A few days ago a commentator asked on the blog:
I am not an economist so hopefully my ignorance can be forgiven. I find myself confused by your oft repeated view that governments spend before taxing, and tax merely removes inflationary pressures from the economy, and your criticism of secrecy regimes for preventing governments from collecting tax due. If governments don't need the tax in order to spend, and companies and individuals are removing the tax which should be due from the economy, doesn't this have the same anti-inflationary effect as if they were paying tax? Am I just being to simple or is there a bit in the argument I'm missing?
Clearly there is a moral argument (with which I completely agree) against secrecy regimes and the inappropriateness of comparing government finances with a private households also makes complete sense, but there seems, from my imperfect understanding, to be a paradox here?
It's a good question and one that has been worth waiting to answer. I apologise to the commentator in question for the time it has taken me to do so.
If we look at MMT What it says is that there is no reason for a government to raise tax to pay for its spending. In fact, that spending must come before tax can be paid, because if that spending had not taken place the currency in which the tax was due would not have been created to let that tax payment happen. Tax, then, in MMT has two obvious and immediate functions out of the six reasons to tax which I have identified. These are:
- Reclaiming the money the government has spent into the economy. As already noted, it may appear that tax revenue is being used to pay for government services supplied but that is not true: government spending always comes out of funds the government borrows from its central bank. Tax, in that case, reclaims the money spent to prevent excessive inflation. The amount reclaimed is that which is considered sufficient to leave the desired rate of inflation in the economy.
- Ratifying the value of money. Because a government requires that tax be paid using the currency that it creates (simply because that's the currency it bills in) that currency has for all practical purposes to be used in the economy for which it is responsible, assuming that tax forms a significant part of people's total liabilities. The payment of tax does, therefore, give a currency its value in exchange and as a result passes control of an economy to the government that charges that tax. This makes tax an absolutely fundamental component in macroeconomic policy.
But these are not the only reasons to tax. One of my criticisms of MMT, and over time I have had them, just as Steve Keen has had, is that the other four reasons to tax are, too often, ignored by those who promote MMT. Those other four reasons are:
- Reorganising the economy. Fiscal and monetary policy are the two fundamental tools available to a government to manage its economy, assuming it has its own currency. As the explanation already offered has shown, money creation and taxation are the flip side of each other. Tax is then an integral part of macroeconomic policy and so of reorganising the economy to meet social and economic goals.
- Redistributing income and wealth within the economy. Experience has shown that market economies are very good at concentrating income and wealth in the hands of a few people in a society. At the same time economics makes clear that this is harmful to the prosperity of a society as a whole because it seriously reduces overall levels of demand in the economy. Redistribution of income and wealth is then an essential function that any Government must undertake and appropriately designed taxes are a proven and effective method for delivering this policy.
- Repricing goods and services. Markets cannot always price the externalities of the goods and services they supply or reflect social priorities. Tax permits repricing of goods and services to reflect these facts.
- Raising representation in a democracy. The fact is that if people know they pay tax they vote. This only seems to be true, however, for income taxes. That's why it is important that people are in that tax system. When they are they want a say on how the system works and democracy is enhanced as a result.
The critical point to make is that once it is apparent that tax does not fund government revenue then tax takes on another wholly appropriate, but different role in the economy. That role is to be the most powerful instrument available to government for the delivery of its economic, social, environmental, industrial and other policies. This is the idea that lies behind my book 'The Joy of Tax' where I argue that the joy in question is the fact that taxes provide the single most powerful instrument available to government to deliver these strategies.
These points have been ignored by many in MMT: it is one reason why Neil Wilson alienated me from it for a long time because he appeared quite indifferent to tax evasion so long as sufficient tax was raised. I may well have the same issue with Bill Mitchell, but I think Bill has issues with almost everyone. In my opinion that indifference is quite wrong.
MMTis in itself a description of what actually happens in the economy. Its strength is precisely that. Unlike neoclassical economics, which has no adequate theory of money and tax or the function of deficits, debt and even inflation control (or it would not rely on interest rates) MMT has answers based on fact. This makes it very powerful. But it would be absurd to claim that this means it is morally superior. Being right is a technical claim, not an ethical one. Ethics have to be added to MMT to taste. But, as I note below this is unavoidable in the case of MMT. Whereas neoclassical economics is designed to suggest the government has no role in an economy, MMT says (not by design, but because it is a fact) that government choice is implicit in macroeconomic management and so too then is Tax and related policy issues. In that case it's my argument that MMT supporters cannot be indifferent as to how tax is collected in the economy.
