How MMT Advocates View Taxation of High-Income Individuals
In 2021 posts titled "Hands off the rich?" and “The Economic Consequences of Mr Biden”, and “The Scrooge McDuck theory of the rich”, economist John Quiggin critically examined the Modern Monetary Theory (MMT) perspective on taxing high-income individuals.
As we continue to discuss economic policies in 2023, I would like to provide an alternative view from an MMT proponent's standpoint, highlighting the broader implications of taxation beyond funding public services.
As we will say in next week’s “MMT, Liquidity Traps, Financing the Green New Deal and Does a JG Require Higher Taxation,” it's important to recognise that the approach to financing public initiatives like the GND within MMT is centred around optimising resource allocation. This includes making better use of unutilised and underutilised resources, as well as redirecting resources from less efficient and harmful uses towards public initiatives.
When introducing new spending programmes, taxes can (NOT should or will) be adjusted to control inflationary pressures (if necessary) and ensure the economy's productive capacity is not exceeded.
This key aspect of MMT's methodology highlights the importance of taxes in managing the economy and demonstrates their crucial role beyond simply 'funding' public expenditure.
The MMT View on Taxation
As Quiggin correctly pointed out, MMT argues that taxes are not used to fund public expenditures for a sovereign government with its own currency. Instead, taxes serve several purposes, such as creating demand for the government's currency, managing inflation, redistributing resources, and influencing behaviour.
However, this does not mean that MMT proponents are against taxing the rich. Rather, the theory provides a different lens through which to view the role of taxation in the economy. As Stephanie Kelton states in her book "The Deficit Myth":
"We can, and must, tax the rich. But not because we can’t afford to do anything without them. We should tax billionaires to rebalance the distribution of wealth and income and to protect the health of our democracy. But we don’t need to crack open their piggy banks to eradicate poverty or to have the federal job guarantee with a living wage that Coretta Scott King fought for. We already have the tools we need. Feigning dependence on those with incredible wealth sends the wrong message, making them appear more vital to our cause than they actually are."
Kelton further emphasises the need for strategic taxation in "The Deficit Myth":
"There is a strong case to be made for taxing the rich, and we need to do it. But we need to do it strategically, recognising that the purpose of the tax is not to pay for government expenditures but to help us rebalance the distribution of wealth and income because the extreme concentrations that exist today are a threat to both our democracy and to the functioning of our economy."
In addition, Kelton highlights the consequences of extreme wealth accumulation and its impact on society:
"Taxes can be used to curb astronomical accumulations of wealth. That’s important precisely because the wealthy use their money to amass power and influence over the political process: they’ve rigged the tax code in their favour; they’ve rewritten labour laws, trade agreements, rules governing patents and protections, and much more. They’ve remade public policy to serve their economic interests. This is why so many of our companies pay out enormous piles of cash to shareholders and upper management, smaller sums to the well-educated upper class, and a pittance to everyone else. It’s why Silicon Valley has gleaming skyscrapers in downtown San Francisco, but working-class communities in Flint, Michigan, don’t have access to water that isn’t poisonous. It’s why our welfare state and health-care system and retirement system are all in shambles, and why we’re staring down the barrel of an unaddressed climate crisis. The profits and power wealthy elites can find in not addressing these problems are just so much greater than the profits and power to be found in addressing them."
In the MMT framework, taxation is indeed a crucial tool for managing the economy and optimising resource allocation.
However, it is not the only way to achieve these goals, as there are alternative methods to free and mobilise resources for public initiatives.
These alternative methods can help counter the notion that MMT is a motte and bailey political strategy.
There are the approaches we will see next week in "MMT, Liquidity Traps, Financing the Green New Deal and Does a JG Require Higher Taxation”, such as well-targeted taxes (aka Progressive taxes), wage and price controls, rationing, and voluntary saving along with the following:
Regulation and Legislation
Governments can implement regulations and legislation that encourage or require businesses and individuals to redirect their resources towards more efficient and sustainable uses.
For example, environmental regulations can incentivise companies to invest in cleaner technologies, while labour laws can promote better working conditions and fairer wage distribution.
Direct Qualitative and Quantitative Credit Regulation
of Financial Institutions
Governments can impose qualitative and quantitative credit regulations on financial institutions to manage the flow of credit and ensure stability in the financial sector.
These regulations can include controlling the amount of lending, setting credit standards, or targeting specific sectors to promote responsible lending practices and prevent excessive risk-taking.
Leverage and Liquidity Regulations of
Non-Financial Corporations
Governments can also implement leverage and liquidity regulations for non-financial corporations to promote financial stability and prevent excessive risk-taking.
These regulations can include setting limits on debt-to-equity ratios, requiring companies to hold a minimum amount of liquid assets, or imposing restrictions on short-term financing. By ensuring that corporations maintain a healthy balance sheet, these regulations can contribute to the overall stability of the economy and help optimise resource allocation.
Incorporating these tools into the MMT framework highlights its adaptability and context-specific approach to economic management. By considering a wide range of policy instruments, including taxation, regulation, and various controls, MMT demonstrates its commitment to addressing inflation and resource allocation challenges in a comprehensive manner.
This approach counters the notion that MMT is a motte and bailey political strategy and emphasises its focus on achieving a more equitable and sustainable economy through multiple channels.
Addressing the Argument: Taxing the Rich
to Fund Public Services
To further illustrate the MMT perspective on taxing the rich, let's consider this quote from Fadhel Kaboub in an article for the Rosa Luxemburg Stiftung:
"MMT economists have been very clear about decoupling spending and taxation at the federal level. We should spend on national priorities such as healthcare, education, green infrastructure, affordable housing, broadband, transportation, research and development of green technology, and more efficient renewable energy production and storage. We should tax polluters, financial speculators, abusive price setters, and ultra-rich oligarchs, not because the Federal government (sovereign issuer of the U.S. dollar) needs their money or their permission to launch a Green New Deal, but because we want to decarbonise the system, stabilise the economy, protect democracy from oligarchy, and establish a more sustainable, equitable, and just system."
The MMT Perspective
The MMT perspective on taxing the rich highlights the broader implications of taxation, moving away from the misconception that taxes are meant to fund public services.
Instead, taxing high-income individuals serves multiple purposes, such as managing inflation, redistributing resources, and protecting democracy from the influence of concentrated wealth.
These goals are crucial for creating a more equitable and stable economy, even though they are not directly tied to funding public initiatives.
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