I got this comment on Twitter last night on my MMT posts and along with some comments from Neil W (who I presume to be Neil Wilson, although he has never said so) felt it deserved a blog treatment:
Richard,
There is a lot I could comment on here but let's just focus on the tax issue. There is no contradiction between the statement “the first order purpose of tax liabilities is to create unemployment in terms of the state's currency” and “spending precedes taxation”. Mosler is saying the tax *liability* precedes spending, whereas settlement of taxes can logically only occur after spending. This is a core MMT proposition (maybe THE core MMT proposition) and is a documented historical phenomenon (see: US colonial currencies, or this paper by Forstater on colonial currencies in Africa: https://modernmoneynetwork.org/sites/default/files/biblio/RiPE%20Forstater.pdf). The purpose of the tax liability is to create seekers of paid work (unemployment) in the state's currency so that the state can provision itself. The state can use this power to fully employ all idle resources/labor.
Charlie
Let me be clear that I began by reading the paper, which I had read before, and which in summary I find as unconvincing now as I did when I read it before.
As Forstater sys in the introduction to his paper:
In Volume One of Capital, Marx laid out what he called “The Secret of Capitalist Primitive Accumulation.” Capitalist accumulation must be preceded by some previous accumulation, “an accumulation which is not the result of the capitalist mode of production but its point of departure” (Marx, 1990, p. 873). Marx identified the “double freedom” requirement necessary for capitalist production: workers must be “free” to sell their labor-power and they must be “free” from the means of production. The existence of a working class ready to sell their labor-power to capitalists requires that a mass of population have no means of production with which to produce their own means of subsistence. If they could produce their own means of subsistence, they would not be compelled to sell their labor-power to capitalists.
Developing his theme he argues:
Several points concerning the role of direct taxation in colonial capitalist primitive accumulation need to be made. First, direct taxation means that the tax cannot be, e.g. an income tax. An income tax cannot assure that a population that possesses the means of production to produce their own subsistence will enter wage labor or grow cash crops. If they simply continue to engage in subsistence production, they can avoid the cash economy and thus escape the income tax and any need for colonial currency. The tax must therefore be a direct tax, such as the poll tax, hut tax, head tax, wife tax, and land tax. Second, although taxation was often imposed in the name of securing revenue for the colonial coffers, and the tax was justified in the name of Africans bearing some of the financial burden of running the colonial state, in fact the colonial government did not need the colonial currency held by Africans. What they needed was for the African population to need the currency, and that was the purpose of the direct tax. The colonial government and European settlers must ultimately be the source of the currency, so they did not need it from the Africans. It was a means of compelling the African to sell goods and services, especially labor services for the currency.
Let me jump from there to Forstater's conclusion, where he says:
The history of direct taxation in colonial capitalism also has some wider theoretical implications. It shows, for example, “that ‘monetization' did not spring forth from barter; nor did it require ‘trust' – as most stories about the origins of money claim” (Wray, 1998, p. 61). In the colonial capitalist context, money was clearly a “creature of the state.”
So let me first, note that, as I argued in my commentary on Mosler's arguments on MMT, Forstater requires that we presume that there is an oppressive and even malign state in existence. He does so because he presumes that from a Marxist perspective the states that we are talking about are malign because they exist to promote capitalism. As someone happy to live in a mixed economy and who has no desire to replace our current overall society with one built on Marxist lines, unsurprisingly I have some problems with this premise. You may not. I, and I think maybe 99% of those who have an interest in MMT, do. Mosler obviously buys it, hook line and sinker. I have no problem with that, but he really should be explicit about that. If he wants to build MMT on the basis of this antiquated view of capitalism in general (which I would clearly differentiate from neoliberalism in particular), so be it. But you really need to be honest about it.
Second, let me also note that we now know where the colonialist trope that underpins the tax argument in MMT comes from. And I would argue it is a trope.
Third, then let's deal with the claim as if it is an acceptable one, which to me it is not because I could not build a theoretical justification for a form of macroeconomic management that only really became relevant in the post gold standard era on the basis of a Marxist view of capitalism that was long out of date and a view of the state long dispelled by democratic forms that Marx did not anticipate, plus a view of colonial exploitation that could never be condoned.
