I have been sent an email that says:
I have been reading the summaries of your tax proposals, but not the details.
I am not very sure, however, what your modus operandi are. You seem to be going along with the principle that tax is required to fund public expenditure, but we who read your blog all know that isn't the way it works. Do I take it that you are seeking to speak the language of the powers that be in order to get your message across in order to improve things without going the whole hog of campaigning for an understanding of MMT in political circles?
The identity of the author, who comments here occasionally, does not matter. The issue does.
My correspondent is right to note that I have not as yet published all the methodology notes that go with this report. There will be some more to come, including a lengthy note on the economics of this issue, but it is not complete as yet.
One good reason for that is that I am aware that many in the MMT community show very little understanding of the role of tax in the economy, and I am having to write an explanation that both reflects the fact that tax does not fund government spending and that tax is absolutely essential, despite that, to the government's fiscal cycle if inflation is to be avoided.
The reality is that the government fiscal cycle, when reduced to a formula, is that it looks like this:
G = T + ∆B + ∆M
where
G = government spending in period
T = Tax revenue in a period
∆B = The change in government borrowing in a period, and
∆M = the change in the value of government-created money in a period.
For the record, a version of this formula is included in Bill Mitchell's textbook on macroeconomics. There is nothing heretical about it.
You will note that despite the fact that MMT purists (Bill, most especially) say that MMT does not require taxation, this is not reflected in this MMT textbook. There is good reason for that.
That good reason is that MMT does not say that government spending does not require taxation. Stephanie Kelton makes this clear in her book, The Deficit Myth.
What MMT actually says is that government spending does not require that taxation be raised before expenditure can take place. The issues are, of course, quite different. The two points are, however, frequently confused, and it would help no end if those who think they are promoting MMT would get their facts right and stop making the false claim that MMT does not require taxation, because it does.
What I am suggesting is entirely consistent with this proper understanding of the government's fiscal cycle, but what I am also recognising is that there is significant government resistance around the world to increased government borrowing, meaning that the variable ∆B is tending towards zero.
I am also recognising that in the current inflationary environment central bankers are, rightly or wrongly, of the opinion that new government money creation should be constrained, meaning that variable ∆M is also tending towards zero in the real world in which I am interested in operating.
As a result, whilst it is completely untrue that government expenditure is funded by taxation, it is also possible that those two variables might, in this circumstance, have a very close relationship. We might in fact be moving towards the possibility that any increase in government spending might need to be matched by tax revenue, so that in this circumstance G = T, or government spending and tax are equal for additional expenditure.
I can live with that fact without accepting any claim that taxation must proceed expenditure, which is not true.
There will be more to come on this, but I hope this clarifies the point.
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Thank you for this blogpost. I agree completely with your comments in the blog not least that those arguing that tax is not required to fund government expenditure. You have made it clear that if there is no real prospect of increasing government borrowing or increasing the supply of money then the remaining element of taxation income is necessary. Surely this means that any government which wishes to commit to public service improvement, decreasing inequality and investment in infrastructure and housing must be prepared to consider taxing wealth, increasing higher rates of tax and increasing taxes on capital gains. I think that borrowing for capital investment could help fill that funding gap too but that is a separate although related issue.
I agree with the last point.
I suppose a short way of describing the importance of tax in a MMT context is to say that taxation enables (among other things) the government to spend more without inflation.
Yes
In the case of high inflation and rising interest rates, most governments will be advised not to borrow for day to day spending, and that makes sense. However, in Ireland for example, there is very high levels of individual savings at the moment, those who can afford to seem to be holding onto cash in the bank, possibly in fear or expectation of the next market crash, at which time they may invest in the stock market or property market cheaper, as pensions seem to be at risk. This short term saving of cash during high inflation and low interest return doesn’t make sense in the long term, so people may be interested in investing in Govt bonds with some tax incentives and the country could invest this money olin infrastructure and development projects. And taxation of the greedy corporates who are making excessive profits and are not reducing prices and the super wealthy is logical for immediate spending requirements, enabling the government to spend on schooling, health care, policing, and social services, which will benefit everyone. IMHO
So far, I could argue for each of your proposals without any reference to MMT.
