I was trolled from the left and right on modern monetary theory and tax yesterday. The right wing turned up here. The left used Twitter. All claimed I did not understand the literature on this issue.
So, for the record, first of all would they please read these two papers on tax and tell me what I got wrong? One is in the Real World Economic Review and the other in Social Policy and Society Constructive criticism I am happy with.
Second, note that there is very little literature on this. MMT has not developed a coherent theory of how tax fulfils the withdrawal function to control inflation it has prescribed to it, hence the papers by me and me and Andrew Baker. Hence too why we are also planning to develop this, considerably. We are seeking to develop theory on how tax does simultaneously have this withdrawal function, which does not fund spending but is an explicit part of the overall funding cycle, whilst simultaneously having a strong function in delivering social, economic and fiscal policy.
Two points though (and quick ones as I have presentations to make to PWC on tax justice and the EU parliament on the abuse of secrecy jurisdictions today, and some preparation to do). The first is that tax as a withdrawal function only controls inflation if it is demand pull inflation. We do not have that right now, excepting amongst the products the wealthy buy, and so it cannot be used to control most inflation at present, excepting for the impact that those with high incomes and wealth have. Tailoring theory to policy in the situations we actually have is intelligent political economy. Sticking to dogma whether useful or not is the exact opposite of that.
And second, to address the MMT zealots, it is undoubtedly true that tax does not fund spending. So there is no tax and spend. But to opened there isn't spend and tax if inflation is to overall be controlled is absurd, but that seems to be what some are suggesting. Learning a tiny little bit of MMT and then shouting that it must be obeyed as a mantra for all time just discredits the MMT cause. I am bored by those who want to do that.
MMT is not a fully developed theory when it comes to tax. And in current circumstances blind adherence to its usual presentations would be as crass as Bank of England policy is right now. Exceptional times require exceptional thinking. Sticking to rules written for other occasions is not exceptional thinking. It is instead crass stupidity. I don't endorse that.
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I was minded to add another comment to the thread you were being taken to task on yesterday but I think that the discussion has moved on to here.
The obvious point is the quote that allegedly comes from Keynes
When the facts change, I change my mind. What do you do, sir?
Worth making the point of course that he managed the financial affairs of his Cambridge College very successfully by doing just that while the other great economist of the period, Irvine Fisher went bankrupt.
But above all else my late fathers rant seems particularly appropriate for the current situation
‘These people havnt got any money!’
Unless that is addressed any proposed solutions to the situation we find ourselves in isnt going to work
You get it
Much of what is ‘known’ about fiscal policy these days seems to be received wisdom to me and has gone unquestioned for far too long.
The ramparts of much of this bullshit has been embedded in our seats of learning to give it credibility and that is where the battle needs to be fought, although it seems you have to be very brave to stick your neck above the parapet to challenge it.
Economics these days is nothing more than pure theory which is presented in mathematical models with false inhibitors to prevent you making connections with the real world where if you observe something different to the model you are being ‘subjective’ or biased in some way or you are looking at non-relevant ‘externalities’.
It is a rejection of truth. Any real science has a element of causal observation about it – cause and effect, note taking and analysis. Economics – so desperate to be seen as credible – completely ignores this core bit of what science really is.
Or you are just up against the tax haters who have everyone up in arms because they don’t understand it’s nuances. As a society we are too negative about taxation because of lies about individual rights.
My little brain tells me that that the money system is like water being poured (if only!) into a bucket – let’s say the water is money and the bucket is the economy.
The bucket fills to the point that it overflows and starts making a mess – so let’s call that overflow inflation . So you either turn off the tap or you empty the bucket – let’s call emptying the bucket expenditure AND taxation. It is to make more room for more water (money) and refill. Or lets attach an overflow pipe to the bucket and call that taxation and expenditure, saving – whatever uses the money up.
Now think about turning off that tap a while if money is also being emptied out of that bucket. Could that be called austerity?
Either way, I get it. Money has to be created and destroyed in a continuous process.
That’s why I have no problem with MMT and taxation – even if my thinking model is flawed – I know that you are right because we know what inflation can be in certain circumstances (it can be caused by too much money as well as too little goods but it has to be one or the other and even both but the art of governance is in managing these as facts and not just (say) using interest rates (a monetary supply mechanism) as a crude weapon to combat inflation caused by supply factors like BREXIT, Covid and war in Ukraine like those effing idiots are doing at the Bank of England!!!!!
