"Modern Money Basics" in Modern Money Theory (M.M.T.)x

[Steve3007]

Does tax fund public expenditure, like me spending what is in my wallet?

This part has been discussed over and over and over hasn't it?

My own answer to your two questions is and was yes and no respectively. Yes it does, but not like your spending. Tax doesn't have to fund public sector wages. New money can be created without removing any existing money from the system. But if that doesn't happen, and if the money removed as tax equals the money created for public sector wages, as I've said before, it seems reasonable to me to characterize that process as taxes funding public sector wages. As far as I can gather, some others disagree and some agree.

---

Consider this question, without referring to money:

What does it mean for group A to "fund" group B?

Here's my attempted answer:

It means that A does a variety of work creating a variety of necessary goods and services that are then provided for B so that B doesn't have to work to create those goods and services themselves, so they are freed to work on the activity that is being "funded".

Do you agree with this answer?

[Wossname]

y gad-fly » Yesterday, 11:41 pm

The technical aspect of Money Supply is a technical concern. Call money destroyed and created, an IOU, or some reinvention. That can be allowed, though confusing. Does tax fund public expenditure, like me spending what is in my wallet?

y gad-fly » Yesterday, 11:41 pm

Money supply is the size of the economy, reflecting asset valuation of all there is.

I don’t think I am saying anything new in what follows gad-fly, but if it helps:

When you spend the money in your wallet, you are spending money that has been created by the government or its banking system. You and I are users of money (but we can’t create it). When we spend it the money passes on to someone else and on it goes. The money circulates around the economy and is a useful tool for promoting wealth creation. It is also taxed just about every step of the way.

The government has a very different wallet to you and me. Mine has very limited funds in (I won’t speculate about yours beyond guessing it must have a limit somewhere). The government’s wallet has unlimited funds in it. It can spend as much as it wants and it can’t run out. It makes money by pressing buttons on a computer keyboard. You and I spend money that is in existence. The government spends money into existence. So as a creator of money it is in a very different position to you and me who are users of money.

I don’t think the amount of money in the economy does quite represent the value of the stuff in the economy in the way you suggest. Of course governments and companies need money to fund their projects or businesses, pay for materials and pay for employees. So governments continually create and companies can borrow money to do this if they wish. But they also have future projects in mind, e.g. to build a new hospital or build a new factory, and governments create money and businesses can borrow money for these things too. There is a link to the wider economy, but it is, I think, a bit more tenuous than you suggest. Money is ideally created to promote wealth creation (increase goods and services), and if it is not doing that it might cause problems (e.g. inflation).

So note governments need to keep spending, and if governments keep creating money, increasing the amount in the economy without limit, you would get hyperinflation and that is very bad. So the government has to remove most of the money it creates. This is one of the functions of tax and we have discussed this earlier. When you pay tax it is different to paying for a burger. Buy a burger and you have moved some money around the economy. Pay tax and you have taken money out of the economy. So in the theory these should be seen as different things.

Advocates of MMT, like Randy Wray, argue that paying tax destroys money. Note then that “tax destroys money”, and “tax pays for public services” are not compatible statements. I have sought to clarify this with Steve but failed for reasons I’m unsure of. It is the case that if you pay tax your account is debited, and if the government pays you your account is credited. I believe, (though I’m not sure and have no wish to misrepresent him), that Steve is suggesting that this amounts to moving money. If I have it, then I understand why he makes the suggestion. But the theory does not conceptualise the economy in that way, because the theory believes at root money is an IOU, a tax credit cashed in and destroyed in the act of paying tax. This idea of money creation and destruction is central to understanding MMT.


Steve does suggest he thinks we are not that far apart in our views. I am not sure, but it may be we can bridge the gap by talking of “fiscal space”. In other words, it is the destroying of money by collecting tax that allows the government room to create/spend money without risking inflation. So, though it is not the same as moving money, tax and spend are revealed as closely linked, and at the same time, as we both agree, the one is not dependent on the other. But however you cut it, this does, unfortunately, mean that you and I, gad-fly, cannot escape paying tax, though we neither of us enjoy paying it!