Is it just that the income of the wealthy is taxed less severely than that of those who labour by “hand and brain”? No.
Is it just that the tax relief available to the wealthy is greater than that available to those who labour? No.
If those who are truly wealthy (so not most of your readers, or the electorate, or even MPs) would rather ensure parity of outcome by taxing all as if they were wealthy, and give tax breaks as if all are wealthy, then let them explain the resultant economy. It might take them more than a summer…
If they don’t aspire to a society where financial obligations, penalties and benefits fall blindly and equally on all, let them stand in their true colours and declare it.
(I apologise if I have been too vociferous. Sometimes my blood boils…)
Thanks Anne
Good perspective
And wholly apporopriate to raise the ethcial dimension which always trumps econiomics
The thing is that we have been taught to reduce the options and tools that we can use to solve problems when in reality it is all about artificial choices and not reduced means or processes at all.
Going back to 2008, no one would have thought that the scale of the losses then could possibly exist – but they did.
The genie is out of the bottle now and must not be put back in.
What we need now is the same sort epiphany about tax and why it has to be used where money is most dense and plentiful for the sake of our economy and democracy.
Thanks
“We might in fact be moving towards the possibility that any increase in government spending might need to be matched by tax revenue, ” (although spending is not directly funded by taxation). I understand your point of view here, but would you comment on the probability of large-scale Govt investment in public services and infrastructure ( I think we all see the need at present), generating so much wider economic activity that tax revenues from personal, transaction taxes, and corporate taxation naturally increase overall tax revenue, So that the tax revenue increases to reduce the potentially inflationary increase in public expenditure, and move towars equilibrium? I don’t have any detailed info on this, but I was under the impression that this is what, broadly, happened in Britain in the 50s and 60s, following the expenditure started by the Attlee programme.
On a general note I think it’s vital that the “MMT community” and progressive Political Economists such as yourself, UCL etc work as allies, not enemies. So work with areas in common rather than controversy over detail and interpretation.
Multiplier effects create the possibility you suggest BUT there will be time lags and so my suggestion holds
It’s just that G and T will change over time
Sorry Richard dont get that at all
I understand that tax revenues take money out of the system– like tally sticks in previous times
How can it pay for Govt. spending?
Surely we have to create new money to finance Govt. expenditure?– or borrow it- and we pay our taxes to “thank” the Govt.for spending on our behalf in the first place.
I did not say it paid for govermment spending
I said money has to be withdrawn by tax pound for pound to match spending
All of it is paid for by new gov’t money in the first instance – but is then cancelled
But we don’t “thank governemnt” – we pay what is due
Someting that needs to be taken into account is where govenment money is spent For instance:-
Money given to the poor will be spent quickly and taxed.
But money given to rich people will be saved and will not be taxed.
This will feature in a future note
This has to be one of the most concise and accessible posts you’ve made Richard on MMT. Making the inter-relationship between MMT and tax so clear provides the essential context that explains how it can help sustain a more egalitarian politics. And it’s so significant that it has emerged from the rich and trusting dialogue you host on this blog. Many thanks.
Thanks
Appreciated
Hi Richard,
Thanks for clarifying this point.
I was very confused by the wording of your other post too.
The opening line confused me greatly when I first read it:
“The Taxing Wealth Report 2024 is about the way in which tax in the UK can be transformed to raise revenue the government might well need…”
I can see how someone can infer from this, on a first, quick read, that you’re suggesting or confirming in some way what lots of people still think: that the government needs tax revenue to fund services.
As soon as I read “tax” and “revenue” and “government need” I think there was an auto-response in my thinking that this meant.you were suggesting the government collects tax to fund services.
That’s what I instantly thought you were getting at. It was only after reading it again, very slowly, that the penny dropped.
I’ve read the Joy of Tax and your blog, so I knew that couldn’t be the case.
