This question was asked by someone called Tim here last night:
Your blog posts and answers to related comments are really helpful in explaining MMT. A couple of questions: 1) please could you explain how you would measure the surplus in your statement “Taxes would need to be targeted at those with surplus income or wealth, not those facing a cost-of-living crisis.”, and 2) what do you refer to by the term “real resources” – I note that the UK is not self sufficient in most if not all physical resources? I'm interested in hearing more about political issues, economic risk mitigations and policy choices arising from the practical implementation of MMT.
I offered this in response:
Thank you, and let me address your issues:
1) What do I mean by “surplus income or wealth”?
I am not using a moral or abstract definition when using this language.
A surplus exists where:
- spending power is not required for a decent standard of living, and
- where additional income or wealth is primarily saved, speculated with, or used to extract rents rather than meet needs.
In practice, this is observable. Indicators include:
- High savings rates.
- Ownership of multiple assets.
- Low marginal propensity to consume, and
- The ability to absorb shocks without cutting essential spending.
That is why taxes on higher incomes, accumulated wealth, land, monopoly profits, and excess corporate margins can reduce inflationary pressure far more effectively than taxing wages close to subsistence. The test is behavioural and macroeconomic: does taxing here reduce demand without causing hardship?
2) What are “real resources” in an open economy?
Real resources are not just raw materials. They include:
- Labour
- Skills
- Time
- Energy
- Infrastructure
- Technology
- Land
- Ecological capacity, and
- Organisational capability.
The UK's lack of self-sufficiency does not remove fiscal space; it changes its shape. Import dependence creates inflation risk if spending increases without expanding domestic capacity or securing supply. That is why MMT places such emphasis on what spending is for. Spending that reduces import dependence (energy efficiency, renewables, housing, transport, skills) increases real resource space over time.
On risks and politics
The important point is that MMT does not deny risk; it relocates it. The risks are:
- Inflation.
- Supply bottlenecks.
- Distributional conflict, and
- Institutional failure.
What they do not include is insolvency.
Managing those risks requires democratic choices about:
- Taxation.
- Regulation.
- Industrial strategy, and
- Central bank coordination.
That is political economy, not technocracy.
I thought this was worth sharing.
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One thing which ought to be top of the list for human beings ought not to be concentrating only on managing private consumption but also tackling climate change and what proportion of private consumption needs to be switched away to public consumption of resources to do this.
One thing that’s been recently revealed surprisingly (primarily on this blog) is that it’s not actually top of the list in the UK’s Green Party which still despite years of existence hasn’t resolved its money mechanics understanding to adequately facilitate this switch!
The party has actually welcomed into its fold individuals who support FIB (a Fiscally Irresponsible Belief) that the UK government has to always operate a FCR (a Fiscal Credibility Rule) which basically boils down to the rich must always call the shots including what to do about climate change. Of course we can daily observe their stance in the media through the climate change oblivious lifestyle they continue to lead!
An excellent curate’s egg (good in almost all parts). 🙂
But I’m surprised you say, “taxes on higher incomes, accumulated wealth, land, monopoly profits, and excess corporate margins can reduce inflationary pressure far more effectively than taxing wages close to subsistence”. Whilst I very much agree that we need such taxes to address inequality and that it is immoral to increase taxes on the poor, such taxes don’t seem to me to be the best taxes to counteract inflation for the following reasons.
First I would point out that, in recent times, we have had little demand driven inflation. Inflation has been primarily caused by external shocks such as the pandemic and war in Ukraine. So we’ve not needed taxes to control demand driven inflation. In fact more government spending is required to address societal degradation caused by pernicious austerity. And, as you have pointed out, high interest rates, supposedly to control inflation, have instead added to it.
But you noted that, “a surplus exists where [there is a] low marginal propensity to consume”, and where there is “the ability to absorb shocks without cutting essential spending”. To me that implies that the taxes you note (except excess corporate margins) do not reduce demand very much, they simply reduce savings, asset prices etc, though I agree that limiting excess corporate margins does tend to counter inflation.
I’d be interested to hear you take on this.
This is a fair challenge, and it helps sharpen the argument rather than undermine it.