[gad-fly]

y gad-fly » Yesterday, 11:41 pm

The technical aspect of Money Supply is a technical concern. Call money destroyed and created, an IOU, or some reinvention. That can be allowed, though confusing. Does tax fund public expenditure, like me spending what is in my wallet?

y gad-fly » Yesterday, 11:41 pm

Money supply is the size of the economy, reflecting asset valuation of all there is.

The money circulates around the economy and is a useful tool for promoting wealth creation. It is also taxed just about every step of the way.

The government has a very different wallet to you and me.

I don’t think the amount of money in the economy does quite represent the value of the stuff in the economy in the way you suggest.

So note governments need to keep spending.

you and I, gad-fly, cannot escape paying tax!

Money is a useful tool for wealth creation? Agreed, but it is also a useful tool for other things, including paying tax, though not every step of the way. Sometimes we get away from paying tax too, called tax exemption, though not often enough.

Government has a different wallet? Agreed. It can replenish the wallet. Wish I can too.

Money in circulation does not quite represent the size of the economy? Agreed. Indeed, much less. A substantial portion of the asset value in the economy is dormant. Say you live in a house worth $ 1m for 20 years, and for 20 years that value would be hidden, though not unrealized, strictly speaking.

[gad-fly]

So note governments need to keep spending, and if governments keep creating money, increasing the amount in the economy without limit, you would get hyperinflation and that is very bad.

you and I, gad-fly, cannot escape paying tax, though we neither of us enjoy paying it!

Government needs to keep spending? Of course. We do not elect it to sit on its hands. Printing money alone does not increase the size of the economy. To borrow a term from economics, inflation is rational expectation, not necessarily bad. Hyperinflation is disastrous. Look at Zimbabwe. Let us discuss inflation later.

We cannot escape paying tax? Depends on what you mean by escape. Avoiding tax is legal, but evading is a crime. I did not pay tax when I was unemployed. Indeed, I got paid by government, and I did not care whether it is tax money from someone else, or whether it is newly printed. I would gladly accept the creation (as far I am concerned) of that money for my destruction.

[Wossname]

y gad-fly » Today, 4:48 pm

We cannot escape paying tax? Depends on what you mean by escape. Avoiding tax is legal, but evading is a crime. I did not pay tax when I was unemployed. Indeed, I got paid by government, and I did not care whether it is tax money from someone else, or whether it is newly printed. I would gladly accept the creation (as far I am concerned) of that money for my destruction.

I don’t think many people enjoy paying taxes gad-fly. But even if we don’t pay income tax, most of us can’t entirely avoid paying some tax (e.g. on alcohol or cigarettes, fuel, take-away hot food, car tax, VAT etc.).


Tax is argued to have a number of functions, for example:

- It gives money value. People have faith in it because almost everyone needs and so uses it because the government will accept it as payment of tax.

- It removes money the government has created and is a means to keep the economy from overheating or stalling.

- In our democracies it forms part of the bargain between government and people e.g. as in “no taxation without representation”. If citizens are to pay taxes to the government then government should be accountable to them.

- Progressive taxation can help redistribute wealth and foster equality.

- It can reflect and promote social policy. For example, government can put up taxes on things it considers undesirable (e.g. smoking) and lower or remove it on other things (like much of the food you buy in a supermarket).

A discussion of these and other issues can be found here:
https://www.taxresearch.org.uk/Blog/202 ... y-a-guide/


You are right that some inflation is good. Also, as you say, tax evasion is illegal and tax avoidance is not. Still, loopholes that let the wealthy stick money away in tax havens to avoid paying tax are not good. This from:

