John Christensen of the Tax Justice Network has just drawn my attention to this extraordinary article:
The article is extraordinary for four reasons. The first is when it was written: 1946. It was way out of its time.
The second is who wrote it: Beardsley Ruml was chair of the New York Fed.
Third, it was extraordinary for what it said on the nature of taxation (see below).
And last, although I will not deal with it, it's extraordinary for arguing corporate taxation was not needed for reasons now wholly outmoded.
So what does the article say? The extracts are a series of screenshots: my apologies if they are slightly disjointed. It starts with this fair question:
The answer is in this section:
The italics were in the original because the editor thought those paragraphs so significant.
Buml continued:
The consequence was:
I have not quite put the four uses of tax like that, and have six reasons for tax in the forthcoming Joy of Tax, but the similarities are uncanny. And what this really says are four things.
First, as Ruml says, taxes are about shaping the society we want to live in, and are not to pay for it.
Second, in that case we are not beholden to anyone to pay for that society: it is paid for by the efforts of all who live in it and not the tax contributions of a few who happen to be very well paid.
Third, in that case tax design follows from social priorities and is not constrained by economic threats of those who do not want to pay.
Fourth this then leads to other ideas such as the fact that closing the tax gap is, as I have always argued, about creating equality and a level playing field for business.
And, fifthly, that tales of the burden of the deficit are just absurd: that deficit is just money, and it is money that we need that is the beneficial residual impact of spending that has been incurred for good reason. Whilst, of course, means that the whole balanced balance argument is just utter nonsense.
And I would remind you that it was a banker who said this. In 1946. It is time we took note.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Fantastic that your attention is being drawn toward this type of document Richard.
Neil Wilson has recently wrote about it as has Bill Mitchell (again).
http://www.3spoken.co.uk/2015/07/taxes-for-revenue-are-obsolete-precis.html
http://bilbo.economicoutlook.net/blog/?p=31604
Should be an interesting discussion on the 27th – pity I can’t make it…
Much like Michal Kalecki’s seminal piece: “Political Aspects of Full Employment”
http://mrzine.monthlyreview.org/2010/kalecki220510.html
Still as relevant now as it was in 1943 when it was first published.
“profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.”
I recently came up with an interesting/useful analogy for control of money supply vs requirement to tax: If an economy is regarded as a canal system [for movement of boatloads of goods and services] it is clearly dependent upon an adequate level of water. If the canal system expands clearly more water is required. This can either be purchased extraneously [c/w bonds] and paid for by contributions [taxes] or remain as a debt OR free water which falls as rain in the nearby hills can be collected into reservoirs to be released into the system f.o.c.[Debt-free Sovereign money]. If too much water is allowed into the system by private contractors [Banks] pursuading entrepreneurs or private individuals to extend the system and that they need more water [business loans and credit cards] to make it viable but the system doesn’t actually expand to cope with the extra water then we have an almighty mess through flooding. The sluice controller [BOE or State] has to step in and remove some of it either by pumping into storage [taxation] or by extending the system itself [public capital projects]. Hope this helps!!
I like it
“storage [taxation]”
Taxation destroys money, so there is no storage. To paraphrase Warren Mosler, government doesn’t ever “have” or “not have” any £s
“[Debt-free Sovereign money]”
Sorry, but ‘debt-free’ money is as meaningful as a ‘food-free’ lunch
You may also be interested in these fluid-based MMT analogy/explanation documents:
http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html
http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-2.html
Thanks
A good analogy. Could I draw your attention to the “Moniac”? A gadget that does actually model the economy as a large hydraulic machine. Chap called William Phillips devised it in 1949. I’ve seen the one in the London Science Museum.
https://en.wikipedia.org/wiki/MONIAC_Computer
I’m not sure Ruml’s reasons for abolishing corporate (profits) tax are now “wholly outmoded”.
He assumed:
a) largely static shareholdings
b) almost closed state
c) double tax which is removed by imputation
d) and got incidence behaviourally wrong
I think that’s a mighty lot of change
These are valid points (given the historical context), but, since the thrust of the paper is that revenue generating is not the primary objective, I view the entire corporate tax avoidance (and evasion) industry as the imposition of a huge unncecessary social cost. I would prefer to tax ‘bads’ such as pollution and GHG emissions, to apply competition law and economic regulation to reduce the abuse of market power and to resource the tax collection system to ensure the beneficial owners of companies pay a fair share of tax – as determined by the legislature. But that’s probably just me.
On a) & b), surely in an era mobile capital and an open state/free market this would mean that the problems associated with corporation tax are even worse than in 1946?
On c), the UK only – at best – has a partial imputation system following recent budget changes, including the one this summer.
On d) from a behavioural perspective, is your position that the directors of companies simply accept that corporation tax falls wholly on their shareholders and they do nothing to pass on the cost to others (such as the employees or customers)? If so, in a de-unionised and lightly regulated world, that would seem to be an uncharacteristically public spirited thing for them to do.
Disagree on a and b
Agree on c
You get part way there on d
You’ve certainly whetted my appetite for your forthcoming book. Can’t wait!