You are right about recent history: most UK inflation has not been demand-driven. It has come from energy prices, supply-chain disruption, war, rent extraction and profiteering. In that context, taxing to suppress aggregate demand would have been the wrong response, just as raising interest rates has largely been the wrong tool. I agree entirely that more, not less, public spending has been required to repair damage from austerity and to relieve cost pressures.
Where we may be talking past each other is what kind of inflation control is being discussed.
You are correct that taxing surplus income and wealth does not significantly reduce short-run mass consumption demand, precisely because of the low marginal propensity to consume. But inflationary pressure does not arise only from supermarket spending. It also arises from asset markets, rents, pricing power and bottlenecks, and that is where these taxes matter.
Taxes on high incomes, wealth, land and monopoly profits work by:
• reducing speculative demand for housing and land, which feeds directly into rents (a CPI component);
• limiting pricing power and excess margins, which have been a major inflation driver;
• cooling asset markets whose inflation spills over into borrowing costs and household expenses;
• weakening the wealth–political power loop that allows firms to raise prices without restraint.
So yes, much of the immediate effect is on savings, asset prices and balance sheets rather than checkout demand. But that is not a weakness. It is precisely where inflationary pressure has been generated in recent years.
The distinction, then, is this:
– Demand taxes (on wages near subsistence) suppress consumption and cause hardship.
– Surplus taxes suppress price-setting power and speculative pressure without doing so.
That is why they are better inflation tools in the world we actually inhabit – one of inequality, market power and asset inflation – rather than the textbook world of excess wage demand.
Thanks so much for that explanation. It makes a lot of sense and I am happy to agree.
It think it highlights that inflation control, like other aspects of economics, is nuanced and that there is more than one way to achieve policy objectives. There are good ways to address inflation and bad ways. Bad ways include raising interest rates (which doesn’t work and may make matters worse, as well as being regressive) and raising taxes on the poor. Raising taxes on the wealthy may be a good way, as you explained (in addition to addressing inequality).
It seems to me that taxing the wealthy is more of a strategic option rather than a tactical one. That is there might be a significant lag before its effects are felt. That’s not necessarily bad; the effects of interest rates has a significant lag though the rate setters often seem to ignore that.
I hope I have taken the intended message from your explanation. Thanks again. 🙂
Thanks, Tim. I think you get it.
Every tool in the MMT toolbox also exists in the toolbox of what might be called more conventional economic thinking, with one exception. It’s just not a useful way of looking at the public finances compared to the conventional view.
Go on then, explain precisely how? Your claim does not in any way stack – but please explain it – and not just tools, but the political economy.
NB This is the stock post being pushed on social media in response to MMT posts.
Noted
This is not a comment on the article above but refers instead to your article in the National today. You must be dismayed if not cross that the headline in the National used the phrase ‘taxpayers money’. The article itself made it quite clear you were writing about public money. I know you don’t control what headline the sub-editor writes, but do you have any way of correcting it? I certainly intend to put a comment in the paper to try to put the record straight.
I have sent a note
It is in the printed paper so it won’t be changed
So I have a SIPP and ISA which I have saved all my life into. I am 58 and probably have 5 yrs left before I retire. Who decides if I have surplus income or wealth? Some faceless bureaucrat? Who knows I might live for another 40 years, so what exactly is “enough” or “surplus”?. I intend to take my SIPP and Isa as a drawdown but by way of comparison if me and my wife wanted £60k inflation linked for the rest of our life via an annuity then that would cost nearly £2m !!!!
So for the majority of people savings represent a future income from a point when you no longer work. It might optically look when you are working someone has “too much wealth” so lets tax em. But once you stop working and you plan for retirement then you soon realise retirement is expensive. For the record i’ve worked as a roofer since leaving school at 16 and now have my own business. I still do the work and we are out pretty much everyday regardless of the weather. If anyone tells me I don’t deserve a comfortable retirement then they will get short thrift. Thats why you have to be very careful with your “surplus wealth” “surplus income” definitions when it has been built on toil and hard work!!!!!!
Haven’t you answered your own questions?
Drop your rather brutish nastiness about tax officials (go on, try, it’s Christmas) and it is obvious that a sensible fomula for pensions can be agreed.
But might you also explain why £60k inflation linked for life in retirment is not wealth? You do know what most people live on, don’t you?