Your opening sentence is very nuanced and accurate: the meaning of it hinges on”might” and which “need” you’re referring to.
But because it doesn’t specify which of the government’s needs you’re referring to, I think there’s an automatic assumption you’re talking about the government’s (false) need to collect tax to fund services.
Sadly, that myth still pervades popular thinking. It’s so deeply embedded that as soon as we read the words tax and raise and revenue and government and need, it’s all too quick and easy to think the “need” relates to paying for public services.
But what this opening sentence actually means is that we *could* make some changes to the tax system and collect more tax because the government might need that revenue (income) for a different reason i.e. not to fund spending.
There’s still a long way to go to divorce the idea that tax is collected befor, or for, spending.
At least that’s what I now think it means. Please correct me if that’s that’s wrong.
Thanks,
Lee
Thanks Lee
You can see why writing this feels like occasional linguistic torture.
I want to be right, but also not alienate audiences. That’s hard…
The clarification was obviously needed and it will appear in the methodology notes in due course.
Linguistic torture just about sums it up for sure. I empathise completely.
Every time I read one of the BoE reports, I have to brace myself for mental gymnastics and be ready to tackle all manner of fancy and vague sounding compound nouns.
Even the fairly simple sounding phrase “interest bearing loans” requires the reader to reverse the word order to figure out that it means a loan that pays interest to the lender.
That’s before you even start to decode the rest of the sentence it’s housed within.
No wonder lay people switch off or are left in the dark and lean on soundbites and age-old tropes.
Your Joy of Tax by the way was very clearly written. That’s partly why I ended up wanting to learn more about tax and money.
Thanks
“I am also recognising that in the current inflationary environment central bankers are, rightly or wrongly, of the opinion that new government money creation should be constrained, meaning that variable ∆M is also tending towards zero in the real world in which I am interested in operating.”
My understanding is that the GFC of 2007/2008 was caused by a shortage globally of safe savings in the form of government treasury bonds and the financial sector attempted to supplement this market in the form of securitised mortgage bonds and in many cases none too fastidiously. You might think that central bankers would have recognised this market need given the prevalent ideology of “market fundamentalism” being rammed down our throats. I would suggest central bankers not recognising this need is driven by a confused anti-state mentality not logic. This need for government treasury bonds or “information insensitive” savings as the economist Gary Gorton incisively describes them will not go away. Central bankers and politicians need to get down to some homework to recognise this and stop being ideological posers!
I agree with you.
I am also accepting the world that I have to deal with.
Excellent post. Thanks.
The equation is helpful. It relates government spending to borrowing and inflation (the change in value of money part of the equation).
You say that across the world borrowing and money creation are being constrained, which leaves taxation to do the job of balancing government spending. I think this is true, certainly in the UK.
The politics of this are what concern me. The propaganda that leads voters to believe the above, that money creation will lead to inflation and borrowing will be a burden to future generations, makes taxation the only remaining way to “raise money” from a campaigning perspective.
Conveniently, this is also a highly contentious subject that can be manipulated easily. Few people want to be taxed and plenty will vote against tax increases.
The propaganda works to ensure that nothing changes. Labour is quite happy to tailgate the Tories on this.
In my view the problem is deeply political. Rebuilding a shattered country is possible (as WW2 proves) and challenges of global warming could be met. But our politicians have chosen not to do so.
I accept your points, entirely.
The formula also helps campaigning for change, I hope.
Richard, I was vey impressed with your initial posts on the Wealth Tax Report.
Thanks for this nuanced clarifications in this post! I look forward to your further comment on this subject. …Your position makes it possible for government to reallocate resources as per your many posts on spending for the public good, a green new deal etc. I think Keynes may have used different language but had much the same in mind in his great item: How to pay for the war.
https://en.wikipedia.org/wiki/How_to_Pay_for_the_War
Thanks
So instead of the old “tax and spend” we need to establish “spend and tax” to describe fiscal reality much as G. M. von Furstenberg said in 1986?
https://www.jstor.org/stable/1925496
Yes