So, what are the two sides really fighting about? Surely the answer is, the future of the welfare state. Progressives want to maintain the achievements of the New Deal and the Great Society, and also implement and improve Obamacare so that we become a normal advanced country that guarantees essential health care to all its citizens. The right wants to roll the clock back to 1930, if not to the 19th century.
The New York Times | The Conscience of a Liberal
Paul Krugman | Professor of Economics, Princeton University
38 comments:
"The other is for conservatives to successfully starve the beast — to drive revenue so low through tax cuts that the social insurance programs can’t be sustained."
???????
Right according to PK taxes are of course needed for govt to be able to spend.... he is getting no where...
rsp,
Matt, not just PK. As long people in generally remain under the false impression that taxes fund govt and public debt is ruinous, "starve the beast" will continue to be effective. The GOP anti-tax position has little to do with tax policy and everything to do with ending the New Deal. It's been at the top of the agenda for decades.
Maybe Krugman is making a political, rather than economic argument.
People think high deficits "bad". Cut taxes a lot, thus raising the deficit to "unsustaimable levels" and then it will be easier to demand spending cuts.
At the end, the deficit will be the same but the public sector will have shrunk.
Just what the Republicans want.
"Right according to PK taxes are of course needed for govt to be able to spend.... he is getting no where..."
Matt, the very idea that taxes fund spending is so absurd it's hard to believe any rational person could come to that conclusion.
Spending occurs first, or there would be no income to tax...
...taxes are paid at the end of the cycle and the deficit is the result of any shortfall...they are ex-post events.
Taxes and by extension the deficit are beyond the capacity of the government to control...both occur after-the-fact, so any correction is unrelated to the problem they are trying to correct.
The budget and subsequent taxation cannot be expressed in equation form because the events are unrelated...the deficit is a kind of fabrication, but it tells us how much liquidity was withheld from the economy.
Withholding more next cycle can only make things worse even though as Jose said "the intersection of curves" shows an alternate result. It occurred to me later that this paradox is common in mathematics...there are solutions that have no real-world meaning and those solutions are ignored.
We can't go back in time and change it, and any adjustment for it in the present the outcome is still unknown (well, we know what will happen) but the government will make a revenue projection that is very unlikely to be achieved because the deficit is a result of a comparison between a real event (spending) and a forecast or prediction (taxation).
I think this is the kind of behavior Einstein had in mind with his definition of insanity.
Apologies for the rambling comment...I'm too lazy to go back and edit it.
I think there is room to discuss how taxes are sold to the public if we drop the charade of funding government, at least at the federal level. This is a serious question. People do not like to pay taxes, but as long as they see them as paying for something the like, they grudgingly go along. Obviously there are legal reasons for paying one's taxes as well, but the politics of taxes would get even more complicated if people realized they didn't fund anything at the federal level. How could this problem be addressed?
I wish someone could convince Krugman and everyone else to quit referring to taxes as "revenue". "Revenue" sounds so necessary.
Unkown
IMO, taxes could be A LOT lower without affecting price stability...
Taxes "drive" a currency. The key rate is the one that simply maintains this "drive". govt dosenst "need" ONE PENNY MORE than that amount (where ever that rate is)... imo this "drive rate" is A LOT lower than current tax rates... A LOT lower...
rsp,
I don't think that politics can be separated from economics given the role of G and T in macro. The attempt to ignore or reduce the role of govt in macro is ideological rather than economic, which honest rightist admit. Dishonest ones try to conceal their political agenda behind economic assumption.
All macro is essentially political in that the way one approaches it in terms of assumptions is related to policy goals, ie.g., growth with price stability (rightist) OR full employment (leftist).
MMT is the only solution that purports to harmonize this trifecta, thereby transcending partisanship. However, this is not actually the case, since the agenda of the right requires a buffer of unemployed to suppress wages, and the agenda of the left is sustainable growth rather than maximum growth regardless of externalities.