£60 k after tax leaves enough to live well on and to enjoy retirement though who knows what care costs you might face around the corner. I can’t afford that btw by means of annuity, i hope to get lucky in drawdown with the markets if i don’t i will cut my cloth accordingly. My point along the way is someone looks at that accumulation when still working say in my early 50s and decide it should be taxed without properly considering you have potentially 40 yrs on the planet when you don’t earn. And yes forgive my rhetoric but many throwing out this agenda whether advisors or politicians really don’t know what it’s like to get up at 5.30 on a cold feb morning, drive for 90mins to a clients, do the heavy lifting for 8-9 hours then drive home tired out. Then do the same again!! I honestly feel many (Zach Polanski for example or the young marxist girl who has been winding you up ) just haven’t done a days work in their life. And for the record i always want to pay my taxes, i have voted labour all my life and come from a working class background. The same can’t be said for many i am venting my frustration at. Many look middle class, university educated and born with a silver spoon up their backside!
I think you need to get over your envy and embrace your success and good fortune .
Yeah well David who decides to take action to stop your kids or your grandkids frying due to global warming? Don’t believe in it? Who told you that? Do believe in it? Then it should be obvious some switch away from from private consumption to more public consumption of resources has to take place and if you actually understand how your country’s monetary system works that switch is effected by taxation increase. Hopefully if it’s a fair increase it won’t hit the retired on modest incomes.
To quote from Google AI:-
“That famous lyric, “You can’t always get what you want, but if you try sometime, you might get what you need,” is from the iconic 1969 Rolling Stones song ” You Can’t Always Get What You Want”. It’s a philosophical line about compromise, acceptance, and finding satisfaction in necessity rather than just desire, often cited in discussions about life, love, and even policy.”
I see a rather large problem with what you have said above.
inflation as measured by CPI is a basket of goods and services.
As such, “surplus income” being invested or saved is not being spent on goods or services to any great extent.
Which means that taxing this surplus incomes will have negligible effect on CPI inflation. You aren’t going to reduce demand for the goods and services in the CPI basket from surplus income.
To use taxation to reduce inflation, you would have to tax people at the margin of demand, to reduce it.
Taxing someone very rich will barely if at all affect their propensity to spend on the items within the CPI measure, and thus not affect CPI.
This would tend to mean higher taxes on lower incomes, as reducing their income will have a meaningful affect on their ability to spend.
Exactly the opposite of what you have claimed.
I repeat this:
________________
You are correct that taxing surplus income and wealth does not significantly reduce short-run mass consumption demand, precisely because of the low marginal propensity to consume. But inflationary pressure does not arise only from supermarket spending. It also arises from asset markets, rents, pricing power and bottlenecks, and that is where these taxes matter.
Taxes on high incomes, wealth, land and monopoly profits work by:
• reducing speculative demand for housing and land, which feeds directly into rents (a CPI component);
• limiting pricing power and excess margins, which have been a major inflation driver;
• cooling asset markets whose inflation spills over into borrowing costs and household expenses;
• weakening the wealth–political power loop that allows firms to raise prices without restraint.
So yes, much of the immediate effect is on savings, asset prices and balance sheets rather than checkout demand. But that is not a weakness. It is precisely where inflationary pressure has been generated in recent years.
The distinction, then, is this:
– Demand taxes (on wages near subsistence) suppress consumption and cause hardship.
– Surplus taxes suppress price-setting power and speculative pressure without doing so.
That is why they are better inflation tools in the world we actually inhabit – one of inequality, market power and asset inflation – rather than the textbook world of excess wage demand.
Dealing with your points in turn:
• reducing speculative demand for housing and land, which feeds directly into rents (a CPI component);
By definition this is wrong. CPI does not include any housing costs. CPIH does, and it forms ~17% of the index. It has been above CPI, but if you consider rental yield statistics, which have shown that yields have been relatively static at 5-6% for the last decade suggests other factors have been the driver of increasing rental costs. Namely increased demand through population growth, decreased supply and the effects of government legislation, including higher taxes on landlords – which have pushed rental costs up. The opposite of what you say.
• limiting pricing power and excess margins, which have been a major inflation driver;
Excess margins have remained around the 10% level according to the ONS. Again suggesting that pricing power has not changed significantly. Again, it is more reasonable to consider input costs (materials and wages) as having been the major driver of inflation.