Let's take one core MMT argument and my first reason for tax as a starting point, which is the fact that tax is the main mechanism available within an economy for the control of inflation. When doing so let's recall that the wealthiest gain most from controlling inflation. It is their wealth that is preserved in that process, and the creditors' obligation that is upheld by controlling inflation, at cost to them. And it is also the wealthy person's businesses that benefits from the stability low inflation provides. It is, then, also in very many cases the wealthy who benefit most from the good ordering of a market economy that a government backed currency based on the price stability that sound taxation provides.
My point, then, is that the wealthy are the greatest beneficiaries of of the most important use which to which tax is put i.e. the controlling of inflation. Logically then you would think that they would be the greatest exponent of tax compliance, which is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
What we actually know is that they do the exact opposite. Gabriel Zucman has suggested the wealthiest evade the most tax. I am not quite as persuaded of this argument as Gabriel is, but I think it has merit. The consequence is obvious. Inequality is increased. Demand is reduced. The prospect of full employment is diminished. The need to run government deficits grows. The consequent demand for tax revenues to potentially control inflation will, in the long term at least, increase, and so the cycle continues. Tax evasion in this context is, then, not a micro economic issue of concern only when appraising the efficiency of the tax authority and when considering the culpability of a particular taxpayer; this is an issue of macroeconomic concern.
Tax evasion does not simply mean that the government has greater difficulty in reclaiming these expenditure that it has injected into the economy, and so has to make greater demand of those with less capacity to pay; the entire structure of the economy is distorted as a consequence and we cannot be indifferent about. If anyone thinks MMT is then only about the quantum and not the profile or quality of the tax collected then, I think, they have seriously misunderstood the fact that whilst MMT might be descriptive, it is within the process it describes an economic theory that demands macroeconomic management in a way that is the precise opposite of the neoclassical economic prescription which suggests that governments must leave everything well alone.
Matters do, in fact, go further than that. Presuming the we are looking at something beyond the quantum of tax collected (T in the formula for national income accounting I describe here) and think that tax does have a social purpose then the failure to collect tax, whether as a result of poor tax design; a failure to resource tax collection, or because of tax evasion and avoidance, is not just a technical economic issue but is instead about the delivery of government policy across the whole spectrum of issues. Once more, this suggests that the concern is not a micro one, but is instead at the heart of macro policy, including macroeconomic policy. I will be publishing more theory on this point soon. For now let me suggest that this puts tax, and its payment or non-payment, at the core of the social contract, democratic process and the rule of law. Or, to not be too unsubtle, it makes it central to the right ordering of society that is, dare I say it again, the central underpinning of the system that preserves the property rights of the wealthy in all societies.
So what has this to do with tax havens and so potentially the broader issue of tax abuse? And is the claim that tax havens remove funds from the economy in the same way that tax does, and thereby deliver a similar inflation control mechanism, of any merit? I have to make it clear that the resounding answer is 'no'. Let me offer three reasons.
The first is that tax havens do not in any way take funds out of the economy. The suggestion that they might do so assumes that money does, in some literal physical sense, have a tangible existence, and that when money goes to a tax haven it is then removed from use. This is not true. Money may be deposited in tax havens but that does not mean that the money is then removed from use: it remains wholly available to those who sent it to an account in such a place or, of course, they would not have made use of such places. So the money is not taken out of the system.
The second reason is that because the primary reason for sending the funds to a tax haven would be to circumvent an obligation to pay tax then we can be fairly sure that tax is not paid as a consequence. But, if the total sum that has to be collected to ensure that inflation is controlled remains constant despite these funds moving to a tax haven then the wrong people will end up paying tax as a consequence with the results outlined above, and a consequent increase in inequality. That is socially harmful and subversive of the intent of any government likely to introduce MMT.
Third, because tax havens exist to undermine the authority of a government outside their own domain (and I stress, they have no other purpose) then is activity means that the delivery of democratically chosen policies is harder to fulfil, and the action is, then, inconsistent with the rule of law, the social contract, and democracy itself, all of which are implicit in the reasons for paying tax in an MMT system in my opinion.