I then note the following as a consequence.
First, the tax is imposed before the currency to make payment of it is in existence. In other words, the liability pre-exists the means of settlement. So, in other words, the tax described by Forstater comes first i.e., before any spend.
Second, I note Forstater's claim that this was done to impose a demand for the currency. But what I cannot accept is that this proves the MMT argument that the spend, which then follows in the form of buying colonial workers' labour, precedes the tax. Glaringly obviously it does not. The liability to the tax is, in itself, a real thing. It does not matter that there is no apparent means to settle it: that does not mean that the liability does not exist. In fact, what this argument proves is that in this situation the tax had to come first and the spend second. To use this as a proof of MMT's claim that spend comes before tax (as Charlie does and as NeilW does in other comments posted, suggesting Mosler also thinks this) is absurd. You can't choose a little bit out a series of transactions and say that this proves your case. You have to look at the series as a whole and if Forstater is right in the series of events he describes that series is:
- Impose a tax for which there is no means of settlement.
- Force labour to work for a currency they do not want, but have to acquire to pay the tax.
- Pay that labour.
- Accept their cash back as tax.
The tax precedes the spend, always, in this particular case.
Third, there is the slight problem for those relying on this argument that taxes of the form Forstater describes are rare and form a tiny component of most modern tax systems, if they exist at all independent of the existence of prior means to settle them.
And fourth, there is another major problem. This is that Forstater overlooks the fact that in many, if not most, of the states where he claims this policy was pursued the conditions in which an MMT approach to macroeconomic management of an economy have not developed. Instead, taxes tend to be low in many former colonial jurisdictions. Tax recovery is also low. But worse, liabilities can rarely be imposed in local currencies because it is commonplace for a second currency (the US dollar) to be in circulation. And it is normal for external debts (both state and private) to be denominated in the US dollar. In that case imposition of taxes in the way Forstater and Mosler suggest to be necessary for an explanation of MMT has not resulted in states where MMT macroeconomic management can function. The exact opposite has happened, and colonialism is now via the currency instead. That is hardly a ringing endorsement of Forstater or Mosler's case.
Put together, these arguments provide no support for Mosler's claims. What they do confirm is that I right in assuming, as Mosler implied in his paper, that his version of the state is necessarily hostile. What these arguments also confirm is that I was right to suggest that Mosler argued that tax precedes spend. Two key claims I made are, therefore, justified.
But let me reiterate, spend does come before tax. It's just that Mosler, Mitchell, Forstater, NeilW and Charlie all get the reasoning wrong. We know spend does precede tax in the UK. Bizarrely Neil Wilson knows this: he was one of those who explained how, in practice, this happens. But since he does not appear to understand why this might happen let me offer a non-Marxist and non-colonial explanation.
The reality is that for a currency to work it must have these characteristics:
- It must be universal in a jurisdiction, meaning it must be the only legal tender for settlement of debts, which fact is reinforced by a functioning legal system.
- It must be a store of value, meaning that over time it became bankable.
- It must be acceptable for payment of tax.
- It must not be capable of being counterfeited.
How did such currencies come into being? Not by imposing hut taxes, but by issuing tokens declared to be legal tender by a monarch in a recognisable form that a banker (or their earlier equivalent) could accept as having value. These were spent into the economy, usually to buy the services of soldiers, and which were taxed out of circulation to ensure they remained in limited supply (which as a matter of fact, they were). That's how currency came about.
The desire to spend did come first.
The desire to spend the token again was what promoted the tax.
And the ability to require the use of the currency was not imposed by imposing a tax for which no means of settlement existed, but by law, banking regulation (in due course) and by requiring tax payment after the spend had been made, the currency itself being acceptable without the requirement to tax because it was made of an inherently valuable commodity, hence the gold standard.
This is what happened. The Mosler argument based on Forstater (whose article is itself deeply flawed, being based on what might at best be called Marxist wishful thinking) simply is not credible in comparison.
