Historically modern monetary theory placed too little emphasis on the role of tax in the economy. It's my belief, explained here and here that tax and modern monetary theory are intimately linked issues.
That's not because tax pays for government spending: it does not.
But tax is fundamental to fiscal policy in a modern monetary theory environment. And without the funding constraint that has limited tax design to date, MMT liberates tax to be an instrument for social change as well.
I regret that there are those in MMT who still seem to deny this, and think that any discussion of tax within an MMT context suggests that tax funds spending. This video explains my position.
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What’s of interest in the Keynes’s quote I posted previously from his 1933 Open Letter to Roosevelt is there was no mention of the role to be played by tax in optimising an economy:-
“… an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees…; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.”
Here’s the explanation why Keynes believed very strongly in targetted demand rather than simply boosting aggregate demand with a scatter gun cutting of taxes:-
http://www.levyinstitute.org/pubs/wp_542.pdf
I don’t however think that’s the end of the story with the advent of instantaneous electronic exchange of money it’s now possible to manipulate taxes in a targetted way to optimise economies. Taxation targetting becomes another arrow in the quiver to boost the spending of those who will spend rather than hoard or engage in asset speculation as a consequence of taxation reduction. This latter part of the argument of course relates to central banks engaging in a version of Supply-Side economics with their QE programmes.
But tax design has to improve to achieve this
That improvement is possible
I have ideas….
As I think I’ve menioned before, tax – the state’s ability to create fiat debt, for which it accepts the fiat money it creates in payment – is something which is essential in MMT (at least as I understand it), but too often appears to be undiscussable or unmentionable.
And it those two powers – to create both fiat money and fiat debt (more politely tax) – that give the state the monetary tools it needs to influence society.
A car has both an accelerator and a brake – to drive safely you need to use, and know how to use, both…
Agreed
Regarding how to make MMT accessible, I think this video works much better than some of the others. It avoids the difficult notion of tax cancelling money (difficult because as someone said most people think about economic flows in terms of the conservation of matter) and gets more directly to points that have a chance of being understood in political discourse and which matter to the public. To add to the accelerator (spending) and brake (tax) analogy mentioned by Jeremy GH, the social function of particular taxes might be said to be to ‘steer’ the economy in desired directions. Using these metaphors might make it less likely that people think in terms of tax being paid into a pot of money held by the government.
Noted, re steering