In other words, within MMT we cannot be indifferent to tax havens: they are in fact antithetical to MMT in just about every way that can be thought of.
But I am open to other suggestions.
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“…..But, if the total sum that has to be collected to ensure that inflation is controlled remains constant despite these funds moving to a tax haven then the wrong people will end up paying tax as a consequence ….”
Which perfectly explains the implications of George Osborne’s policy response to David Cameron’s assertion that we are ‘all in it together’.
We saw a perfect example of how the Bank bailout and QE injected cash into the system when it was needed (absolutely in line with logic of MMT). That the banking system survives warts and all is entirely owing to this injection of liquidity. That we will need to do it again is entirely because the finance sector remains substantially unreformed.
Meanwhile because this cash injection has not been sufficiently clawed back through taxation it is completely distorting the asset markets which have suffered rampant inflation.
The real economy is critically starved of liquidity and dying on its feet.
I refuse to believe that the architects and proponents of this skewed travesty of ‘classical’ economic madness do not understand full well what they are doing. I can only conclude that they are morally bankrupt.
All that asset appreciation (at least of the assets which really matter like houses) could have been avoided if we’d had LVT. It’s got to come. I’m really excited by the possibility of policies using MMT and LVT.
I’ve wondered whether the biggest danger of having a build up of bonds etc in tax havens is because of the political consequences of that. I agree with the original commentator’s point that money hoarded in tax havens is not money pushing up CPI type inflation (it may feed through to inflation of prime London housing etc though). But I worry that it creates a powerful constituency that is going to demand government policies that ensure that avoiding any risk of inflation is always the top priority and everything else is sacrificed to that end. If there are people with hundreds of billions of pounds worth of debt securities, then they will clamor to stop full employment and investment in education, infrastructure etc etc that are needed for the general well being and prosperity of everyone simply because they will fear that the real value of their debt securities may become imperiled by inflation that might result. The interfluidity blog had something about this a few years back too called “Depression is a Choice”.
QE has killed this argument
If bonds are a pain, just buy them back.
We can
And now bondholders know that they have by and large lost their power
I wasn’t thinking of “bond-vigilantes” holding the government to ransom; I realise that they can’t. Rather I was meaning that political lobyists, political donors, think-tank funders and the like would push for deflationary policies if they held lots of bonds (or cash). QE can not sove that issue. Basically I don’t think austerity was just muddled thinking; I think it was a self interested policy motivated by the urge to avoid inflation at all costs so as to preserve the real value of debt securities (including cash). Taxing away those stocks of financial assets is the only cure.
I confess I can’t see how that could work
If anyone else can might they help, but I simply think there is no effective leverage
Remember that money in a tax haven is worthless – there is nothing for it to do there
I think that Stone has a good point in a way.
In this final phase of neoliberalism, leveraged investors (and their lenders) have become highly dependent on ultra-low interest rates and sorely exposed to the slightest risk of an intererst rate rise. By necessary extension this means that that they are also dependent on low (sub-‘target’) inflation.
For one thing central banks might raise rates if the CPI is over 2%, and what’s more, without low inflation, very low interest rates become negative real interest rates.
In a more robust economy one is more likely to expect inflation and interest rates that are at or above 2%. But as it is our highly exposed investors and lenders may not be viable in that scenario. They require (sub-target) stagnation. So, as Stone puts it: “Depression is a Choice”.
Thank you for explaining this with so much clarity. Bill Mitchell’s Book cowritten with Tom Frazier, Reclaiming the State at pages 190/1 seems to broadly agree with what you say about the purpose of taxation. I have heard others, may be Mosler, say there is a case for the abolition of corporation tax. This would affect the ability of tax revenue to effectively stability prices, unless the loss of that revenue was shared amongst others. This in turn would lead to feelings of unjust treatment by people who will be asked to make good the shortfall, or live with higher prices. Your framework explanation helps to form a logical response to tax havens. Thank you.
