I am seeing quite a lot of criticism of Biden's tax plan for the US, from right across the political spectrum.
MMT does not like it because it argues that tax is not required to fund government programmes, which is true, but misses the broader point I make below.
I do not like it because it links the spend on the plan to the money raised, and that I suggest is wrong. If need is real then spend must happen, and tax revenue will flow from it. Getting the ordering right is important, and Biden gets this wrong.
The Right do not like it because it taxes wealth, and that in their view is wrong, although there is no evidence to suggest that the levels of tax on wealth do impact real levels of actual investment.
And those who will pay more tax clearly do not like it.
But let me make the point very clear that in my opinion there are six reasons to tax:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation - people who pay tax vote;
6) To reorganise the economy i.e. fiscal policy.
I stress, these are not choices. They are true right across tax. All tax is subject to these criteria.
So, tax does recover spend, and does not fund it. MMT is right.
But tax also does control inflation.
And it does redistribute wealth, and reorganise the economy. And so on.
These are not alternatives. Taxes work in this way, simultaneously.
My point, then, is to suggest that the criticism of the plan has to be on these broad criteria, and not any narrow one if it is to be appropriate.
Biden has some of this right, but not all. Most opponents do not even get the issue.
It really is time the world understood tax.
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I understand your concern that ‘links the spend on the plan to the money raised’ but perhaps the argument is that this is how all US spend is characterised even though it is always untrue. Stephanie Kelton, I think, makes that point in her book that politicians always need to find a budget allocation for e.g. defense spending, and that spending is done regardless of the budget being in any way true.
Provided Joe Biden makes the spend then that should have the desired effect? Saying that I fully appreciate that it can come back to bite later, but by then the effectiveness will be known.
If he does go ‘Tax and Spend’ then he is stuck. Ditto if GOP hold him to that.
I live in hope that progress will be made in US.
If it had no consequence I see your point.
That family plan is specifically linked to tax raised though
That does mean the link has a consequence in this case and that’s wrong
Thanks and understood.
What is interesting is that different explanations of monetary dynamics lead to different psychology. At the moment the explanation that money spent during a crisis must be recouped by taxes leads people to be more accepting of the US government raising tax. Interestingly some of the wealthy themselves are reported to recognise that they should share a bigger load of the burden as they perceive it, giving a rare opportunity to produce a reform in tax that is redistributive. It isn’t the whole story though, it depends on the subsequent reduction in overall tax also being targetted in a redistributive way.
(Mind you, whether those same people’s accountants find loopholes to exploit is another matter).
A similar openness for fairer taxation in the UK needs encouraging, and I hope if an opportunity arises you concentrate on using your expertise in the technical aspects of tax to promote it happening. It would be a pity if the opportunity was wasted simply because you disagreed with the rationale which has made people ready to consider it. In the long run MMT evangelism is less important than progress towards a fairer society.
I am beginning to think a return to tax may be timely…..
Your advice is noted
The agnotological view is that tax is best not understood because the notion of it can be abused.
Like much of everything.
I laughed…
… and sausages
so wealthy individuals who remove themselves from taxation by legal or illegal means are bad for the economy because….???
Would it also be fair to say by removing money and stashing it in some tax haven somewhere that they might be indirectly helping to keep inflation down?
I know you are trolling Damion but let me respond anyway
What you reveal is your ignorance.
You know there is no such thing as money in a tangible sense, don’t you?
And that there is therefore no money as such in tax havens?
There are just promises to pay recorded there, which are backed by balancing promises to pay that return the economic substance f activity straight back to the place where the person responsible for the tax haven fund is resident?
And that therefore your claim is complete nonsense based on the gothic that you think there are piles of notes stacked in havens when there are no such things?
If you are going to troll at always troll well
Hi Richard
Genuinely not trying to troll. If my somewhat flippant tone has come across that way I apologise. Just trying to understand as a lay person, non-economist, non-accountant, MMT better.
I discovered your work thanks to the Youtube algorithm, which lead me here. BTW, I think your videos on youtube, on all aspects of economic theory are great and I’m impressed that you take the time to respond to all comments on this discussion board.