I’ll leave you to deal with the Right wingers, but you have my email address and you are welcome to send any of the dumb lefties to me to be put straight or they can go forth and multiply as far as I am concerned.
If they are that dumb – to treat the money system as a closed loop where all human society has to do is fight over who gets their share of the money – then God help them. It might make great class war fare but an economic model it is not.
Oh – and good luck with your efforts. It’s cutting edge stuff – but it shouldn’t be.
Thanks
You get it
The slight issue with the analogy is that the size of the bucket varies depending on how the water flows in and how it flows out.
Henry
No.
The issue is that money flows in and out at all – that is all that matters. It’s flow – not how big this or that is. The size of an economy (the bucket in my analogy) is variable anyway – it can expand and contract for all sorts of reasons – what matters is that some sort of commensurate flow of money is maintained into the right areas of the economy (we learnt that from 2008 didn’t we unless we are going to have a high street Government owned bank again?).
It is about being aware of the flows and how to manage them for the best outcomes for everyone. And I mean everyone. And that job is the job of Government.
Interest rate rises are just monetarist supply side actions that are rentier enriching but masked as anti-inflationary – an outright lie in my view. Much more is needed – tax too has its part obviously. No matter what size the economy, Government has role in distributing the flows of cash. And also, stopping that flow when things are stable or the social utility is maximised.
My only concern with MMT and tax however is the the fact that western markets have got so used to operating much as they like that I just wonder what their reaction would be to a more proactive intervention by Government. Our markets to me have an almost libertarian anarchic quality that could back fire. It could be like kicking a hornets nest. But then again, it might not. But we won’t find out unless we try something new.
If interest rates are a sledge hammer to extract cash out of the system by applying a rate to all then surely tax operates in a similar way but by being more targeted. Both mechanisms work to take cash out of the transactional system. The difference is that tax normally has a variable rate based on tax payers level of income and heritable assets. By being more targeted taxation must therefore be a better way of combating inflation, if as many of your critics believe inflation is solely caused by an excess of money supply, than the rather more blunt measure of interest rates.
This is rather simplistic but the criticism is simplistic in that the critics latch onto one sentence such as “tax doesn’t fund spending” and drawing the conclusion that no one need therefore be taxed or “the state can print as much money as it likes without consequence” and bringing up Zimbabwe or Weimar Germany.
You get the nuance most miss
I like what Helen Schofield is always telling me on ProgressivePulse.
Money is not a thing – it is a process…
Agreed
Yes – agreed also – it is a continuous process of creation and destruction (use -send/taxation/savings – temporary destruction and permanent), dynamic in the truest sense and not static like those who already have enough like to portray it as ( and why is it is nearly always those who have enough money and more who adhere to the view that money is static I wonder?).
“MMT is not a fully developed theory when it comes to tax.”
I suppose you can say this about any theory. There is always room for refinement but it looks OK, as far as I can see.
I agree that many MMTers, mainly on the left, don’t get it quite right They don’t get much further than parroting slogans such as: “Taxes don’t fund Government Spending”, “A currency issuing government can never run out of money”, “Pounds and Dollars are just like runs on a scoreboard”. etc
These are all true but there is another side to it. ie The explanation that taxes are still necessary to give a value to the currency and enable a currency issuing government to spend without causing high inflation. As Stephanie Kelton often explains: A government deficit is everyone else’s surplus. Therefore, everyone else can only run a surplus if the Government is running a surplus, and equally the Govt can only run a deficit if everyone else is running a surplus.
This last part is usually ignored. However, it does mean that it isn’t always a straightforward choice of the Govt to run a deficit. It can only do this if the rest of us are saving. If it tries to do it, without our co-operation, high inflation will be a huge risk.
Agreed
Sorry. It should be ” ..everyone else can only run a surplus if the Government is running a deficit….”
1st mantra- “success is in the detail” whether it’s a practical problem to be solved or a hypothesis to be thoroughly investigated. Keep up the good work Richard- it’s why you have so many followers seeking understanding.
Are you able to share the presentations to PwC and EU?