Thanks
re CT see this http://www.taxresearch.org.uk/Blog/2014/08/08/we-need-a-corporation-tax/
And much on the Tax Justice Network site
The argument for its abolition is wrong headed
I do not think Zucman is quite right, but not – I think – quite for the same reason as you. The cultural power of a currency is related to the fact that tax can only be paid in that currency. This is not precisely the same as the cultural power of taxation. The cultural power of taxation is compulsion. The taxes that are avoided or evaded are first those that are easiest to avoid or evade (whether a ‘high net worth’ individual, or a sole trader, or a rogue trader); tests for this depend on the penalties, monetary or social or reputational, that follow discovery, or the nature of regulation or policing, and even of the drafting of the legislation.
The most successful taxes are those that are impossible or very, very difficult to avoid or evade. This is not principally a function of the morality of the tax payer. The politically iconic government tax is ‘income tax’, and it only works because of PAYE, which captures vast swathes of the population in an iron grip. NI, VAT and so on are similarly difficult to avoid or evade. It has little to do with morality.
Everything else, outside the “compulsory” or practically unavoidable taxes (typically taken at source – and that is the key), is a Hobbesian free-for-all, dictated by the wealth of the taxpayer and the tax advice he can buy (perhaps helped by firendly or naive legislation), or by the inadequacy of resources within the tax authorities, either to match the wealthy’s expertise, or the ‘boots on the ground’ throughtout every part of the country to pursue transgressors (wherever in society they occur). In most cases , the tax authority mantra (their test of doing anything) will be – is the game worth the candle?
Usually they will deem it isn’t.
The deem wrong then because they are applying the wrong test
Their test is ‘does it raise revenue’ when their test should be ‘does it deliver social purpose’
I suspect they will be motivated by the “easiest compromise” as much as the highest revenue. Government’s are fickle. They bluster about closing loopholes but typically do nothing to spook supporters. There are also media pressures, and always resource pressures. There is nothing good for them; save in short periods of hysteria following a scandal. Then it all dies down, and nobody wants to know, least of all Government.
I also suspect the British regulatory culture has become inured to defeat and despondency; after all the British record in regulatory success (beyond the rhetoric of – surprise surprise – governments and media – is absolutely abysmal). Usually in Britain we are eventually obliged to put our Regulatory institutions out of their misery by despatching them; Department of Agriculture and Fisheries, FSA; need I go on ………
That’s a pretty pessimistic perspective
I never know why, but I am an optimist at heart, and I think we can do much better than that
I meant to say, I thought that was a very interesting post.
Thanks
Some take a while to write
That one did
Some take a while to write
That one did
Feet of clay.
I thought you just casually, tossed them off in an idle moment between attending to your students and the household chores. 🙂
I thought it was good/useful/comprehensive/concise/(or something)-enough to bookmark so I can find it again.
You have rumbled me
Most do not take long to write
wonder if someone who better understands MMT could help me clear something else up.
I’ve ofen heard it said that a fiscal deficit is the only way in which money can be injected into an economy continuously. This presumably is why we ofen see graphs where private sector savings are mirrored by public sector debt. But what about all the money that is create by banks? I understand that leaving money creation to the private sector will create unhealthy levels of private sector debt, but i don’t understand why the money created by banks does not add to private sector savings?
Does this help?
http://www.progressivepulse.org/economics/the-duopoly-of-money-creation
the diagrams suggest that money created by banks does not affect private sector savings as it is returned to the banks in the form of repayments + interest. but as repayments + interest are always greater than the initial loan (by the amount of interest repaid), does this not suggest that all goverenment deficits will evenually be swallowed up by the financial sector in the form of interest on loans? also does not account for debt that is never repaid, which should surely add to private sector savings?
sorry if my understanding of the concepts are poor. if theirs a book you could recommend that makes it all clear i’d be happy to go away and read that rather than take up too much of peoples time.
Can I suggest you read the rest 0f what Charles wrote on this issue?
I admit I have not got time to answer the questions
Should money creation be left to private banks? Surely the central bank should collect the seignorage, if not be in total control?
Carol,
“Should money creation be left to private banks? Surely the central bank should collect the seigniorage, if not be in total control?”
We touched on this briefly last week. I hadn’t known it had a name.
Effectively as I see it the private banks are renting money which is not theirs, and collecting the rent (in the form of interest) which should accrue to the government as owner/issuer of the money (if indeed it legitimately and justifiably accrues to anyone).
I don’t quite understand why this is not classed as criminal activity.
