I have already mentioned a piece I had written for the Real World Economic Review on modern monetary theory and taxation recently. Now Randy Wray, one of the leading MMT thinkers has reviewed the price on New Economic Perspectives. I quote at length, as I think that's fair in this case:
[T]his issue of rwer contains what I believe to be a first—an article that tries to fill a perceived gap. Some months ago Richard Murphy had written to me arguing that MMT has not gone sufficiently in depth on the issue of taxes. I thought that was a strange accusation—since most critics argue we talk too much about taxes (as in driving the currency and fighting inflation). Further, I had added a chapter to the second edition of my Modern Money Primer to discuss taxes in more detail—good taxes and bad taxes. But what Murphy meant was taxes at the micro level. I responded that I accept the Musgrave&Musgrave approach (which I had studied—and taught; it is THE source on public finance). He responded that that is not sufficient. I remained puzzled.
But his piece in rwer, “Tax and modern monetary theory”, clarifies his point. And, I must add, in a reasonably respectful manner. Again, this is something we rarely see from critics—who call us fascists and communists (without I suppose recognizing that there’s an ocean of difference between the two—but, then again, the critics aren’t scientists). Richard argues that “cash paid in tax is a residual figure arising from a plethora of decisions on tax bases, reliefs and allowances, as well as tax gaps that result from non-compliant taxpayer behavior”. Recognizing MMT’s argument (based on Ruml) that taxes are not really for revenue purposes, he argues for seeing “use of tax [instead] as a critical instrument in economic and social policy management”. I agree.
My own contribution to the rwer issue actually addresses his first point, that taxes are a residual—what I call (following Keynesian theory) a leakage. They cannot “pay for” anything since the spending must come first. I argue that it is truly amazing that our Post Keynesian critics adopt the leakages and injections approach, recognizing that saving (a leakage) cannot finance investment (an injection) because injections logically come before leakages, but then drop it when they discuss government spending and taxes. The same logic MUST be true of government spending (injection) and taxes (leakage). But they all get “dazed and confused” when it comes to government. They simply abandon any understanding of basic macro theory and jump on the “taxes pay for government spending” bandwagon. Truly bizarre and rather embarrassing too.
In many places I have also discussed the use of taxes for behavioral management (sin taxes, and the like). But Murphy’s article goes deeper than I have in the past. I recommend reading it, and I’m going to incorporate some of his arguments in my future work. I want to be clear—I’m not embracing everything in his article and I’m not convinced that his insights lead to an entirely different (and implicitly presumed to be better?) paradigm, modern taxation theory (MTT). But I’m glad he tried to make a positive contribution.
I most certainly tried.