I think it would also be very helpful if you could have links to all your published material (books, papers, presentations, articles, columns, letters, etc etc) . So its all easily accesible and in some sort of chronological order.
Perhaps you can also have links to your youtube videos and other online stuff (media interviews, podcasts, virtual meetings/presentations).
As it stands, one needs to use the search/category/tax research wiki facility and trawl through loads of blogs
I also clicked on the publications tab and was taken to a 2017 blog.
Just food for thought that’s all – a knowledge repository.
There is the Wiki – see the menu
The issue is time – I simply have not got enough time available
Re this morning at PWC there was no presentation e.g. slides and it was Chatham House
I am planning a blog post though
This afternoon – I will share afterwards
Constructive criticism:
Having read the papers you link to a couple of things become immediately obvious. The most obvious being the lack of any testing or analysis on the claims you make about MMT.
You make a hypothesis: that taxes can be used to control inflation.
The normal route of scientific method would then be to test this. In economics this would typically be through the use of real world data, so back-testing. Yet you don’t do this at all.
Having missed this rather critical step you jump straight to the conclusions – which are invalid without the necessary testing. They are totally unsubstantiated claims.
You accept this in your article above when you say:
“MMT has not developed a coherent theory of how tax fulfils the withdrawal function to control inflation it has prescribed to it”
However your papers don’t add anything to the argument. There is no evidence within your papers to suggest what you are saying is true. You have gone straight from hypothesis to conclusion to implications thereof, without stopping to test if what you have claimed is valid or not.
You also say above that:
“The first is that tax as a withdrawal function only controls inflation if it is demand pull inflation.”
Which makes MMT essentially useless. If you can’t control demand pull inflation, you can’t control inflation full stop. MMT would likely exacerbate any inflationary system through increasing the money supply and government spending, which would likely increase demand. If you then can’t do anything about that demand, you are likely to see inflation compound and spiral. What you have said would actually make any inflationary system worse which invalidates MMT as a serious form of monetary policy.
I also note that in your previous articles you have said that inflation can be reduced by lowering taxes, which stands opposite to what MMT claims. Yet you also say this fits within MMT. You can’t have it both ways. Either raising taxes reduces inflation as MMT claims, or it doesn’t, debunking one of the main claims of MMT.
a) Show me the evidence that interest rates control inflation. I want to see it – with data, since the mechanism has been tried (you won’t find it)
b) Show me that the blunt tool of interest rates is more effective than the use of selective tax rates in tackling inflation
c) Tell me why, in theory, removing the spending power of people through taxation cannot work to reduce inflation when, apparently, removing the spending power of people using interest rates can
d) Tell me why you would want to reduce the spending power of people at present through increasing taxation when we already have a cost of living crisis and we do not have demand pull inflation
e) Explain why you think all inflation is of similar type and cause
Then tell me what I have wrong
In answer to your questions:
a) There are literally hundreds if not thousands of papers discussing and analyzing this. Real economic papers, with proper mathematical and statistical treatment of real world observations, unlike the papers you provided, which skip over any testing or analysis.
b) For this to be answered, you have to show that tax rates are effective at controlling inflation in the first place – which is something you have not done. All you have done is made a claim they are, but no evidence to show this.
So by default interest rates, whilst being a blunt and imperfect tool, are better than tax rates at controlling inflation, as the former is evidence to work, the latter not so.
c) In theory, tax rises can reduce inflation by removing spending power, much in the same way interest rates can.
Two points to make here. If you are going to claim that tax rises are more effective, then you actually have to produce analysis to show as much.
Secondly we go back to the change in outlook you made in a post – that tax CUTS now could reduce inflation. Which is it? Not to mention the political difficulties of raising taxes in the face of high inflation, which no politician seeking re-election is likely to do, making MMT unworkable in practical terms.
d) “when we already have a cost of living crisis and we do not have demand pull inflation”
Demand pull inflation is the upward pressure on prices following a shortage in supply. What is causing inflation at the moment is supply constraints in various commodities and supply chains. It is demand pull.
e) I don’t and never said so. But at least interest rates will have an effect on the general price level, where taxes (by your own admission) will not do so.