In order I think the answers to your questions should be : 1)No. and 2)Yes.
As others have said, Richard, thanks for this excellent clarification. I’m an avid reader of your tweets and blogs. I can’t claim I’ve grasped all your extensive writings on the subject but I certainly have a much greater understanding of the role of tax in the good society (I have your book “The Joy of Tax”). I can’t express how much I value your erudition.
Thanks
I write to understand
Sometimes it works!
A very informative piece.
Surely the tax haven drain causes a significant misallocation of resources as it renders Britain less able to compete in the world by diverting private resources that would otherwise be available for the productive economy. Indeed does tax haven money ever return ‘home’ ever to be involved in anything other than rent extraction?
So, by making home industry weaker and less able to compete, surely we could suggest that tax havens encourage imports?
Which links in a way to Steve Keen’s view that MMT doesn’t pay sufficient attention to the balance of payments.
I think it is really important to realise that there are no funds in tax havens. Tax havens only exist to undertake bookkeeping exercises: you cannot invest there because there is no money to be made in such a place because there is no one there to generate a return on the sum invested. So, by definition, all money in tax havens is, effectively, ’round tripping’ from one location and most likely back to the same place from which it departed not long ago.
In that case does the money’s departure really have an impact upon the economy in question? The answer is yes the reasons I note in the post. Tax is not paid by the right people. Tax is paid by the wrong people. Inequality is increased. This has secondary consequences on demand and so on investment, and so on investment returns as well as productivity, which flows into wage rates. All these things matter.
Do they much matter to the balance of trade? I am not sure.
Are they however deeply corrosive to the whole democratic political process? Of that I do not have a doubt
Many thanks, Richard, for the explanation
“I think it is really important to realise that there are no funds in tax havens.”
I liken this problem of the actual existence of this stuff we call money to the difficulty of discussing evolution and natural selection.
Even people who understand what they are talking about, almost inevitably slip into the trap of attributing some degree of deliberation to evolutionary ‘progress’.
We have an exactly similar difficulty with the discussion of fiat money which only exists as debt.
Does it actually matter whether money is in a heap in a vault in a tax haven or not if that is the effect of the ledger saying it is ?
Money is like electrons. If nuclear physicists are to be believed it can be simultaneously sitting chastely at home in a tax haven whilst simultaneously cutting up rough with the boys on Wall Street.
🙂
Excellent piece. I agree, tax is not needed for spending, it is needed to stabilise the economy (and by implication the wider political economy).
I would say that your points 2 and 4, inequality and strong democracy are related.
The distribution of wealth is a key consideration in the overall efficiency of the economy and the stability of democracy.
Tax havens are destabilising because they provide only the already rich with a means to get richer and lobby for rules changes that further their cause, even if that means undermining democracy in the process.
Although they can play this game for decades, history shows it always ends badly for everyone.
Thanks Charles
Richard I like you and I like your blog. I also like Bill Mitchell and I like his blog.
I’ll be honest though: you’re both occasionally prickly characters and you are both quick to tell people where to go 😉
Nothing wrong with that when aimed at real establishment adversaries – it’s well needed when confronting an entrenched mainstream economics and it is difficult to avoid when you’re the outsiders. However, it’s really counterproductive when it occurs between heterodox economists.
I believe you, Bill Mitchell, Steve Keen and other outsiders are under a lot of pressure to:
1) constantly defend your heterodox positions,
2) constantly defend NOT accepting mainstream positions.
The mainstream, as exemplified by Simon Wren-Lewis, use a combined approach to undermine you:
– trolls constantly needle you all BTL and on twitter while…
– the mainstream generally ignores you but…
– …when the mainstream does engage they refuse to tackle the substance of your arguments instead opting to debate straw-men, usually by attacking the comments made by non-professional commentators supposedly representative of heterodox opinion (but who really knows who these online commentators actually are?).
Claims that “aggressive and unreasonable language” has been used seem to pass for cogent arguments against the heterodox economists’ main positions.
This is just standard manipulative and controlling behaviour by a hegemonic power. The violence caused by the hegemon is all around us everyday but is approved of as the normal way of things. However, the upset caused by a caustic remark or rude commentator is deemed sufficient reason to ignore the whole heterodox position.
It’s obviously complete bullshit.
