I mentioned yesterday that Prof Andrew Baker, a colleague at the University of Sheffield, and I had won an award for our academic journal paper on “Modern Monetary Theory and the Changing Role of Tax in Society" in the academic Social Policy Association's 2021 Awards round. That journal paper is here, and is free to access because of support for our work from the University of Sheffield. Andrew, rightly I think, suggested that a note on the arguments that we make in the paper might be appropriate here.
Firstly, the article uses insights from Modern Monetary Theory (MMT) to show that rather than taxing first and then spending the resulting revenues, governments first spend, bringing money into existence in the process, and then effectively recover some of that outlay through taxation. This is a spend and tax cycle, rather than the tax and spend cycle that most people, politicians included assume exists. Narratives of public spending as taxpayers' money don't make much sense in this context: all money is actually created by the government when understood in this way.
What we wanted to show was how thinking about tax in this way brings its role as an instrument of social policy more sharply into focus. It also highlights its capacity to incentivise some economic activities and disincentivise others. In that way we suggest that tax can itself be used as a tool to shape society, or to achieve objectives governments and electorates agree to prioritize by shaping incentives, prices and redistributive patterns.
This then means that whilst tax is not the lifeblood of public services (although its function in managing the consequences of public spending makes it fundamental to their delivery), it instead constitutes an enormously powerful tool to shape society and social relations as a whole, creating a need to explicitly announce and specify the objectives to be attached to various tax policies.
In our paper we identified that the current UK tax system is far from socially neutral, but rather weakens the social contract, in a fashion that has little macroeconomic rationale. Over £400 billion of tax reliefs and allowances are provided each year in the UK as revenue the government chooses not to collect. These reliefs effectively operate as a form of social tax expenditure (tax spending). Much of the reasoning behind this spending is wholly unexplained.
What we also found was that 81% of UK wealth is held in heavily tax incentivised assets. We estimate that around 25-30% of that £400 billion of reliefs are used to provide subsidies for this purpose. The UK's system of allowances and reliefs therefore has a substantial redistributive effect, in effect subsidising the already wealthy. When as MMT recounts, savings are not required to fund investment and reliefs potentially create leakages that may interfere with what we call taxation's cancellation (or removal) function, which limits the money supply created by government spending to control its impact on inflation, we call for a systematic evaluation and overhaul of the UK's system of allowances and reliefs. We show that the primary impact of using tax expenditure to prioritise savings and unearned investment income is to create regressive social effects.
This work builds on some other work we have done in designing a new system or methodology for evaluating tax systems, (called spillover assessment) and assessing the extent to which a national tax system has 'redistributive integrity', that is whether it acts to reduce, rather than increase inequality. This work has been picked up by international organisations including the World Bank and the related Global Initiative for Fiscal Transparency (GIFT), for whom we have just prepared a commissioned 195 page report on how to build more transparent tax systems by publishing information and reports on their performance against a set of agreed criteria. This includes a set of high-level principles of tax transparency that GIFT and the World Bank are working to adopt. The award-winning article is one of the underpinning academic pieces for this work with Washington DC-based international organisations.
In the paper we suggest these insights create possibilities for using tax to achieve social objectives such as mitigating income and wealth inequality, increasing access to housing, or funding a Green New Deal. Our intent in the article was to challenge social policy researchers to think through how tax systems and social tax expenditures might be redesigned, so that they serve creative social policy purposes. We concluded that in an era of extensive central bank credit creation, or quantitative easing, taxation's role will be pivotal in offsetting benefits arising to the already asset rich and mitigating the rise of inequality during the pandemic.
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:
Buy me a coffee!
Thankyou for this clear and informative summary. It is very easy in this country and with this government to become disillusioned and depressed. Your work and comments are the most effective antidote to despair. Time and again you offer us hope. Long may you continue to use your intelligence in this way.
That’s my plan…..
I’m afraid, Richard, I get an “Error 1005” when I try to access the paper. But congratulations on the award.
I will test the link
You can find it by googling Baker Murphy Modern Monetary Theory
[…] Cross-posted from Tax Research UK […]
Thank you for the precis.
Many Thanks to you & your colleagues for all you are doing to progress our well being.
Good piece Richard. I do have one query though and I raise it good faith (not nitpicking). It concerns this bit: “all money is actually created by the government”. I’ve seen others say that as well but what about the endogenous credit money component created by ex nihilo bank lending?
Some will, of course, say that its money that is destroyed when the loans are repaid, but its a big component and at a time of very low interest rates, record household debt and 40 year mortgages it travels a long path to destruction.