I think there is room to discuss how taxes are sold to the public if we drop the charade of funding government, at least at the federal level. This is a serious question. People do not like to pay taxes, but as long as they see them as paying for something the like, they grudgingly go along. Obviously there are legal reasons for paying one's taxes as well, but the politics of taxes would get even more complicated if people realized they didn't fund anything at the federal level. How could this problem be addressed?
The purpose of taxation according to functional finance is to reduce effective demand when there is inflationary pressure building at full employment when the economy cannot expand supply quickly enough meet demand. Then some "bloodletting" is called for. This is most simply imposed as a consumption tax and it can even be be a variable rate tax that adjusts with the cycle, such as a VAT. Unlike sales taxes paid by consumers, the VAT is added by the seller and remitted directly to the tax authority. So what consumers see is variable prices rather than a tax added to the price that they pay at the point of purchase.
"The purpose of taxation according to functional finance is to reduce effective demand"
What about the "taxes drive a currency" purpose? ie Without taxes, you couldnt have a state currency in the first place...
we pay taxes in the first place to exhibit our subjection to the authority of the civil govt... libertarians and Libertarians hate this I know but that is the way it is under our current type of system...
I dont necessarily agree with that FF "purpose" Tom, unless we are at full employment... this point has recently been made somewhere else and I agree with this being an important distinction.. rsp,
There can be more than one purpose for a tool, Matt. The purpose of taxation wrt state money is to create a need for the private sector to obtain the currency and in so doing to allow the state to move private resource to public use through elected representation rather than confiscation, as had ordinarily been done historically.
The purpose of taxation wrt to FF is to address inflation by reducing effective demand.
Here was Lincoln in 1863 trying to get Congress to get a state currency system started here in the US:
"That Congress has power to regulate the currency of the country, can hardly admit of doubt; and that a judicious measure to prevent the deterioration of this currency, by a reasonable taxation of bank circulation or otherwise is needed, seems equally clear."
Taxes "drive" a state currency in the first place... Lincoln knew this already 150 years ago...
Using taxes to regulate demand would have to come later (as supply for govt provision tightened up) and is a tertiary function of taxation...
rsp
You can even go way back further than Lincoln here to apostle Paul 2,000 years ago:
"5 Wherefore it is necessary to be subject, not only because of indignation, but also because of conscience.
6 For therefore you are settling taxes also, for they are God's ministers, perpetuated for this self-same thing.
7 Render to all their dues, to whom tax, tax, to whom tribute, tribute, to whom fear, fear, to whom honor, honor." Romans 13
And I'm sure there is more direct info on this in Plato and/or Aristotle from centuries before Paul went to the nations that I havent been able to find yet...
This is "old news" to humanity, they knew it, we know it...
Present morons-in-charge excepted of course ;)
rsp,
Tom,
The other thing is "savings" as a demand leakage... so we have 'taxes' and 'savings' that we need to always be thinking about...
Ive lately been trying to think more about "savings" too , rsp
Seems to me you're both equally correct on taxation, which purpose is more primary really kind of depends on the level of development and stability in the issuer. The US in 1863 was necessarily more focused on driving acceptance. On the other hand, a country like Britain in 1863... probably not so much.
For the US in 2012, getting the right level of aggregate demand is far more pressing of a concern than whether people will accept the dollar. On the other hand, a country like South Sudan in 2012 is such a fledgling issuer that they have to worry about their tax collectors coming back beaten up and empty-handed while citizens prefer other currencies.
None of the purposes ever go away completely but priority is context sensitive.
I agree that taxation creates a demand for the currency…I see another reason for taxation beyond simple regulation of the economy that is related to regulation…
If a small group (the 0.1%) is allowed to accumulate a geometrically increasing stock of funds, while pricing is determined by the demand of the remaining stock of funds held by the 99.9% that is not expanding geometrically, then at some point the 0.1% will be able to purchase every thing of value in existence.
