Kalecki pointed out that interest on the debt was subject to taxation, which reduced the net cost of the debt, and servicing of the debt should also be deflated for the rise in prices….
Kalecki proceeded to show how ‘it is possible to devise special taxes for financing the interest on National Debt which will render its increase harmless, in the sense that it will have no repercussions on output and employment; that therefore it is not necessary to consider the reduction of the budget deficit as such an important problem of war finance; and that a regime under which budget deficits would be used whenever necessary to maintain full employment does not involve insuperable difficulties'. He proposed that the interest on the National Debt should be financed by an annual tax on all privately owned capital (including government bonds). This would be ‘neutral’ in the sense of leaving capitalists as a whole with the same amount of money (bank deposits) that they started with: the tax paid by capitalist would be returned to them in the form of interest on their holdings of government bonds. The tax would also be ‘neutral’ in the sense of not affecting in any way incentives to invest and produce, since the profitability of these activities would not be affected by the tax. As an alternative that would also not affect those incentives Kalecki suggested an income tax with exemptions for income that is invested in fixed capital. Either of these two methods would remove the financial burden of government debt. ‘Consequently, to keep down the Budget deficit in war time in order to reduce the increase in the National Debt ceases to be the primary objective of war finance. And, if to maintain full employment in peace-time requires budget deficits there is no reason to be scared by the rising National Debt.”
Kalecki reinforced his point that technically the National Debt should not be a problem, if financed within the economy, in his contribution to a set of studies of The Economics of Full Employment that were prepared and published by the Oxford Institute of Full Employment.
Kalecki’s chapter was titled ’Three Ways to Full Employment.’ The three ways were: deficit spending on public investment and social welfare, financed by borrowing; stimulating private investment; and redistributing income from those on higher incomes to households on lower incomes.
Kalecki reiterated his previous arguments that a fiscal deficit always finances itself, in the sense that the spending ensures that funds accrue in bank accounts to finance the government borrowing. The rate of interest would not rise as long as the central bank expanded commercial banks reserves sufficient to allow commercial banks to maintain their cash ratios.
(CJH note: The Federal Reserve already does this)
….Wage pressure on prices of consumer goods could be regulated by a combination of price controls, subsidies, and income tax. Concerns about the ‘burden’ of the National Debt could be met by servicing it from the proceeds of a capital levy, or a tax on profits with the amounts of fixed capital investment deducted from the profits liable to tax. This last Kalecki called a modified income tax that would have a neutral effect on output and employment. Here Kalecki pointed out that domestically financed government debt is merely a redistribution from tax-payers to bond-holders; the National Debt is not ‘a burden to society as a whole because in essence it constitutes an internal transfer’. Obviously when bond-holders are capitalist rentiers, and taxpayers are less wealthy, such a redistribution is regressive. But it is not difficult to see that his proposed capital levy is ingenious precisely because it adjusts the tax system to make it more progressive as tax-payments to bond-holders make the system more regressive.”
These ideas resonated well when the U.S. was more socially oriented, post Great Depression, WWII and Korea. That population was labeled as the Greatest Generation. That population suffered through the Depression, and went to War II—and in Korea, at great cost of American life. Back then a favorite motto was “Tax and Spend.”
pgs 35-37 in the book; the monetary economics of Michal Kalecki, written by Jan Toporowski, Professor of Economics and Finance at University of London, Visitingt Professor of Economics at the University of Bergamo, Professor of Economics and Finance at International University College, Turin, and Visiting Professor of Economics at Meiji University