Ok, apologies then
Genuine question: Does tax have a role in modifying behaviour in directions deemed beneficial to individuals or society as a whole? I’m thinking of things like tobacco duty and fuel tax. Or are these just convenient items on which to pin taxation?
Yes
But because of their nature they gave also been exploited for revenue and that is a mistake
Thank you, Richard.
I think Biden’s tax plan (much of which I think has been formulated by Kim Clausing) is very astutely devised, for *political* reasons. The aim is to distinguish it from the Covid Rescue package, which will rightly be funded from borrowing. He has linked the American Jobs Plan, and now the American Families Plan, to a Tax Plan that aims to redress the burden of taxation from labour to capital. This will be very popular, and make it very hard for Republicans to oppose.
Even if MMT is good economics (on which I’m agnostic), it is clearly bad politics in this conjuncture. The Labour Party fell into the trap of saying that there is no need for tax rises, and was totally wrong-footed when Sunak raised the corporate tax rate. They failed to seize the initiative to lay out a strategy for needed tax reforms, in the way proposed for example by the IPPR in the run-up to the budget: https://www.ippr.org/research/publications/tax-and-recovery
The Biden Plan does not hypothecate the proposed taxes. It simply puts forward a strong political case for needed tax reforms, without which it would be politically impossible to fund the level of spending it proposes on jobs and family care. The plans already face some scepticism among Democrats (e.g. Larry Summers). This is exactly the level of boldness now needed, which the current Labour Party leadership has signally failed to provide.
Richard, I assume that you support both Biden’s tax reforms and the associated spending plans? If so, I think it’s a bit blinkered to criticise the plan as whole because it is not based on MMT.
Thanks for the comment Sol.
I do, of course, support Biden’s tax plan. I warmly welcome moves to shift the burden of tax from labour to capital, and have long campaigned for that. Like you, I have known Kim Clausing for some time and I share your view that this could be her work, and it’s good.
The issue is not with the detail of the tax though. The direction of that is right. The criticism is with the economics of the plans (for there are multiple plans). And the criticism is both macro and micro.
First, at a micro level there us not enough green spending.
Nor is there enough support for families.
The problems demand more action than the plans deliver. They are big, but after decades of harm they are not big enough. I think it entirely fair to say that. I hope you’d agree.
And then there is the reason for the caution, which is also suggested by the time scale for delivery, which is too long. And that is that the macroeconomy is wrong.
Implicit in the plan is the age old US paranoia with debt which is never seen in military issues or, come to that, corporate tax cuts, but us when it comes to spending plans like this. Then, whilst what you say about hypothecation may be strictly true, the requirement is that quite large parts of the plan for families, in particular, be match funded i.e. they can only happen if other spending cuts (which may cause harm) or tax revenues can be found. So the plan is constrained by tax.
But government spending is not constrained by tax, ever. We know know that government spending is equated within governments to tax revenue, changes in borrowing and changes in the total sum of government created money. You need never have heard of MMT to now know this. The last year has proved it. MMT is not in the equation then in reality, although it does much better explain the reality of what happens than other theory does. But I stress, it’s explanation, not policy. The policy is happening.
So the criticism is that Biden has ignored this and has related the amount of assistance to poorer families to the amount of tax being paid by wealthier ones, creating a relationship that does not need to exist and which is wrong.
Poorer families do not heed to be assisted by the rich. They need to be helped to deal with the consequences of an unjust economy.
The wealthy do not need to be taxed to assist those less well off. They heed to be taxed because to correct the failings in the distribution of reward that is implicit in too many current forms of capitalism, which results in gross and destructive inequalities that harm everyone, the wealthy included.
My point is that linking these two is wrong. They are not connected directly, except through a failing economic system. Each needs to be addressed. Tax is a tool that assists both operations, although one in particular. But to pretend, as the Biden plan does, that tax funds the assistance for poorer families is wrong. It is one of the options for doing that. So the linkage is incorrect. And the constraint it imposes is also wrong. And I think it right to say so.
But that does not mean I am saying the tax on the wealthy is wrong. That is necessary in its own right. Period. It’s the link that is wrong.
The merit of MMT is that as a theory it lets us see that. And that is why it is useful.