Banks create money solely because the government licences them to do so. They cannot do so otherwise. As a result the backstop of all money creation is the government
And do remember, most bank-created money that ends up as deposits is also government-guaranteed, just to reinforce the point
“Banks create money solely because the government licences them to do so. They cannot do so otherwise. As a result the backstop of all money creation is the government
Banks create money by creating credit. OK — but anyone who creates credit is creating money.”
Might well be money of greater or lesser righteousness, use, anonymity and so on but it’s still money….To take a stupid example. We’re in a pub. We’re drinking in a round. First bloke gets the round in. That’s the creation of credit. The other three — this is only a small sessh — now owe our first bloke a pint. And on to stage two, one bloke has paid off that debt — destroying credit in the process — but the other two now owe two pints each and so on.
We have credit creation and destruction in the course of buying rounds for people. And there’s not a single government licence in view here, is there?
And if bank credit is money — which it is in the wider sense — then so is drinking in rounds.
Money creation might well be influenced by government rules, we’ll agree to that. But it is not dependent upon a government licence.
In principle you might think you are right
But money is transferable
Try and transfer that right created in the pub and you will not be able to
So it isn’t money at all
It is just debt
Money is a very special kind of debt because it is transferable
And so you are wrong
Thanks Richard for clarifying the situation so well. I think the spend and tax model might be easier to understand and accept for the general public who are unaware of how money is created. Plus the inflation fearmongers can be rebutted by pointing out the gov’s power to tax back any inflationary surplus of money.
One question that has occurred to me since reading the linked paper yesterday. As I understand it the spend-then-tax MMT rationale means that taxation has the function of rebalancing the money supply following government expenditure; does that imply that exact rebalancing (i.e. tax receipts = spending) is not required if the government expenditure has the effect of growing the overall economy?
That seems to be something that can’t easily be taken into account in the conventional tax-then-spend approach to government economics, but ought to be an important policy driver.
Rebalancing is emphatically not required if there is growth as in tat case is likely that there is a need for an increase in the money supply
Great, it is as I suspected. It is amazing how a different theoretical explanation leads to such different thinking about how to structure tax, and how much to tax.
Now, how to get there from here …?
That’s the hard question….
Downloaded the paper. Excellent work. No chance though of any political Party taking note. The Tories know of course but they will hide the reality in pursuit of their greed. Labour are full of cowards and ‘Centrists’ and are only there to pick up their comfy wages, expenses and perks. So, unless there is a revolution it is going nowhere. I am in favour of revolutionary socialism btw! Or eco-socialism. We are running out of time to save the planet and rampant capitalism will have to be tackled head on at some stage.
Thank you Richard, and now Andrew, for your many works.
Watching economics being daily used and abused in attempts at political control of society and governments your colleagues collective explanations of how things work, and why, make another moment in the development of knowledge seem appropriate to consider. That is the notion that it may be time for another “Einstein Level Moment” (from The Guardian, Smarter Science, 9th June 2021). Not in the realms of Physics but decidedly within the economic explanations you deal with and surely at a fundamental and globally impacting level.
It may have been that at the opening of the 20th century scientists were weary of inadequate explanations and met with / were offered Relativity.
We are governed by the wealthy using secrecy, lies, overweening greed all highly organised for its own purposes and absolutely not for the betterment of the generality of populations. Time is ripe for new explanations, structures and practices as you discuss which are theoretically sound, efficient and beneficial for complete societies.
Thanks for this excellent summary.
Right at the beginning you state that money is spent into the economy and this spending comes before taxation. Taxation therefore has nothing to do with our ability to spend. This makes perfect sense to me. But when I read articles on economic issues a different view is often put forward. Here’s an example from today’s Guardian:
https://www.theguardian.com/commentisfree/2021/jul/11/ending-pension-lock-is-a-start-but-theres-no-easy-fix-to-the-yawning-generation-gap?CMP=Share_AndroidApp_Other
In it the excellent Will Hutton argues that a yawning gap is opening up between the rich older generation and the much poorer young generation. Right at the end he mentions QE. He says such measures are ineffective in addressing problems of unequal distribution because the spending goes straight into raising asset prices. Is he right and is this a problem for MMT?
He is right
This is a problem MMT will not recognise
I do
Hence my demand for more work on wealth taxes (in fairness, Stephanie Kelton gets this in MMT) and also bonds to funds the GND to apply that wealth for social gain by changing tax reliefs.
Thanks Richard. Very helpful answer.