It isn't just a case of a small group accumulating massive wealth…If the wealth of the 0.1% remains stable while everyone else's declines they are still becoming richer…it's the ratio of distribution that is important.
"The other thing is "savings" as a demand leakage"
…and maybe profit which is a special class of savings.
Tom, I understand that taxes allow G to control demand , or put another way, to free up non-inflationary fiscal space for G spending. I also understand that taxes create demand for the currency. I do not question this. What I wonder is, if MMT were to make enough progress that people began to realize taxes do not fund government, would it become harder to justify the amount of taxation required to accomplish those two real purposes of taxation? VAT approach might work, though VAT is a bit regressive. This could be OK for inflation control, and also for driving currency demand. Of course, the other function of taxation, if desired, is to redistribute wealth. VAT is not as good at this as progressive income taxation. In any case, I do wonder at the politics of taxation in an environment that acknowledges their irrelevance to funding the government. I think the real functions can be a tough sell for many people. Isn't there some anecdote about FDR saying that the payroll tax was a necessary obfuscation to sell SS?
Rsp
CB (Unknown above)
Krugman's taking about the Platinum coin again - though he still doesn't get monetary and banking operations.
http://krugman.blogs.nytimes.com/2013/01/02/debt-in-a-time-of-zero/
"would it become harder to justify the amount of taxation required to accomplish those two real purposes of taxation?" - unknown
The amount of taxation we should be worrying about is taxation of income of the wage-earner as that is a direct hit to aggregate demand. FICA taxes are particularly regressive.
Taxing excess savings should have near zero effect…it matters who and what we tax.
Taxing consumption (VAT) is another direct hit to demand, although I know local and state governments have to raise revenue somehow…a VAT for federal taxes would be another step backward.
Paul,
Trying to figure out that "savings" / "retained profits" issue is probably imo just as important as the "tax" part... it's a "tough nut" imo... "savings" by itself doesnt seem unreasonable to me at first view... but if just a small cohort ends up with all of it, then that looks like it could be problems at first view...
rsp,
The other thing is "savings" as a demand leakage... so we have 'taxes' and 'savings' that we need to always be thinking about...
Ive lately been trying to think more about "savings" too , rsp
FF is about using the tools of fiscal policy, expenditure and taxation for fiscal purposes. It abstracts from taxation for driving the currency and also being used as a negative incentive.
The construction of fiscal policy is determined by the sectoral balance identity, which shows the size of the fiscal deficit required to offset consolidated non-govt saving desire.
It's a tidy package that is easy to to explain in simple terms.
paul I agree that taxation creates a demand for the currency…I see another reason for taxation beyond simple regulation of the economy that is related to regulation…
If a small group (the 0.1%) is allowed to accumulate a geometrically increasing stock of funds, while pricing is determined by the demand of the remaining stock of funds held by the 99.9% that is not expanding geometrically, then at some point the 0.1% will be able to purchase every thing of value in existence.
It isn't just a case of a small group accumulating massive wealth…If the wealth of the 0.1% remains stable while everyone else's declines they are still becoming richer…it's the ratio of distribution that is important.
Yes, inequality is a negative externality above a certain level. Taxation can be employed as a negative incentive.
Tom, I understand that taxes allow G to control demand , or put another way, to free up non-inflationary fiscal space for G spending. I also understand that taxes create demand for the currency. I do not question this. What I wonder is, if MMT were to make enough progress that people began to realize taxes do not fund government, would it become harder to justify the amount of taxation required to accomplish those two real purposes of taxation?
Given that only state and local taxes payable in the currency are needed to drive the currency, that is not an issue.
Justifying the deficit on the basis of offsetting non-govt saving desire is straightforward.
But the transfer of private resources for public use and employment of those now public resources for public purpose is a political question. It over the specifics of fiscal policy rather than the fiscal balance as indicated by saving desire.
Matt,
Gross Private Saving is about $2.8T, Retained Earnings $1.5T and Debt Held by Foreign Investors $4.9T.