https://www.greeneuropeanjournal.eu/tax ... you-think/

There are very good reasons for tackling tax evasion/avoidance and closing down tax havens, and for collecting more taxes in general; however, these have little to do with the financing of public expenditure (with the possible exception of the Eurozone). They largely have to do with social justice, inequality and the distribution of political power. It is a well-established fact that today’s soaring levels of inequality – which have returned to levels of over a century ago – represent a grave economic and social problem. As acknowledged even by the International Monetary Fund (here and here), inequality hampers growth (“when the rich get richer, benefits do not trickle down”, one IMF study notes, consigning decades of trickle-down propaganda to the dustbin of history), exacerbates financial instability, erodes social cohesion, and leads to political polarisation. Even more importantly, various studies show that extreme inequality represents a threat to democracy itself. Allowing a small minority to amass obscene amounts of wealth leads them to wield disproportionate influence and power, and allows them to capture to legislative process and push through laws that further cement their power and influence. As Branko Milanovic writes, the “higher the inequality, the more likely we are to move away from democracy toward plutocracy”. Tax havens and offshoring, by facilitating the concentration of wealth, exacerbate the problem of inequality. For this reason they should be shut down.



A core claim of MMT, as I have said, is that taxes don’t fund anything.

See:

http://bilbo.economicoutlook.net/blog/?p=9281

[Sculptor1]

y gad-fly » Today, 4:48 pm

We cannot escape paying tax? Depends on what you mean by escape. Avoiding tax is legal, but evading is a crime. I did not pay tax when I was unemployed. Indeed, I got paid by government, and I did not care whether it is tax money from someone else, or whether it is newly printed. I would gladly accept the creation (as far I am concerned) of that money for my destruction.

I don’t think many people enjoy paying taxes gad-fly. But even if we don’t pay income tax, most of us can’t entirely avoid paying some tax (e.g. on alcohol or cigarettes, fuel, take-away hot food, car tax, VAT etc.).


Tax is argued to have a number of functions, for example:

- It gives money value. People have faith in it because almost everyone needs and so uses it because the government will accept it as payment of tax.

- It removes money the government has created and is a means to keep the economy from overheating or stalling.

- In our democracies it forms part of the bargain between government and people e.g. as in “no taxation without representation”. If citizens are to pay taxes to the government then government should be accountable to them.

- Progressive taxation can help redistribute wealth and foster equality.

- It can reflect and promote social policy. For example, government can put up taxes on things it considers undesirable (e.g. smoking) and lower or remove it on other things (like much of the food you buy in a supermarket).

A discussion of these and other issues can be found here:
https://www.taxresearch.org.uk/Blog/202 ... y-a-guide/


You are right that some inflation is good. Also, as you say, tax evasion is illegal and tax avoidance is not. Still, loopholes that let the wealthy stick money away in tax havens to avoid paying tax are not good. This from:

https://www.greeneuropeanjournal.eu/tax ... you-think/

There are very good reasons for tackling tax evasion/avoidance and closing down tax havens, and for collecting more taxes in general; however, these have little to do with the financing of public expenditure (with the possible exception of the Eurozone). They largely have to do with social justice, inequality and the distribution of political power. It is a well-established fact that today’s soaring levels of inequality – which have returned to levels of over a century ago – represent a grave economic and social problem. As acknowledged even by the International Monetary Fund (here and here), inequality hampers growth (“when the rich get richer, benefits do not trickle down”, one IMF study notes, consigning decades of trickle-down propaganda to the dustbin of history), exacerbates financial instability, erodes social cohesion, and leads to political polarisation. Even more importantly, various studies show that extreme inequality represents a threat to democracy itself. Allowing a small minority to amass obscene amounts of wealth leads them to wield disproportionate influence and power, and allows them to capture to legislative process and push through laws that further cement their power and influence. As Branko Milanovic writes, the “higher the inequality, the more likely we are to move away from democracy toward plutocracy”. Tax havens and offshoring, by facilitating the concentration of wealth, exacerbate the problem of inequality. For this reason they should be shut down.



A core claim of MMT, as I have said, is that taxes don’t fund anything.