“we are not beholden to anyone to pay for that society: it is paid for by the efforts of all who live in it”
And there’s the rub if money is the abstract representation of “effort” to transform non-human resources into the goods and services we all need it must be cancelled out as soon as the effort is completed but human beings seek physical and emotional security and therefore want to store “effort” for use in later times. Such “hoarding” of “effort” as Keynes recognised depletes a societies ability to utilise “effort in the here and now. We collectively fail to recognise this and generate unnecessary conflict amongst ourselves when we really need to regulate “hoarding.” Taxation is one of those regulatory devices that allows us to create new “effort” to inject into and thereby energise our societies in a stable low inflationary manner.
Is tax necessary?
Well in theory I suppose monetary operations could neutralise excess reserves to control the target interest rate but clearly inequality would grow massively without redistribution. Inequality is surely the root of many societal problems and purchasing power will be used to try and increase the gap.
Secondly the power to tax confirms the authority of the State, much to neo-liberals’ annoyance, and also is necessary to cement acceptance of the currency. Why use it if some people or corporations don’t need to acquire it? And the currency is key to the State’s power to advance purblic purpose. Currency is legal tender as decided by the State, used to settle contracts and as final settlement for private banks. It’s tax that drives the currency.
One thing ithat needs to happen however is for the notion of taxation to be totally separated from the need for the government to fill the output gap between what the private sector throws up and full employment of real resources. A sensible combined monetary and fiscal approach to government treasury operations shouldn’t be beyond the wit of man to implement.
Of course we will use tax
But it is not to raise revenue but reclaim money from the economy
Sp how it is reclaimed is always decided for social purpose
That is the point
Since Functional Finance is where this all ends up eventually, it’s probably worth pointing people to Abba Lerner’s paper on the subject.
http://k.web.umkc.edu/keltons/Papers/501/functional%20finance.pdf
I will re-read
Hi,
Over on Mike Norman economics they’ve suggested you have a gander at this (another classic).
Apologies if it’s been sent already.
http://k.web.umkc.edu/keltons/Papers/501/functional%20finance.pdf
A duplicate, but I will leave it in
Sorry, missed Neil’s at the bottom there!
Seeing as you are sharing a stage with Bill Mitchell on Thursday 27 August, I’m sure you will want to read his superb (as usual) blog about PQE published online today.
http://bilbo.economicoutlook.net/blog/?p=31626
Keep up the good work.
Glad you were finally made aware of this document @Richard Murphy. I have Neil Wilson to thank for bringing it to attention a year or so ago, via his blog.
Now the difficult task will be to get this rather revolutionary message out and into the wild.
Not an easy one, considering its counter-intuitive nature, and the prevailing received opinion, which maintains a death-like grip on the national psyche.
Having said that, I would imagine their may well be sympathisers not only on the left, but also on the low-tax, libertarian right – where I presume Beardsley Ruml was coming from, so perhaps not entirely the uphill battle it would appear.
Looking forward to the 27th.
HAHA! I was wondering when you’d put that up Richard. Nice one! I hope you use your position to influence Labour into accepting this very basic fact. It basically opens up a debate on what kind of society(local and global) do we want if we dont have to rely on the charity of the rich.
Also, this raises another far more serious question. If we have known something so darn basic since 19-flipping-46, why has it still not been understood amongst the general public and the political profession? Has there been a deliberate attempt to stymie the progress of society as a whole in the interests of the few? Or are there other dynamics at work here? I think this is THE MOST SERIOUS QUESTION that needs to be answered considering that we are moving forward into the future where we as a whole world face massive challenges such as climate change, huge populations to provide a dignified life to, resource constraints and more nations gaining political power on the global scene. We cannot rely on half-arsed thinking anymore by anyone in an influential position. Or tolerate behaviour that undermines the lives of many for the interests of the few.
Does anyone know here know if some serious academic has done any studies on this?
In tax I suspect there has been no study on this
In MMT there is, but many dismiss that
It’s core to my new book
By study I meant, a study on why such simple knowledge as taxes now being obsolete under a fiat system do not propagate through to transformative policy, and why instead we end up with nonsense such as relying on taxing vodafone to fund our education system.
As an old man who has argued for years that tax is not needed, I am delighted at your revelation of Ruml, and hence Lerner. I hope Jeremy Corbyn is listening to you. However, borrowing from banks (whether private or state run), allowing either of these to print money, and interpreting money as present wealth (or even as an IOU entitling a sovereign to claim future wealth, i.e. unspecified goods and services) all fail to address the underlying motivational problem: that “the love of money is the root of all evil”.
What would address this is a “credit card” economy, in which the spending of money represents not wealth but debt, and the acquisition of existing wealth is repaid with income representing work in its regeneration for the future: usually an employer’s IOU’s for work done by employees in communal projects. In the credit card system the role of money, banks and government appear honestly. The money in one’s credit card acount represents debt (the more you have acquired with it, the more you owe). The banks merely authorise the credit limit, account for its use and discipline repayment; the logic of this works whether the account holder is an individual or a group project in which the credit limit is a budget. The government is equivalent to a major company in which a board of directors oversees ministerial CEO’s coordinating complex group projects. These can be accounted for in the same way as production projects, with debts written down as bonuses or left confronting the account holder for non-performance.
The government’s present controversial role in the financing of welfare simply requires that everyone has an adequate credit limit and proportion of expenditure written off for the young, sick and elderly etc, plus family and voluntary work as well as formal employment. What is not written off remains to remind account holders of how much they owe society, motivating not fear of loss but openness to opportunities for repaying it: perhaps gratefully, even honourably but in any case satisfyingly writing it off.