And no, I have not referenced this post because a) I do not have time b) I am still replying to Mosler, who referenced nothing and c) it will not help then argument.
What I am sure of is that my rejection of Mosler's claims and his worldview is even more justified now.
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Hi,
I believe the mainstream theory government finances spending by tax, borrow or print is wrong. In the UK all government spending works by creating money and there are unlimited intraday overdrafts at the central bank borrowing happens at the end of the day. Money can’t leak abroad it is a swap/exchange, not a conversion. If there is no saving or pay back bank loans in the spending chain you will get all government spend back as tax. Similarly, if people spend from savings or take out bank loans and spend no saving or pay back bank loans get all that money back as tax too. Government spend at Tesco get some back as VAT (taxes as ‘cashback’), Tesco pays its employees another chunk taken by government in income tax and so forth.
https://publications.parliament.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm
Point 20 says:
“ensure that its position is balanced at the end of each day”
Also at diagram in bottom surplus/shortfall in consolidated fund.
Thanks, but also see the explanations in the link in the post
I could imagine that the economics of bootstrapping a currency in a subsistence economy with no historic traditional currency of its own might be somewhat different to the economics of a country that has used currency for hundreds or thousands of years. I’m not convinced that one necessarily has much to tell us about the other.
I don’t work for “capitalists” because I need to pay taxes (at least, not primarily) but because I want to earn enough currency to buy the things that I and my family need and want, from housing and clothes and food, through fuel for cooking and heating and transport, to art and literature and entertainment. Even in a subsistence economy, many – perhaps most – people aim to produce a surplus to give them some security and to exchange for things they want but can’t make easily themselves. In the “hut” scenario, they just need to be persuaded that currency is a useful portable store of value and medium of exchange over time and space. They doesn’t necessarily mean working for the state. Perhaps they might sell their labour or good or services to the state, or they might sell them to someone who has some of the tokens they need to pay the tax. Some places allowed taxes to be paid in kind directly, through labour or goods.
This all has the feel of just-so stories. How does it apply to the Bank of England and HM Treasury?
It feels like fantasy to me
I share your scepticism and incredulity
But maybe we are just not aware of the state’s violence towards us
Quite. And if it wasn’t for the state’s monopoly of violence, who knows what foul deeds I might get up to.
Good thing I am content to pool and subordinate my personal autonomy in this shared endeavour that we call the state.
🙂
@ Andrew,
“I don’t work for “capitalists” because I need to pay taxes (at least, not primarily) but because I want to *earn enough currency* to buy the things that I and my family need and want….”
Yes of course. That’s what most people would say including myself.
However, and has Richard himself has described, the currency has a value because of the tax imposed by Government. No imposed tax means you can’t buy anything with it.
So it doesn’t matter what our motivation is to get the currency. We end up working to provision the government, and the capitalists if you like, and in return we get paid enough, hopefully, to look after our families.
Currency has a value because the government makes it legal tender for all transactions, but just tax
Pragmatically the duty to pay tax reinforces that, as I have long said
But my general view is one I share with Keynes
And respectfully, you can have your worldview, but it really is paranoid, to be kind and no rational basis for democratic economics. And yes, I do know it originates in Weber’s thinking. But bluntly, even given neoliberalism I cannot and will nit stare it. Your repeating it will not alter the view of a democrat, but I guess you aren’t.
Currency has a value, like pretty much anything else, which is determined by how much people are willing to pay for it. What differentiates it from pretty much anything else (Bitcoin, NFTs included), is that the Government requiring tax payments in that currency creates an inherent value and prevents the value from falling to zero.
Hence, we have variable exchange rates, which can demonstrate confidence in a currency. However, as long as there is a functioning tax system, the inherent value will be maintained and we won’t end up like Zimbabwe 2008.
Being legal tender for all debt matters too…..
It can’t be ignored
Which came first? The Chicken or the egg? I don’t know…. or really care. Which ever it was it was in a world completely different from the one we live in today. We will never know the real motivation of those folk all those years ago was in using money…. other than they didn’t sit about debating about it in abstract terms.