Now, having answered your question and also having noticed you are doing your best to avoid answering the questions I posed you, would you be kind enough to answer properly, rather than obfuscating or trying to turn the discussion around?
We are talking about tax and MMT, and you asked what you got wrong and for constructive criticism. I pointed out a few of the things that are obviously wrong in the nature of constructive criticism – which you specifically asked for.
Certain things you have said are worth exploring and it would be nice if you could answer them properly:
1. Do you have a quantitative model or statistical evidence to show how or even if taxes can be used to control inflation, and if so how effective is it? Has a statistical or empirical comparison been made to traditional interest rate based monetary policy been made, and if so what were the findings?
2. You have said elsewhere that MMT/Tax rises cannot control demand pull inflation. If this is the case, surely MMT is effectively useless as a form of fiscal policy? Furthermore, your policy prescription is for the government to spend more into this demand pull inflation shock. Wouldn’t this increase in demand make the problem even worse, again making MMT policy prescriptions useless?
3. MMT claims that tax rises can be used to combat inflation. However you have more recently said that tax cuts can be used to do the same. The two are mutually exclusive, so either you are wrong or MMT is wrong if looked at in isolation. Which is it?
I look forward to reading your answers!
a) I asked for evidence, not hyperbole. You have given no evidence.
b) If interest rates control inflation by cutting spending so do taxes. You have no case.
c) We’d use taxes by trial and error – exactly how interest rates are used, but much more bluntly
d) We do not have demand-pull, we have monopolistic profiteering, which is nothing like the same thing
e) So VAT and duties have no impact on price levels but interest rates do? To which planet are you referring?
To the rest
1) No one has any such model for any system of controlling inflation. It’s always guesswork which is why the MPC disagrees with itself, often
2) MMT can control demand pull infaltio0n. But we don’t have it. And you are making stuff up.
3) Tax cuts can literally cut prices right now and save people who have no money from starvation – which matters more than anything to me – but clearly not to you. So you’re callous, ignorant and unaware we have more than one type of inflation.
I suggest you take your ignorance and hatred of people elsewhere
You might also want to learn how to think and argue and some economics would also help you
Mark
Richard is not having it both ways – all he’s suggesting is watching, analysing and then taking action through tax instead of just reaching for the rather tired same old same old. How can you fight inflation with inflation as interest rate hikes do? Would you try to put out a fire in petrol station with petrol? Huh? Tax might go up or down to modify behaviour and inflation. It’s not one or the other it’s either – or. For goodness sake……………..
Or how about finding a Government with the minerals to try MMT on this basis out?
You start your argument by saying he’s not tested his hypothesis. And then you go on to say it’s no use testing it – it wouldn’t work anyway thus doing the very same thing you accuse Richard of!! Do you think we’re stupid or something?
Ideally we should be doing some modelling here – that ‘s what would be useful and if we are and YOU are truly interested – lets model the jocker – that’s what I say. Model it in some way. Is that possible? Forgive me but I don’t know.
Whatever happened to trying things out? Instead all we want to do these days is make up any excuse not to try something new.
Is that you too Mark?
@ Mark,
I take your point about higher taxes either reducing or increasing inflation. You’re quite right that the MMT theory is that increased taxation, relative to government spending, is deflationary. The situation at present is that wages are falling so aren’t the factor leading to higher prices. The problem for both fiscalists and monetarists is essentially the same ie to do the right thing for the economy as a whole when there are conficting requirements.
You ask for evidence of the MMT position. Monetarists themselves provide that whenever they warn governments that running an unduly lax fiscal policy will be inflationary. So, doesn’t it follow that running an unduly tight fiscal policy will do just the opposite?
You can’t have it both ways either.
Mark, you say:
c) In theory, tax rises can reduce inflation by removing spending power, much in the same way interest rates can.
Interest rates don’t remove spending power. They shift it from debtor to lender. It only results in reduced spending if the lender doesn’t spend it.
Taxis fundamentally different because it destroys spending power. After taxation the money is no more.
I’m struggling to understand this sentence, not helped by the typo (opened) –
“But to opened there isn’t spend and tax if inflation is to overall be controlled is absurd, but that seems to be what some are suggesting.”
Opened should be pretend
Spend and tax can’t. control demand pull inflation is what i am saying, any more than interest rates can
you didn’t address the questions raised by mark
Every comment I made addressed them
You trolls really do have problems with comprehending debate don’t you?
