Richard Leggatt April 7, 2015 at 7:59 am

Modern Monetary Theory Means We Shouldn’t Have A Progressive Tax System

Forbes Magazine. Author Tim Worstall

Just a small thought here about one of the implications of Modern Monetary Theory (MMT). Which is that if we do accept that this is the way the world should be run then we almost certainly should not combine it with a progressive tax system. Indeed, the implication is that it would require a deeply regressive tax system in order for MMT itself to work.

Leaving aside all of the detail and nuance MMT is essentially the observation that governments can and do print as much money as they like. Quantitative easing, QE, is a perfect example of this. The money can be spent on real world goods if the government so desires. So why don’t we just do this? Why bother with all of this nonsense of governments taxing people to provide the money to do things, borrowing at interest from the banks and the rich and so on? Just print the money and spend it!

There are some obvious objections to this. If it were all so simple then surely someone would have tried it before: to which the answer is no, not really, because this only works in a world of purely fiat money. And we’ve only been in one of those for 40 years or so. Well under the amount of time necessary to explore all of the possible policy space. Another might be that Zimbabwe did do exactly this and they ended up running out of the currency needed to buy the ink to print more currency. So perhaps it’s not quite that simple?

The answer, in MMT, is that we do still need to have a taxation system but it’s not there for the purpose of raising revenue. Instead it’s a method of managing demand in the economy, of reining in that surging demand being produced by simply printing more money and spending it. If you like, the government creates money and spends it and then collects in some portion through taxation and destroys that money. In this manner we do indeed have a budget constraint but it is the acceptable level of inflation that provides it, nothing else.

Now, my objection here is the incentives it provides to politicians. Currently their nuttier schemes are held in check by the fact that they do, in however desultory a manner, have to get the money out of the populace in some manner. If they can just print as much as they like they will (no, I am not at all cynical about politics, the political process nor politicians) and have enormous fun spending it. Their aim of, as ever, winning re-election by not taxing people too much will almost certainly lead to the level of taxation being lower than that inflation stymieing rate. Thus, I consider MMT, when confronted with political imperatives, to have a high inflation rate baked in.

But leave that objection aside: what is the implication for the tax system under MMT? Currently, we insist that the rich should pick up a goodly chunk of the tax bill because, well, they’re the rich. It’s Willy Sutton’s “Because that’s where the money is”, or Adam Smith’s paying in greater than proportion to income. Or simply the moral point that those with lots of money should be paying more into the common pot than those without lots. None of which I have any problem with. Indeed, there are very few indeed who do: even flat taxers are in fact arguing, once a personal allowance is included, for a policy that increases the average rate of taxation as incomes rise.

But all of this changes under MMT. Firstly, that moral argument that those with more should pay more fails. Because no one is in fact paying for government through taxation. That’s coming purely from creating new money. Secondly, a system of taxation designed to prevent inflation would look distinctly different from one designed to raise the revenue with the least hissing of the geese.

For example, wealth is not inflationary: thus under MMT there would be no justification for taxing wealth. Indeed, incomes are not inflationary: thus don’t tax incomes. Nor are savings, nor income from savings. We’ve thus obviated pretty much the whole of our current taxation system: except for two things. Pigou taxes and consumption taxes: these would still meet the theoretical needs of our system.

Pigou taxes for the obvious reason that we don’t impose them for their tax revenue: we impose them so as to change market prices and thus deal with externalities. The revenue is an after thought, a welcome one true, but still not the point at all. Which leaves us with consumption taxes: these are necessary in our pursuit of inflation. For of course it is the buying of things with that great flood of new money which produces the inflation in the first place. It is here that we would need to be collecting our inflation busting taxation therefore.

And the thing about consumption taxes is that they are, by definition, regressive. At least if we accept Keynes’ idea of the marginal propensity to save they are of course. For those with higher incomes will save a larger portion of their incomes than those with lower. Thus lower income people will be paying more in that inflation busting tax upon consumption (say, a sales tax or a VAT) as a percentage of their incomes than richer people will be. For they spend a greater portion of their income on consumption subject to that consumption tax.

All of which really rather amuses me to be honest. The people who support MMT tend to be over at the more progressive end of the lefty spectrum. Not entirely but it’s a definite tendency. And these are entirely the people who would be horrified at the thought of abandoning progressive taxation in favour of a regressive system. But as far as I can see MMT destroys the argument in favour of progressive taxation and, given that we only tax now in order to curb inflation, insists that we must move to an entirely consumption based tax system. One that will be, by necessity, a regressive tax system. I wonder how they justify this to themselves: or even, to be honest again, whether they’ve even noted this contradiction?