchetti and Kim Schoenholtz, is from my perspective a feature rather than a bug. Disintermediation of commercial banks is desirable. Disintermediation would provoke replacement of retail deposits in bank capital structures with central bank lending facilities, breaking the deceptive political economy under which commercial banks are notionally private despite nearly all of their risk being borne by deposit-insuring, bail-out providing states. It is long past time we straightforwardly acknowledge that contemporary commercial banks are conduits through which public investment is delegated to (ideally) decentralized actors whose incentives are (ideally) commercial and apolitical, but which are ultimately agents of the state. If you are a banker and you think you are John Galt, you are just lying to yourself, as well as the rest of us. Jamie Dimon is just a poorly supervised public servant who’s fibbed his way into exemption from the General Services pay scale. For a discussion of some of the conceptual and implementation issues surrounding CBDCs, see Rohan Grey. (I use CBDC to mean open access, federally provided digital money, not to express a preference about whether the Federal Reserve should be the agency that manages it.)

More urgently than CBDC, however, I think we need a federally operated digital payments platform in the mold of Amazon Pay, Apple Pay, or Google Pay. A payments platform is distinct from the media by which payments are ultimately made, which might be a credit card, a debit card, a bank account, a stablecoin, or CBDC. A payments platform wraps payment media beneath a persistent customer identity, and adds related information like billing and frequent shipping addresses. Payments platforms are increasingly the digital reification of business-to-customer relationships. If you have an Amazon account, if you have set up Apple pay, you and those platforms have a persistent, resilient, nearly zero-friction means of consummating transactions on-line, and increasingly at physical points-of-sale. This gives Apple, Amazon, and Google a tremendous advantage over other businesses, because who wants to go through the trouble of entering credit card information and addresses, expiration dates and security codes, usually on a finicky mobile screen, just to make some dumb little purchase? Even with apps and businesses for which you do go to the trouble of entering all that crap yet again, even if you check “save for payment information for future use” on those apps, the shelf life of your relationship is short. A credit card expires or gets compromised or is lost, and the relationship is broken. You have to start over and may well never bother. Your Amazon or Apple Pay identities are persistent. They are often backed by multiple payment media, and when an underlying payment medium breaks, you do bother to repair it, because you can amortize the burden of data entry over the many businesses you’ll use the platform to pay. Your identity belongs to Apple and Amazon and Google, and is rented to other businesses, under terms the platform providers set. Businesses have little choice but to accept those terms. To conveniently pay from an iPhone, customers must rely on Apple Pay. When purchasing from small businesses on the Amazon marketplace, customers must use Amazon Pay. The platforms enjoy clear network effects: each payment system becomes more valuable to both customers and businesses the more customers and businesses are on them. The value of those networks is extracted in markups (charged opaquely to businesses, not visible to payers) by within-ecosystem monopolists, at the expense of transactors.

It’s easy to argue that these platforms should be broken up or regulated on antitrust grounds. Epic Games has filed antitrust lawsuits against both Apple and Google for the cuts those platforms take and their heavy-handed exclusion of other, cheaper payment channels. But sometimes when we think about antitrust we spend too much energy on the anti — on what in the status quo we want to undo or dismantle — and too little on what we’d like to create. Even when we win, often the result of clipping some bad practice is to create a power vacuum that some new not-so-great practice rushes to fill. Rather than just attack the problem, often it is best to construct a solution.

Businesses would prefer to independently own their customer relationships, but because the network value of payments platforms is real, it will be increasingly difficult for them to do so. There will be some large-scale intermediary that manages, and so potentially gates, those relationships. What we can do is ensure that there exists a fair payments platform, a platform that can’t discriminate against businesses without due process (as private payments providers assuredly do), which imposes no toll on transactions beyond the cost of managing and running the platform, and is conveniently available from all the digital ecosystems.