I think yourself and the other outsiders would do well to take a leaf out of the insiders’ book and find ways to put your differences aside so you can present a united front. Then, together, you’d be able to cover more intellectual ground. That would prevent the more sketchy areas of heterodox theory being so easily attacked by the mainstream.
Ultimately there is only one reality so it shouldn’t be that hard for heterodox economists to get together and work it out but you can’t all do it separately and alone while sniping at each other and arguing with the mainstream.
I’m not aware there is much between me and Steve
Bill does not to dial it back
I could sometimes be more temperate, I admit
I am trying to work on it
“Bill does not do dial it back”
You can say that again 😉
I’m just a layman and I’ve learned absolutely tons from you, Steve Keen, Bill Mitchell, Warren Mosler, Stephanie Kelton and many others.
However, as a layman I probably too easily see things as black-and-white, too us-and-them and consequently expect greater agreement and coordination between those “on the same team” than is realistic. As an activist I am maybe too desperate for clear concise alternatives to communicate to my party and the public. As a pessimist I’m probably too impatient for progress to occur.
I really believe you and the others are doing a great job. FWIW all my simplistic feedback/criticism is well intentioned and meant to be constructive.
And it is appreciated….
I love that you don’t put up with BS, Richard. Keep it up, but don’t let it damage your health.
I suspect I thrive on it!
Hope you’re well Carol
Another naive question, and apologies if this question has already been covered elsewhere in this blog:
There are those tax payers who have no objection to (and indeed take pride in) paying a fair and right amount of tax on the basis it goes towards providing public goods such as health care, education, pubic safety, foreign aid, public infrastructure without which the market could not function, etc.
If central bank money creation – not tax – is the basis for paying for these public goods, have these tax payers been mistaken about the “good” they thought came from the tax they paid? Should they now abandon such satisfaction and instead look for comfort from the other 6 justifications you suggest for paying tax?
In effect, yes
But also, let’s be clear, they can take comfort from the fact that the spending on those things could not take place unless they were williing to p0ay their taxes
It’s just that the link is indirect
Antony,
This is something I’ve thought about myself.
When I first realised my taxes weren’t paying for anything I was still in a state of mind where I was transitioning from a layperson’s understanding of mainstream new-Keynsian/neoclassical economics and I felt a bit like “what? They just destroy my money? God damn it! What’s the point of taking my money off me to stop me spending when I don’t have enough to spend as it is??? It’s absurd.”
It’s quite a big stumbling block in that intellectual transition. Taxes funding nothing and the disturbing thought that money isn’t a real thing and is created out of thin air probably is too much for many people to overcome and thus the whole idea gets rejected before it’s even understood.
For me it only really gained traction in my mind because I’m so desperate for something big that can overcome the problems I perceive as threatening our whole civilisation: excessive inequality, corruption, inefficiency and ecosystems collapse.
I guess I only grasped these new ideas because I was primed to accept them via:
1) political biases in favour of collective democratic action,
2) awareness of complex and dynamic systems from my biology training,
3) the time and inclination to seek out and explore new ideas.
Is it as likely that someone with training in the arts or a more mechanistic science or technical field will as easily accept these ideas?
Is it as likely someone with a more individualist/free-market political outlook will be as accepting of the need for greater collective action and government “interference” in the economy?
Will people with less time and curiosity ever find and absorb these ideas?
I’ve got to give a presentation on Labour economic policy Vs heterodox progressive alternatives to my local party in a week’s time so this is a personally as well as a globally pressing concern!
My thinking is that the best approach is a simple narrative starting with asking the question: “what is money and where does it come from?”, working through the duopoly of money creation and the component parts of the two money circuits and finally moving onto the policy implications of an accurate understanding of the existing system.
I guess to make the ideas acceptable to newbies, especially those who are more politically centrist, we have to tell the whole story in one go so they can see how the more counterintuitive elements fit into a logical system in which most of their old understanding of money actually still applies with only moderate modifications. Conversely we need to avoid shocking newbies into rejecting these ideas by exposing them only to the most counterintuitive elements out of their broader systemic context.
