MMT and the Role of Taxes in a Progressive Economy
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In our last post, we explored the concept of endogenous money and its implications for economic growth within the MMT framework. As we reach the ninth and final post in our series on MMT, we'll reflect on the broader social implications of the theory.
Modern Money Theory (MMT) is a macroeconomic framework that offers an alternative perspective on government spending, taxes, and inflation. This article is based on a Twitter thread by Darren, a self-proclaimed Modern Money Theorist, discussing the implications of MMT for various economic policies and how it can help us achieve social justice.
Let's bring our exploration of MMT to a close with a look at how this theory can shape our society for the better.
Pigouvian Taxes, Tobin Tax, and Income Taxes
According to MMT, taxes such as Pigouvian and Tobin taxes can be utilized to minimize unwanted economic activities like pollution and excessive financial speculation. A Pigouvian tax is a tax applied to transactions that cause extra costs for people not involved in the deal. Examples include taxes on tobacco, sugar, and carbon emissions. The Tobin tax is a fee on rapid currency trades, aiming to discourage short-term trading and create more stable markets.
However, when it comes to raising income taxes, MMT suggests considering the redeployment of non-productive resources (e.g., excess military spending, excess financial firms, etc.) to productive purposes before raising taxes.
If inflation is driven by sectoral bottlenecks prior to full employment, MMT recommends spending to reduce bottlenecks or innovating to find alternative sources. In this context, MMT is highly concerned with inflation and taxes.
Progressive Taxes and Automatic Stabilizers
MMT emphasizes the importance of progressive taxes as automatic stabilizers. If tax rates are progressive enough, they might not need to be increased even at full employment. MMT may recommend qualitative credit controls, price controls, or quantity controls depending on what is driving inflation and why.
Qualitative credit controls refer to selective credit control that focuses on the allocation of credit to different sectors of the economy. The flow of credit is encouraged towards the priority sectors while discouraged from the non-priority sectors.
Price controls involve the government setting limits on the prices that can be charged for goods and services. These controls can be used to curb inflation by preventing excessive price increases and maintaining affordable prices for essential goods.
Quantity controls are regulations that limit the production, consumption, or distribution of specific goods or services. These controls can be used to manage inflation by controlling the supply of goods, which in turn can affect demand and prices.
All of these approaches are linked to one of the main foundational principles of MMT: the macroeconomy is driven by buffer stocks. Setting the price and letting the quantity float, or vice versa, is based on the buffer stock principle.
Buffer Stocks and the Job Guarantee
One of the main principles of MMT is that buffer stocks have an active role in driving the macroeconomy. Automatic stabilizers, like unemployment benefits, act on the same principle. MMT and some post-Keynesian economists recommend adding more automatic stabilizers to the toolkit, such as a Job Guarantee program. This program would set a fixed minimum liveable wage with socially productive public purpose jobs and expand or contract as needed with the private sector.
Strategic Manufacturing and Trade Policy
In light of the COVID-19 pandemic and supply chain issues, MMT suggests bringing back strategic manufacturing and essential industries to domestic shores. Local manufacturing would help ensure health and security and apply the buffer stock principle more broadly. Where domestic production is not possible, MMT advises designing trade policies with geographical allies to reduce supply chain risks.
The Sahm Rule and Predistribution
The Sahm rule for unemployment, which triggers fiscal stimulus when the unemployment rate rises quickly, also operates on the buffer stock principle. MMT recommends predistribution over redistribution, meaning that resources should be appropriately allocated in the first place rather than relying solely on redistribution through taxes and transfers.
Taxing Billionaires and Millionaires
MMT supports progressively taxing billionaires and millionaires, not for their money, but to reduce their power, influence, and potential control of available resources. A strong-willed government can claim resources through compulsory acquisition, while a weak-willed one may rely on the philanthropy of the wealthy, which often perpetuates the status quo.
Social Justice and MMT
Proponents of MMT, like myself, argue that it is the only economic paradigm that challenges the prevailing neoclassical economics and neoliberal hegemony. By working together in a community spirit, MMT believes we can achieve true social justice and real freedom for all.
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