See:

http://bilbo.economicoutlook.net/blog/?p=9281

One simple and clear way out of the economic crisis caused by COVID is to allow inflation to flourish for a few years to lower the values of all that cash sloshing about in savings and in off shore accounts.
Legislation to push wages up to meet inflation could be used to maintain the cost of living index amongst people on low incomes; increasing spending public wages, and increasing the minimum wage.
This would alleviate government debt through QE, and to hit the tax evaders by lowering the value of their holdings

[Wossname]

Sculptor1 » 28 minutes ago

One simple and clear way out of the economic crisis caused by COVID is to allow inflation to flourish for a few years to lower the values of all that cash sloshing about in savings and in off shore accounts.
Legislation to push wages up to meet inflation could be used to maintain the cost of living index amongst people on low incomes; increasing spending public wages, and increasing the minimum wage.
This would alleviate government debt through QE, and to hit the tax evaders by lowering the value of their holdings

Hitting the rich while protecting the poor, what's not to like?

I expect you have seen this from professor Murphy:

https://www.taxresearch.org.uk/Blog/202 ... a-bailout/

[gad-fly]

y gad-fly » Today, 4:48 pm

We cannot escape paying tax? Depends on what you mean by escape. Avoiding tax is legal, but evading is a crime. I did not pay tax when I was unemployed. Indeed, I got paid by government, and I did not care whether it is tax money from someone else, or whether it is newly printed. I would gladly accept the creation (as far I am concerned) of that money for my destruction.

most of us can’t entirely avoid paying some tax.
Tax is argued to have a number of functions.
You are right that some inflation is good.

A core claim of MMT, as I have said, is that taxes don’t fund anything.

agreed on all the above. Your thoroughness in bringing up the subject the matter is appreciated.

Tax does not fund everything? Of course not. That is why government creates new (not replacement) money. How? Not by printing alone for no good reason, but by printing in order to correspond with the increase in the size of the economy. Such increase can be brought about by the public or the private sector.

I have waited for some time to wade into taxation, as far as MMT is concerned. Are you ready?

[gad-fly]

Sculptor1 » 28 minutes ago

One simple and clear way out of the economic crisis caused by COVID is to allow inflation to flourish for a few years to lower the values of all that cash sloshing about in savings and in off shore accounts.
Legislation to push wages up to meet inflation could be used to maintain the cost of living index amongst people on low incomes; increasing spending public wages, and increasing the minimum wage.
This would alleviate government debt through QE, and to hit the tax evaders by lowering the value of their holdings

Hitting the rich while protecting the poor, what's not to like?

I expect you have seen this from professor Murphy:

https://www.taxresearch.org.uk/Blog/202 ... a-bailout/

No. I have not seen it until now. What is the Tax Justice Network? Tax haven is for the super-rich rather than the rich. Hitting the super-rich is not the same as protecting the poor and rich.

[Wossname]

gad-fly » Today, 4:41 am

. What is the Tax Justice Network?

https://www.taxjustice.net/about/

[Steve3007]

I presume making the rich poorer by stoking inflation would work best if the rich hold their money in the form of cash (bank deposits). If they hold it in commodities, assets and stocks then presumably that doesn't necessarily work. After the Brexit vote in June 2016 the FTSE 100 temporarily dived. But then, after the initial shock of the unexpected result wore off, it climbed steeply largely because the value of the pound had also dived and FTSE 100 companies are priced in sterling but make most of their profits overseas. So as the pound fell they suddenly looked cheap.

[Wossname]

y Steve3007 » Today, 10:16 am

I presume making the rich poorer by stoking inflation would work best if the rich hold their money in the form of cash (bank deposits). If they hold it in commodities, assets and stocks then presumably that doesn't necessarily work. After the Brexit vote in June 2016 the FTSE 100 temporarily dived. But then, after the initial shock of the unexpected result wore off, it climbed steeply largely because the value of the pound had also dived and FTSE 100 companies are priced in sterling but make most of their profits overseas. So as the pound fell they suddenly looked cheap.

You make a very good point Steve.

Inflation is a tricky beast. It often hurts the poor most, (which is why, I believe, Sculptor1 was seeking to protect them). Much wealth is tied up in assets and inflating the value of those assets will only make the rich richer and move things like housing further away from the average struggling Joe / Josephine.