All a lot easier said than done…
But a highly liberating thought in the current austerity narrative. Austerity is wrong because we don’t tax and spend, we spend and tax. If you start with that – it gains people’s attention. And even the BoE says it’s that way round:
http://www.taxresearch.org.uk/Blog/2017/09/19/the-bank-of-england-admits-monetary-policy-does-not-work/
Also if you call the government a money factory (everyone knows it prints money) and that’s part of the reason for its existence http://www.progressivepulse.org/economics/welcome-to-the-money-factory
Peter,
Thanks for these links. I’d read Richard’s blog at the time but early on so missed most of the discussion. Your piece is very useful too.
It is a considerable bugbear of mine that I cannot lay my hands on absolutely definitive proof that our money system operates (or can operate if voluntary restrictions are discarded) in the way MMTers and associated economists say it does.
Like you and many others on here I believe the truth is very close to how MMT has it. Indeed, like you in the broader sense I believe money is whatever we choose it to be (within the constraints of human nature, basic logic and the laws of physics!).
However, as I get closer to having to “officially” draw my labour party comrades’ attention to these heterodox ideas I feel more and more uncomfortable with the fact that I have had to make a somewhat of a leap of faith to reach my current understanding.
Maybe it’s my scientific training that leaves me casting about for more evidence and greater certainty? Whatever it is I’ve decided I’m only comfortable doing this presentation in an official setting if I am totally open about the foundation of my belief that what I say is true. I’m going to assemble the best evidence I can but I’m also going to have to explain the logic behind my leap of faith too!
Adam,
I note your references to “hard science”; physics, and your demand for proof. I should say that as a sceptic, if not quite a pyrrhonist I do not subscribe to your expectation of finding “absolute definitive proof”; because philosophically I doubt if it is available, even in physics. I would propose that physics offers a uniquely powerful method of producing reliable predictions, but not quite ‘absolute proof’; everything remains contingent. Nevertheless I understand your desire for rigorous proof, and here I would suggest that the weakness of economics is that it attempts to mirror mathematical physics (typically a methodological paradigm for all science), in doing theoretical economics, but does not have a strong tradition in experimental economics; theories are tested deductively, but rarely if at all by experiment (which is difficult, the data often too complex or impenetrable, and there is no robust methodological tradition), or even by a more constrained technique of close observation and measurement (or even to establish uniform, rigorous, consistent and universal standards of measurement). Thus there appears to be nothing to mirror sufficently closely the key role of experimental physics in economics (I think Werner has explored the issues very well, and described what may be done). At the same time there is not quite the same conceptual clarity and pursuit of simplicity and purity in economics, that perhaps makes it a little slippery for someone who approaches economics from the perspective of a non-social scientist (although I think psychology has taken experiment much further than economics)?
Adam – thank you for your reply. I certainly don’t envy your task and I wish you luck.
It’s a shame though.
In today’s sound-bite driven world, where concentration spans are short for even the simplest of things, abandoning the pithy and compassionate sounding “tax pays for good things” argument seems like great loss – especially given that it is hard enough to convince many to pay/agree with the benefits of tax in the first place…
As someone who took pride in that simple argument myself, it is also with reluctance that I neither have the comfort of it, nor have it at my disposal in discussing with others who protest paying tax.
I hope a suitable replacement for lay people like me is found soon.
My understanding of Neil Wilson’s argument about tax havens is that the person depositing the money there is voluntarily depriving themselves of its use. Whether money is in a bank account in Britain or the Caymans, they are not spending it which results in the same effect as if the money was taxed back to the Treasury. Obviously in Britain you can spend it at your leisure if you choose, but if you’ve stashed it abroad you cannot spend it there because the local currency is not Sterling. You either have to spend the money in the currency zone it belongs to, or swap it for the local currency of the tax haven. If you do the latter, the person who then receives your Sterling then has the same choice to make. Eventually the Sterling will have to make its way back to Britain because there is nowhere else for it to go.
I think his point is basically that because inflation occurs by having too much money/demand flowing round the economy chasing after too little supply, ‘unused’ money isn’t/won’t be contributing to that. From my interactions with him I don’t believe he would disagree with your argument about the moral implications of tax havens though.
I could be wrong about that being his conclusion, hence why I don’t wish to attribute it to him, but it seems to make sense to me at least.
But you can deposit in whatever currency you like in a tax haven
And especially if you are evading access the funds at will
The argument makes no sense at any level
It also assumes the money has a physical quality it, of course , does not possess.
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