• cooling asset markets whose inflation spills over into borrowing costs and household expenses;
I think you would be hard pressed to claim that financial market prices have been a driver of CPI, considering it doesn’t form part of the basket. However, on the margin, excess savings tend to reduce interest rates, nullifying your argument.
• weakening the wealth–political power loop that allows firms to raise prices without restraint.
See above. Profit margins haven’t really moved in a decade.
This taxation issue is one of the many problems with MMT. Taxes would only be useful to control inflation if targeted at demand, which means the majority of people and those with little or no surplus. To reduce demand on the rich, taxes would have to be confiscatory. Neither would be politically possible and both would have deleterious effects on growth. Even the tax rises Labour has implemented have caused inflation to rise and higher earners to leave the UK, with growth slowing as a result of both.
You are trying to make the case that only the rich would have to be taxed further as you are well aware that to suggest that taxes would have to rise for all, significantly, would remove any sort of support for MMT. It’s the political equivalent of a bribe, and highly dishonest.
I am replying although the email address you use is notoriously popular with trolls. Don’t assume I will do so again.
————-
You’ve bundled a set of objections together, but several rely on misstatement, some on selective measures, and a few on claims that simply aren’t evidenced. I’ll take your points in turn.
1) “By definition CPI does not include housing costs”
That’s not correct in the way you’re using it. CPI excludes owner-occupier housing costs, but it does include rents (private rents and some social rents) and certain housing-related services. CPIH adds an imputed owner-occupier housing component. So when I refer to rents feeding inflation, that is relevant to CPI, and more strongly relevant to CPIH. Your critique only works if “housing costs” is defined as owner-occupation alone, which is not what was being discussed.
2) “Landlord taxes push rents up; therefore tax rises raise inflation”
This is a classic incidence argument, but it is not a free pass to claim “the opposite of what you say”. Whether landlords can pass costs on depends on the state of the market, bargaining power, and constraints on supply. In tight rental markets, landlords try to pass through costs; in weaker markets, they can’t. The deeper driver is exactly what you concede: restricted supply and structural demand pressure. That is why the solution is not “don’t tax landlords”; it is build housing, regulate rents, tax land values, and reduce speculative demand so the rentier premium is squeezed.
3) “Profit margins haven’t moved so pricing power isn’t a driver”
Aggregate margins can be stable while sectoral margins move sharply. Inflation is not driven by “the average firm”; it is often driven by firms with market power in energy, food processing, logistics, housing and finance. Also, “margins” are an accounting outcome, not a direct measure of market power. Prices can rise because costs rise and because firms use the moment to widen spreads. Both can be true.
Continued in part 2
Part 2
————
4) “Asset prices don’t affect CPI, so irrelevant”
They affect distribution, credit, rents, and policy. Asset inflation feeds into housing costs (rents and imputed costs), borrowing against assets, and political pressure for high rates to “defend” credibility. You’re right that equities are not in the CPI basket. You’re wrong to think asset inflation cannot transmit into the economy that CPI measures.
5) “Tax only works if targeted at mass demand; rich taxes would be confiscatory”
No. The aim is not to “confiscate” but to target surplus: unearned income, wealth gains, land rents, monopoly profits, inheritance and avoidance structures. The rich have low marginal propensity to consume, but they still shape demand through housing, services, carbon-intensive consumption and—crucially—asset markets. Taxing surplus can cool those pressures without raising VAT on food or cutting public services.
6) “Labour’s tax rises caused inflation and drove high earners out”
That’s assertion without evidence as presented here. UK inflation dynamics in recent years have been dominated by energy shocks, supply chain disruption, food costs, interest-rate policy and housing constraints. Blaming “Labour tax rises” for inflation as a general claim is not serious without specifics and data.
7) “MMT is a bribe; dishonest”
That is rhetoric, not argument. MMT does not claim “tax the rich and nothing else ever matters”. It claims the constraint is real resources and inflation, and tax is one tool (alongside regulation, price controls in emergencies, public investment to expand capacity, and credit guidance and controls). Sometimes broader taxes may be necessary; the point is to avoid making those the default solution when surplus and rent extraction are plainly large drivers of economic dysfunction.
If you want a serious debate, it has to start by dropping the household analogy and then asking the only question that matters: what is the inflation pressure, where does it come from, and which policy mix best addresses it without worsening inequality?
