I was asked yesterday on this blog why issues such as tax abuse and the use of tax havens remain important when modern monetary theory is understood. The implication was clear: if tax does not fund government spending, and if enough tax can be collected anyway to control the otherwise inflationary consequences of that spending why worry if some tax that might be due is lost?
I admit that this view has been commonplace in MMT. Neil Wilson, who used to comment regularly on the subject of MMT certainly seemed to share it. Hints of it have turned up not infrequently elsewhere in MMT commentary. And I have always felt the attitude profoundly wrong, which is why I wrote a paper on the subject for a special edition of the Real World Economic Review on MMT last year, available here.
I have already written about that paper on this blog. I won't reiterate what I said there. I would add that Randy Wray subsequently said of the paper that it was ‘the first development in MMT from someone outside the core group'.
I guess it's got some merit then. And what it says is that the reason why tax abuse matters is that unless it is tackled at least six things happen.
First, too little money is initially collected by tax. So inflation is not controlled. The government is not in fiscal control in that case.
Second, to re-establish control they put up taxes on those people they can collect from, and most especially employees, who as a result pay more than fair share in taxes compared to businesses, the self-employed and the owners of capital.
Third, this then creates inequalities and social injustice.
Fourth, this also undermines the ability of the government to deliver its social, economic and fiscal policies through the tax system, which it should be able to do.
Fifth, we then get weak government at best.
Sixth, social order might break down, as is common when tax evasion is rife.
In other words, tax is not just about revenue raising, as argued in The Joy of Tax. Instead there are six reasons to tax:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation - people who pay tax vote;
6) To reorganise the economy i.e. fiscal policy.
In that case, which opinion Randy Wray seems to have endorsed, an effective tax system is key to MMT, and tax abuse has to most especially be tackled when its prescriptions for economic management are being followed.
And as for tax havens, what then becomes clear about them is that they are not only about abusing the tax systems of other countries, they are also about undermining their whole social and economic systems as well. And that's good enough reason to keep them well and truly on our radars.
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What’s your view on gift aid when donating or purchasing from/to a registered charity? I stopped ticking the box under the impression this diverted funds that could be spent on public services.
I can live with it at basic rate
I take objection to higfher rate gift aid relief – and have said so earn when it has made me unpopular
Hi Richard,
Sorry that this is not really relevant to this blog but I would appreciate your view on “casino economics” I cannot understand why shorting is allowed. Who else can sell things they do not possess? Should these transactions be made illegal or heavily taxed?
I personally have major reservations but not’s an issue I am much inclined to go into now
Sorry
When someone short sells, they are betting the market will fall.
When someone buys that commodity, they are betting the market will rise.
At the end of the day, if the market has fallen, then the short seller will win.
If the market has risen, then the short seller would have lost.
Whats the problem?
Leverage
Almost all investments are leveraged to a greater or lesser extent. That’s quite a weak argument against short selling.
Over leverage and so excessive risk is easy In this sector
Hence why it requires regulation / stopping
Gambling is always addictive and requires control
On a slight tangent……
Sorry Richard!
More questions!!!!
I noticed today that Positive Money are pushing for a Central Bank Digital Currency. They suggest that the BoE is weighing up the options of creating one at the moment.
Do you think that this is the way to go? Not sure of the pros and cons?
The idea is crazy
The BoWE cannot be in the business of providing personal credit – that is not its job
So this is a in credit only bank
And that makes no sense
LKiuke most PoMo ideas it shows no idea of the whole picture – they are really bad at seeing them
“First, too little money is initially collected by tax. So inflation is not controlled. The government is not in fiscal control in that case.”
Correct but it then panics when inflation does take off with monetary and fiscal policy (jacking up base rate and slashing or deferring government spending usually capital projects). Hence what quaintly used to be called “stop-go” government policy!
“Taxes drive money”.
“What do you get when you drop taxes? Well, Bitcoins.”
Randall Wray, ‘Modern Money Theory’; Ch.5, p.137.
John S Warren.
Do I deduce, that if a government cuts taxes then they also must cut spending? (or else there is too much going into the economy and not enough coming out)
This lack of money then creates a space that the likes of Bitcoin can fill?
No!!!!!
The government just runs deficits
This is fiscal policy
Bitcoin is a faux currency and has no role in it
Richard.
OK.
But is it true that, if a government runs a smaller deficits then there is less money buzzing around in the economy? This creates a reduction in activity?
If a government chooses to spend less (run a smaller deficit), this means the government will then have to reduce taxes or it will remove even more money out of the economy?
I’m trying to figure out why, as John S Wary wrote, “what do you get when you drop taxes? Well Bitcoins”.
Are the Bitcoins taking advantage of lack of government money in the system? People looking for a means of exchange when money supply is reducing?
Ignore the Bitcoin issue – it’s utter distraction
And a government deficit only makes sense in proportion to total activity – what is happening there is what matters
I cannot agree more with you. Thank you for all your contributions to my Doctoral Thesis. Kind regards.
Would agree that tax evasion is bad,so good points here.
Tax is a sacrifice we all have to make to allow gov spending. If some are not taking their share of that burden,others have to instead,usually ones who can less afford to evade it in the first place.
This is very good. I’d never have thought of it this way at all. Clear, concise, and on point. You should be proud.