I have forwarded your replies to certain posters on this thread to the institutions who have bestowed upon you the role of ‘visiting professor’, in order that they can consider the manner in which one of their faculty treats other people with an understanding of economics so obviously far in excess of your own.
I wonder how they will feel having their name and reputation attached to such an unpleasant and obliviously ignorant character
You are truly shameful .
I suspect that they will greatly admire my tolerance and resilience in the face of very obvious trolling
@ Mark
If rising energy prices and the rising prices other essential imports, such as raw materials and food, which are largely outside the control of anyone in the UK, what is the correct course of action from a leftist and MMT perspective?
We can’t increase Government deficits unless we have an increased level of saving and we don’t want to allow inflation to get out of control by trying to force them higher.
These rising prices are a rationing mechanism – meaning that we will all have to make do with less. MMT doesn’t say how we should share out the burden, but if we want to protect the most vulnerable it will mean increasing taxation on those who can afford to pay and increasing the social benefits and reducing the tax paid by those on lower pay.
There’s no chance of the Tories doing this but this is what they should be doing rather than relying solely on higher interest rates for all to dampen inflation.
If rising energy prices and the rising prices other essential imports, such as raw materials and food, which are largely outside the control of anyone in the UK, what is the correct course of action from a leftist and MMT perspective?
We can’t increase Government deficits unless we have an increased level of saving and we don’t want to allow inflation to get out of control by trying to force them higher.
These rising prices are a rationing mechanism – meaning that we will all have to make do with less. MMT doesn’t say how we should share out the burden, but if we want to protect the most vulnerable it will mean increasing taxation on those who can afford to pay and increasing the social benefits and reducing the tax paid by those on lower pay.
There’s no chance of the Tories doing this but this is what they should be doing rather than relying solely on higher interest rates for all to dampen inflation.
I think I have comprehensively answered this question already on this blog, several times and in my ebook
@Mark
“You [Richard] make a hypothesis: that taxes can be used to control inflation.”
That’s no hypothesis. That’s fact.
No experiments required – just logic. Suppose there were no tax:
Without taxes the amount of government issued money would just snowball.
In a generation, while the economy would be, on a generous growth rate, about 165% of its original size, the amount of money that would have been spent into it would be about 100 times the size of its GDP – and that is even while trying to keep cash expenditure consistent with that of year one.
see
http://www.progressivepulse.org/economics/inflationary-reply
Indeed
Sorry – I beg to differ on the modelling front Peter.
We model climate change and god knows what else. But I still think there is value in modelling MMT in some way simply because people refuse to believe it.
Yes – some refuse to believe climate change and still don’t accept it despite the modelling. But if MMT is still being developed – why not? I only wish I was clever enough to do it or be part of it. Yes – the mechanics of MMT are there and exist – I agree.
The best way to reveal they are there and that they are not being used (and that that is the bad choice) is to show what will happen if they are used.
When the naysayers took the workings of the University of East Anglia ‘ Climate Gate’ professor Philip Jones and ‘independently’ ran his figures they got the same results as him apparently.
That’s the best ‘fuck you’ I can think of to any one who is disparaging the facts and sticking to dead ideas – or even worse – no ideas.
@ Peter May
It’s not a fact, unfortunately.
You are making the assumption that government issues increasing amounts of NEW money (which it does not in normal times) and that the only mechanism of removing it is tax (also not true).
Government spending from general taxation does not increase the base money supply.
You have basically started from an MMT perspective and ignored everything else.
The reason for starting with an MMT perspective is it is what happens
I can’t see that anyone is saying, as Mark claims, that the government issues “increasing amounts” of new money – just that what it spends is new money much of which eventually leaves circulation through taxation or savings.
And I can never see how the concept of the government spending from general taxation can work as I find myself asking where the money has come from with which those taxes are paid. A bit like trying to start a game of Monopoly without the banker distributing any notes.
You are right
@ Mark
and
@ PSR
What I asked was
“Suppose there were no tax?”
That’s not modelling – that’s just basic inquiry..
@ Ros Wain
“like trying to start a game of Monopoly without the banker distributing any notes”.
Precisely!
Precisely