The simplest and least heavy-handed way to do this would be for the government to provide a public payments platform, which would set fees just sufficient to break even on operating costs. The Pays of Amazon, Google, and Apple could continue to exist. Those firms can surely innovate faster than the Federal government will. But the price premiums those innovations command will be limited by the option of using the public service, which, like the strange antagonist from It Follows, or like a textbook of market capitalism, will eventually catch up and compete down fees.

What we want is not just antitrust. We want free enterprise, a business ecosystem in which people can use their own minds, interests, and experience to explore wants in their communities not currently met, and then even from a very small scale, develop commercial solutions without incumbents extracting tolls or using advantages of bigness to eat their lunches. Network effects in payments are an economy of scale that should not be left to private providers.

Let’s just put FedPay on our smart phones and call it a day.

Update: Adam Levitin was prescient about this stuff in 2016. (ht @squarelyrooted)

There are economies of scale in businesses. Some of them are technical. States should not try to insist that Mom and Pop should be able to bootstrap competitors to GM out of savings from their second job. But technical economies of scale peter out at scales much smaller than megafirms. Tesla, which (in physical, rather than casino-financial terms) is not so big, can compete with GM. Technical economies of scale require the scale of a factory, producing in quantities that fully amortize fixed capital costs, but not more than that.

Beyond technical economies of scale, there are economies of scale due to network effects. These are real economies, but as John Hussman describes them, network effects should be classified as “uninvented public goods”. Firms should be rewarded for discovering them — and indeed they have been and are rewarded, quite handsomely — but networks should not remain monopoly franchises of private entities indefinitely. They are “natural monopolies”, which competition will not regulate in the public interest. They should fall, whether through outright ownership or as “regulated utilities”, into management by the state. [1]

Besides technical economies of scale and network effects, there are less savory “economies of scale”. There is traditional monopoly or market power by which firms can extract rents from workers, suppliers, and consumers. Market power is a correlate of scale that looks great from any firm’s perspective, but its “efficiencies” are just transfers from other stakeholders, and are destructive in aggregate. There are resource and coalitional “economies of scale”, the way very large firms can engage in predatory pricing, or coordinate the activities of lawyers and lobbyists and media, and eventually politicians and regulators, in a firm’s interest. Again, these are not true “economies” at all. They may benefit incumbent firms, but are of negative social value.

Finally there are economies of scale in the insurance of stakeholders, which is a genuine efficiency and of tremendous social value. A large firm can provide generous sick leave or parental leave, because the absent employee is one of a large stable among whom the extra burden can be shared, and over which the financial cost can be amortized. For a small firm, even temporary loss of a skilled worker can paralyze the business. And a small firm’s finances may be too weak to pay the leave. “Mom and Pop” firms are notoriously shitty at providing flexibility and insurance benefits not because Mom and Pop are bad people, but because a big insurance pool functions better than a tiny one. This is a real economy of scale. However, much of this advantage of bigness would disappear if the social insurance function were sensibly provided by the state instead of our relying upon individual businesses to offer “benefits”. (The state cannot relieve businesses of the risk that a critical employee may need to step back, but this risk fades even at small-to-medium scales beyond “Mom and Pop”.)

When we think about “antitrust”, we should always ask ourselves from what apparent advantages of scale actually derive. If it’s just traditional market power, traditional antitrust remedies like breaking firms apart or forbidding mergers may be sufficient. Traditional antitrust can also help prevent and limit resource economies of scale, by limiting conglomeration or forbidding predatory pricing. If the scale advantage is due to network effects, forbidding scale will be socially costly, so the answer will involve some means of exerting public control over the network, whether by regulating or nationalizing private platforms, or by creating public alternatives that engender similar or even stronger network value. Addressing coalitional “economies of scale” encompasses the broad challenge of good government, of reigning in corruption, which probably does require truncating private scale. Addressing the economy of scale in insurance provision is the core work of social democracy. If you believe in free enterprise but oppose a social democratic welfare state, you have a serious contradiction in your worldview to examine.