I am aware you replied but all you did was repeat yourself, and delivered neoliberal tropes. Your comments were deleted. You simply revealed yourself as a troll.
The MMT risks are Macro risks whereas insolvency and most the other things usually mentioned as risks are risks from a Micro perspective. Trying to big those up to macro social , economic or political scale strains the seams of argument ; it’s certainly not something delivered on a plate by General Equilibrium Theory.
So we’re dealing here with something more than monetary theory, important as that is in itself. The basis on which policy decisions are taken which affect everyone can’t be simply scaled up from individual household or enterprise-centred reasoning. But we’re encouraged to believe that ‘democracy’ means they must be -and would be elected politicos tend to act as though it’s either self evident or sacrosanct that they are.
It’s time to break out of that sort of cocoon, or at least try . Of course, as we see here, good citizens will turn up saying ‘we’re just holding these assets in this way to provide for our retirement, etc.’ Of course, that’s part of certain equations. But the much bigger problem is people who are not in a position to form questions the answers to which could provide them and everyone else with better terms on which to live and work.
Can I check if I have understood something? When you say the government can spend by ‘borrowing’ from the Bank of England…. Are you saying we should do that instead of what we currently do which is issue ‘gilts’ ?That these gilts or bonds are essentially paying interest to people ‘saving’ money by depositing it with the government? Would our debt to the Bank of England be interest bearing in the way that gilts are? If yes….what would the benefit be versus issuing bonds? (Are Gilts the bonds talked about in ‘bond markets’?) or does it make no sense to pay interest to the Bank of England because it is paying interest to ourselves even though the Bank of England is in some way supposed to be independent? During QE we gave the money to the banks and they had to pay interest to the Bank of England? Or was QE given interest free to the banks to solve the liquidity crisis? I feel like I agree with everything you say on MMT but I want to make sure I have my facts straight….. if I have understood this right…. Is the reluctance to borrow from the Bank of England directly and the preference for issuing gilts or bonds a historical issue related to previous hyperinflations such as the Weimar inflation?
Thanks. Let me deal with these in turn.
1. Should the government “borrow from the Bank of England” instead of issuing gilts?
Potentially, yes. More accurately, the government can finance spending via central bank money rather than issuing gilts to the private sector. Historically, the UK did exactly this through the Ways and Means account. Gilts are not operationally required for government spending; they are issued for policy and institutional reasons.
2. What are gilts?
Gilts are the UK government’s bonds – the instruments traded in “bond markets”. From the private sector’s perspective, they are interest-bearing savings assets provided by the state. Issuing them is not about “raising money” the government lacks; it is about offering a safe place for surplus money to sit and about interest-rate management.
3. Would borrowing from the Bank of England be interest-bearing?
It does not have to be. Any interest charged on Treasury balances at the Bank of England is a policy choice. At the level of the consolidated state, paying interest to the central bank is economically meaningless – it is paying ourselves. The significance is political and institutional, not financial.
4. What really happened under QE?
QE did inject funds into commercial banks’ reserve accounts at the Bank of England. Those reserves materially improved banks’ liquidity and balance-sheet positions. Crucially, the Bank of England then chose to pay interest on those reserves. That was not a necessity; it was a design choice to preserve a particular interest-rate framework.
When interest rates later rose, this turned QE into a large fiscal transfer from the state to the banking sector. Banks were effectively supported twice: first through the provision of abundant central-bank money, and then through interest payments on that money.
5. So why issue gilts at all?
Three reasons:
• to provide safe assets for pensions and insurers
• to manage interest rates within a market-based framework
• to maintain the appearance of “market discipline”
None of these are about funding spending.
6. Why the reluctance to use the central bank directly?
Largely historical and ideological. Fears of “printing money”, often shaped by misreadings of episodes like Weimar, led to rules distancing governments from their own central banks. Those fears confuse real resource collapse with monetary operations.
Your understanding is now essentially correct:
– gilts are savings vehicles,
– interest payments are optional,
– QE was a deliberate pro-bank design choice,
– and the preference for bond markets reflects politics and institutional habit, not economic necessity.
Thanks for the clarity.
Looks like QE had one design element that was worse than I thought…. I thought the banks may have paid us interest but we paid them… WOW!
You are right – WOW