I didn't post this earlier because it appeared at Warren Mosler's here, where John Carney responded also in the comments.
However, I see from the comments here that not everyone who reads this blog picked it up over there.
Definitely a worthwhile read, especially if you are keeping track of how MMT is getting around.
Added plus, Carney calls out Krugman on a freshman error.
Hats off to John Carney for doing his part in helping to save the world. We desperately need more people with megaphones and bully pulpits explaining this.
How High Should Taxes Get on the Wealthy?
thanks for passing over to here
ReplyDeleteI think the broadest view to take on the taxation issue, in line with Abba Lerner's concept of functional finance, is that since taxes are not needed to fund spending, the question of whether or not to tax is always a question of what public purposes are served by taxing. The regulation of inflation via the regulation of aggregate demand is one of those public purposes, and one which has been the focus of a lot of MMT writing on the subject of taxation. But it is not the only public purpose to consider. The aggregate amount of purchasing power in existence is important, but so is the relative distribution of purchasing power. There is a good argument to be made that gross inequalities in income and wealth are harmful to the proper functioning of a democratic society. These inequalities damage and corrupt the political intuitions of that society, and interfere with the ability of the political system to serve the maximum number of people and promote the general good. So removing purchasing power (which also equals bribing power and politician patronage power) from the uber-wealthy might be a good thing to do independently of any impact it might have on aggregate demand.
ReplyDeleteBut on the question of aggregate demand regulation, it is true that because of the higher savings rate of the wealthy, taxing from the top of the income scale does not remove as much aggregate demand as taxing the same number of dollars at the bottom of the scale. So to achieve the same inflation ceiling target, one will have to tax away even more money from the top earners than one would have to tax from the bottom earners.
But due to the sharply declining marginal utility of nominal income as one goes up the income scale, it might be that taxing that higher amount from the top removes less value from taxpayers than does taxing from the bottom. Suppose you have to tax $1.5 trillion from the top 5% to achieve the same reduction of aggregate demand that would be achieved by taxing $1 trillion from the bottom 50%. It is still entirely possible that taxing the $1.5 trillion does less damage to the top 5% than would taxing the $1 trillion from the bottom 50% do to that bottom half. Removing a rich man's power to buy a third Mercedes is better from the standpoint of overall utility than removing a middle class guy's power to buy a second Chevy, even if the former removes more aggregate demand.
Also, it is important to recognize that although a sovereign currency-issuing government is never revenue constrained in the end, and can always choose to deficit spend, the particular sovereign government we live under has voluntarily chosen a self-imposed system of laws and fiscal regulations which require the spending authorities to either tax or issue debt to the private sector in order to spend, and they have also chosen a self-imposed limit on the amount of debt they can issue. So long as they are determined to leave these voluntary, self-imposed constraints in place, we will have to tax in order to spend.
OT, but think Tom would like this:
ReplyDeleteKeen: Government should print money to pay off our debts
http://news.bbc.co.uk/2/hi/programmes/hardtalk/9641873.stm
@ Leverage
ReplyDeleteKeen's proposal, or thumbnail sketch of one rather, is interesting but it is basically a repudiation of capitalism, so it is not going be adopted unless the developed world is ready to change the foundations of its economic philosophy. I think it will take much more pain than that, and Steve intimated that either such a level of pain is in store or the affected economies will stagnate for a decade or more. Not enough of TPTB — the people that actually affect change — are staring into a sufficiently deep abyss yet.