What I do now is that I live in a country where fiat currency exists. It is used (to almost) the complete exclusion of all other competing alternatives by government, taxpayers and non-taxpayers alike. So, here and now a government can spend before it taxes or without taxing at all. Surely we can all agree on that?
Precisely
And we need to understand the proper consequences
Hence why I am exploring all these issues
MMT is a crank philosophy populated by cranks and so no one cares.. yet you write 10000s of words over and over again and provoke a crank v crank row (though you are mostly getting ignored which must incense you) .. what the hell does that say about you and the bali’s of your time!
You are paying attention.
I hate to have to point the bleedin’ obvious out to you .
In fact, you were so keen to get attention you posted this twice.
Sort of undermines your argument, don’t you think?
Richard,
Any fair review of the history of money suggests money emerges in the way MMT describes. The stability of money as a store of value and legal tender laws are important. But money, especially pure fiat, is fundamentally tax driven, both historically and today. Tax liabilities are largely what enable fiat to smoothly function as a store of value and tender for settlement of purchases and other obligations. Forstater is not recommending African colonial style taxation- the colonial examples are useful because they clearly elucidate how fiat currencies come about and the explicit role of taxation in this process. Similarly we can look at examples from the American colonies where taxes were levied concurrently with bills to ensure their acceptance. The function of taxes as the fundamental currency driver is common to all MMT scholars (Kelton, Mitchell, Wray, Mosler, Tymoigne, Forstater, Tchernova, etc). There are internal disagreements I’m sure, but not on this question. Forstater himself has written more on the history of tax driven money, both in theory and practice (https://www.scribd.com/doc/76915699/Tax-Driven-Money). There is no ‘Marxist’ interpretation required.
To me it seems as though you do not like the association of taxes with ‘unemployment’ and ‘coercion’. I understand this impulse, but it’s important to acknowledge what tax is actually doing. If the state did not have to impose a tax as a condition to get its fiat currency accepted and sustain its value, then it simply would not do it as there would be no reason to. It is fine to recognize that the purpose of tax is to create sellers of labor and goods in the state’s currency. That does not make tax bad or scary, and instead empowers us to understand that unemployment is never a necessary fact of the economy, but rather a failure of the government to employ idle labor. Likewise, tax is undeniably coercive. Nobody would pay tax if they were not forced to. But this is a form of coercion which supports the common good. We all benefit from the ability of the government to provision public services. Taxes are coercive, but that does not make the state “oppressive” or “malign”. It’s a necessary fact of social democratic development in a monetary production economy where the state brings resources into its employ for the public purpose.
Charlie
This is so laughably wrong that your time on this blog is at an end.
First, despite what you say, the vast majority of people pay their taxes voluntarily, and want to. Please do not ignore the evidence. People do not think we live in a violent state. They actually appreciate what the state does for them, support it, want it to exist, believe in democracy, and will willingly participate in the process of promoting its course. If you wish to oppose the very essence of democracy, please do so elsewhere, but not here.
Second, your claim about the history of money is also ludicrous, as is the creation, narrative story that Warren Mosler and Matthew Forstater have promoted. Money was not created in a fiat format. The relationship between tax and money was not created with fiat currency in use. Fiat currency came into use when the relationships between money and tax were already mature.
The whole point of a modern monetary theory is not to pretend that there has always been money of the same form. Clearly there has not been. Instead, its purpose is to explain how fiat money developed from asset-backed currency, and how this gives rise to different potential management of money within the macro economy. That is its importance. The creation of the whole Marxist backstory of oppression, based on violence, is an utter distraction, and a fantasy of no relevance to the understanding that a modern monetary theory can offer. Amongst the many reasons why I find that story repugnant is the fact that it so grossly distracts from what needs to be said by capturing the MMT narrative for extremism and antidemocratic causes.
Your time here is over precisely because you promote those causes.
The crux of Charlies contribution is here:
‘If the state did not have to impose a tax as a condition to get its fiat currency accepted and sustain its value, then it simply would not do it as there would be no reason to.’