Subtract those from $12T (Total NFA) and we are left with about $2.8T.
I wonder how close an approximation that is of the level of net funds circulating in the domestic non-govt?
Of course, the other function of taxation, if desired, is to redistribute wealth. VAT is not as good at this as progressive income taxation.
Yes, how much inequality is permissible is a political question, although there are economic answers to the consequences of inequality. It's a matter of what level of negative externality the society decides politically to permit.
But since democratic republics are plutocracies by design, that level will likely be higher than optimal.
Paul,
That number is about the same as the Fed's "Factors affecting Reserve Balances" ie the Fed's "Balance Sheet"... Im not saying it is related I have to think about it some more...
rsp,
"But since democratic republics are plutocracies by design, that level will likely be higher than optimal." - Tom
This is an example of the difference between engineering and governance (and economics).
In engineereing we know that exceeding the limits of the design will result in failure…politicians seem unconcerned with those limits, or are ill-informed about what th ereal limits are.
n any case, I do wonder at the politics of taxation in an environment that acknowledges their irrelevance to funding the government. I think the real functions can be a tough sell for many people. Isn't there some ane
I think it boils down the question whether a people is smart enough for democracy, at least to the degree that democracy is operative in a democratic republic, and whether the "rabble," i.e., the majority can be trusted with the truth without ging crazy with the purse strings and destroying the currency, which is why there are republics (plutocracies) instead of popular democracies in the first place.
This is literal different between republican and democrat, although in the US the GOP and Dems are both republicans. The Founding Fathers offed the populist democrats right off the bat and they never regain a toehold.
Isn't there some anecdote about FDR saying that the payroll tax was a necessary obfuscation to sell SS?
Yes.
"Given that only state and local taxes payable in the currency are needed to drive the currency, that is not an issue."
Good point, and of course, these taxes do fund those levels of government as they are not currency issuers. This does bring me to another interesting question: Is there any theory which attempts to derive the minimum amount of taxation required to "drive" the currency? My guess would be that this is influenced by all kinds of externalities and impossible to determine. geerussell hinted at the importance of context above in assigning priority to the various functions of taxation, and it just got me thinking. Could it be that at some point convention and convenience of transaction are sufficient to sustain demand for a currency? Just musing here.
Paul,
Did you get those figures from the Z.1?
If so, which tables?
rsp,
Taxation just gets the state entry into the market with its currency. An economy is an institutional construct with a lot of other things happening that affect a currency's degree of acceptance domestically and internationally. Taxation is just the key to the door, so to speak, through which G enters as the currency provider.
Tom,
I defintely see that... the "key" metaphor... I think the tax rate at which "the key works" is A LOT lower than what we are doing at present... and I dont think that prices would go up necessarily...
So we should not be afraid of "telling the truth" out of a fear that people wouldnt pay their taxes if they knew that their taxes didnt "pay for anything"... we should NOT be afraid of this revelation to the public... as long as taxes are A LOT lower, people would still pay it voluntarily and in addition we would still have tax enforcement, just at much lower rates... there is nothing to fear about this imo...
rsp,
we would still have tax enforcement
This is the key to the key.
"Did you get those figures from the Z.1?"
Matt, I got them from FRED...which comes from z.1.
GPSAVE
CP
FDHBFIN
we would still have tax enforcement
This is the key to the key.
It's also a hint towards another important function of taxes. The hold on the key has to be perpetually renewed through a process of tax bargaining, the give and take of which allows the people to have some leverage over and accountability from government.
Any regime can see the key slip from its hands if it fails to bargain effectively.
Taxes may be burden on taxpayers but they're also a leash on government, held by taxpayers (even when they don't fund anything)
Yes, this is the point of taxation with representation. Taxes become "voluntary" instead of coercive. Previously in history they were just levied and coerced by the military, who, BTW, was paid out of tax revenue so they had a stake it seeing taxes paid in full on time.
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