And here:
‘It is fine to recognize that the purpose of tax is to create sellers of labor and goods in the state’s currency. That does not make tax bad or scary, and instead empowers us to understand that unemployment is never a necessary fact of the economy, but rather a failure of the government to employ idle labor. Likewise, tax is undeniably coercive. Nobody would pay tax if they were not forced to.’
This is so ridden with value judgements based on anti-statism. I’m sorry but it has to be said.
I defer to Christine Desan and her observation that the British state simply printed the pounds in to the economy to create it and sat back and watched the wealth be produced. So the government did its bit by issuing money for free – creating a legal tender for exchange and investment.
The role of tax has changed throughout the history of money, and I think MMT has kept up with that, but it seems its detractors have not, choosing to keep faith with weird ideas about tax from revolutionary times.
We live in a world awash with money (much of it mis-allocated in my view), we keep getting inflation, we keep getting boom and bust and this is where tax is a key safety valve function – not ‘coercive’.
The fact is that money needs to be controlled I’ m afraid especially with the gross flows we have now aided by technology , whether its Russian mafia money being laundered or dodgy funding for undemocratic projects like BREXIT and the Tory party.
My final point is about Marxism. If the suggestion is that tax is a form of state oppression then that is wide of the mark. The British state printed free money into the economy to create the modern economy. There was nothing oppressive about that and that role is still crucial today but denied by the likes of Neo-liberal numpties mis quoting Adam Smith. And tax – well – it’s role has changed as money has changed. Good!
Where the oppression and exploitation was and still is however, is how the market – capital – treats labour and the modes of production as well as the sources of production (the environment). It’s not in tax raising by a government who issues money for free.
If you read Clara Mattei (The Capital Order, 2022) you will see a certain kind of state violence against people called AUSTERITY.
And what is austerity? Well, its the NOT using of taxation as a redistributive mechanism, it is the non-printing of money as investment, wages, pensions. Indeed it is the withdrawal of taxation and money and also therefore the withdrawal of managing and controlling the use of money for the benefit of a wider society. It is also the deregulation of consumer and worker rights. That is definitely state violence against its people, akin to how capital treats its workforce and the planet because austerity favours capital. Austerity is the importation of capitalist interests into government.
But it is not taxation unless of course you are a greedy capitalist bastard wanting to use your tax money instead to fund political parties that create investment opportunities (privatising state assets), funding dodgy think tanks and buying bent politicians who use voting to get capital friendly policy in by the back door.
In that sense I’ll tell you what taxation also is – these days it’s a crusade against greed that leads to un-democracy, against shadow powers that try to rule the world with money power without any accountability whatsoever.
Richard – it’s your blog and I thoroughly respect you and Marxism has some rather quaint and infuriating qualities but it also has some kernels of truth? A right wing view trying to culturally appropriate Marxist critique in an argument is not necessarily Marxism’s fault.
Brilliant
So well said PSR
Desan and Mattei provide a very powerful basis for your argument, which is compelling
Mosler+tax is often represented by his scenario given in a symposium:
“There’s a man at the door with a gun, and you can’t leave until you have done work enough to get one of my business cards so that you can pay tax as you leave. Ergo, a tax demand creates the need to work. It precedes spend.”
I ask: how did Mosler obtain his business cards and the armed guard without spending?
How did the ancient ruler *enforce* the tax demand without spending (money or goods) on a militia and prisons? Maybe it was a benevolent ruler who provided grain storage for a fee which became a tax (?Michael Hudson?) – but the barns were built by labourers who needed food and tools… which involved spending before any idea of tax arose.
If I am way out of line, I ask not to be published, I don’t wish to muddy the waters.
I feel great sympathy with Clive Parry’s point of view on this; and should leave my comment there (if I was wise). Nevertheless, since I my inclinations are historical I feel moved to say something (although the origins of MMT’s internal disputes seem to me quite futile and pointless); but I only wish to suggest that since Mosler is American, I doubt if Marx is a critical factor. For early Americans, the malign state was quite obvious, pernicious and very real – and for very specific reasons of tax, finance and representation. The Malign State was Britain. The proof? The American Constitution; they took the English common law tradition, but the British Constitution represented the unacceptable face of the Malign State. I think that history more relevant than Marx, because it leads to different kinds of distinctions, and leads to different kinds of entangled misunderstandings (including assuming commonalities we should not necessarily assume ar face value).
Both lead to extremism
The other anti-state ‘tradition’ though in the States also has a back ground in the former confederate South – that’s the impression I got from reading Nancy MacLean’s ‘Democracy in Chains’ (2017).
Agreed
Both may well lead to extremism, but in Britain we still find it difficult to face the malignity of the early modern British state; especially for those unfortunate enough to fall under its power and sense of entitlement; we moved as pirates throughout the world
But this is always one of the paradoxes of power.
Policies at home may well be more benign at home but more aggressive abroad.
We look at President Roosevelt as a benign president. He wanted to socially improve the condition of the American worker in his New Deal.
This did not stop him from getting his hands on Britain’s old oil empire, stopping the war grant aid overnight without a warning to the Brits beforehand whilst supporting Germany.
I am not saying that it is acceptable but it is a tragedy.
More so now because governments seem quite fine with using such negative imperialistic style policies at home.
“The liability to the tax is, in itself, a real thing. It does not matter that there is no apparent means to settle it: that does not mean that the liability does not exist. In fact, what this argument proves is that in this situation the tax had to come first and the spend second. To use this as a proof of MMT’s claim that spend comes before tax (as Charlie does and as NeilW does in other comments posted, suggesting Mosler also thinks this) is absurd”
It can’t be absurd if everyone else thinks this too!
The MMT line that the spending precedes the tax in its collection but the imposition of the tax creates a debt in the population in the first place which makes the spending possible in the first place. So, yes, in strict accountancy terms we all should include, on our balance sheet, the debt we owe to the state in future unpaid taxes but most of us don’t think in those terms. As an accountant, you could be the exception, and this opens up a possible way you could make a valid contribution to MMT without having to claim everyone else is wrong apart from yourself.
Most of us, including myself at one time, have or had a tendency to think that the Government collects taxes to spend and borrows the difference. Deficits are bad and surpluses are good etc. These have been the key notions to dispel.
I am making that contribution.
Randy Wrtay has already acknowledged that.
But I will do so without subscribing to the extremism in the form of MMT that you espouse.
I oppose extremism in all its forms, including when disguised by some in something that looks benign.
“ Third, there is the slight problem for those relying on this argument that taxes of the form Forstater describes are rare and form a tiny component of most modern tax systems, if they exist at all independent of the existence of prior means to settle them.”
That was my immediate reaction too, but then I thought of Council Tax. Isn’t that a non-income/capital-gain tax? And car registration tax. I suppose they are small compared to the income tax but they are definitely not rare. Or do I misunderstand something?
Thanks for the long explanation of all this, very interesting. I hadn’t realised any MMT proponents actually suggest tax precedes spend.
Council tax is a service charge
It is not universal
Nor is car tax
[…] Government spend precedes tax in the real world, but not for the reasons some supporters of modern m… Richard Murphy, Funding the Future. Hmm. […]
I had observed in a prior comment that a reading of the archaeological record is helpful in understanding the “sequence” as you outline it here, and I believe that it supports your interpretation that the setting of the tax obligation/liability must come before “spending” since these sorts of obligations/liabilities themselves precede the existence of “money” as we experience it. After all, taxes predate the existence of money.
Beyond that I’m not sure that I have strong feelings about the implications for the validity of further observations regarding the operation of our current fiat monetary systems either by yourself or Mosler et al — all of which are useful in dispelling the prevailing orthodoxy which I believe has been terribly misleading and damaging to citizen well-being. I am grateful for the time you have taken to present your thinking in your MMT documents and posts, all of which have been helpful to my own understanding, especially on the tax side.
* What Marx said in the quote given sounds plausible even if the follow on logic is mistaken.
* There is a degree of coercion in tax, it is illegal not to pay it.
All law is coercive
Are you saying that makes all law bad?
And all who support the rule of law are coercive?
That is the inference I object to.
Why make it?