Some point the finger at the way QE has been managed. Bankers have not, as was hoped, used much of the money created by government to support businesses and stimulate the economy so much as to speculate in the property markets and financial markets, which has driven up property and share prices. Perhaps the idea of a National Investment Bank may therefore have merit. For example, channeling money directly into housing development might actually combat house price inflation.


Clearly the tax havens are long overdue for abolition.
Secrecy means estimates are uncertain but here from Finance and Development magazine 2019:

https://www.imf.org/external/pubs/ft/fa ... shaxon.htm

American Fortune 500 companies alone held an estimated $2.6 trillion offshore in 2017, though a small portion of that has been repatriated following US tax reforms in 2018. Corporations aren’t the only beneficiaries. Individuals have stashed $8.7 trillion in tax havens, estimates Gabriel Zucman (2017), an economist at the University of California at Berkeley. Economist and lawyer James S. Henry’s (2016) more comprehensive estimates yield an astonishing total of up to $36 trillion.


Perhaps a more direct way of addressing the issue of inequality is through the tax system. Even here things are not simple, and matters are well beyond my competence to offer advice on. Someone who is qualified is Professor Richard Murphy. He points out that the tax system currently supports inequality and that the effective tax rate for the wealthiest 10% of the population – once income and wealth were combined – was 18%, less than half the 42% effective tax rate for the bottom 10%. He recommends changes to the tax system here:

https://www.theguardian.com/politics/20 ... xpert-says


He outlines some of the complexities in his blog here:
https://www.taxresearch.org.uk/Blog/202 ... -taxation/

He is delivering follow up blogs for those interested, currently freely available on his website.

[gad-fly]

I presume making the rich poorer by stoking inflation would work best if the rich hold their money in the form of cash (bank deposits). If they hold it in commodities, assets and stocks then presumably that doesn't necessarily work. After the Brexit vote in June 2016 the FTSE 100 temporarily dived. But then, after the initial shock of the unexpected result wore off, it climbed steeply largely because the value of the pound had also dived and FTSE 100 companies are priced in sterling but make most of their profits overseas. So as the pound fell they suddenly looked cheap.

The super-rich is not stupid. They can have the best financial advice money can buy, tailor-made to fit, though this does not mean that even the best professional investment advice cannot be wrong. Inflation would hurt the poor, the middle class, and fixed income earners more than the rich, because asset value does not depreciate. You own a house? Do you regret not having sold it years ago?

The reason why tax haven persists is because there are competing tax jurisdictions. The one abolishing it will end up being the loser. There is so much a tax jurisdiction can do. The super-rich has wings. Clip them? No problem. Wings and anything else can be bought at a price. I believe government is already doing the best it can as far as tax haven is concerned, although there is room for improvement along the way.

[Steve3007]

Much wealth is tied up in assets and inflating the value of those assets will only make the rich richer and move things like housing further away from the average struggling Joe / Josephine.

I agree.

Some point the finger at the way QE has been managed. Bankers have not, as was hoped, used much of the money created by government to support businesses and stimulate the economy so much as to speculate in the property markets and financial markets, which has driven up property and share prices.

I can see why using that money to buy property, and thereby pushing up property prices, would be unhelpful to people who currently don't own property and would like to do so. But it's not as clear cut to me in the case of buying shares in companies. Buying shares in a company is supporting business isn't it?

Clearly the tax havens are long overdue for abolition.

As far as I can see, the fundamental problem is that, by definition, tax havens are not under the legal jurisdiction of other countries. Abolishing something generally means passing laws to remove it. I presume other means would have to be used.

I haven't read the whole of that article that you cited yet.

Perhaps a more direct way of addressing the issue of inequality is through the tax system. Even here things are not simple, and matters are well beyond my competence to offer advice on. Someone who is qualified is Professor Richard Murphy. He points out that the tax system currently supports inequality and that the effective tax rate for the wealthiest 10% of the population – once income and wealth were combined – was 18%, less than half the 42% effective tax rate for the bottom 10%. He recommends changes to the tax system here:

https://www.theguardian.com/politics/20 ... xpert-says

The first interesting thing that strikes me about that article is the headline:

"Wealth tax rise could raise £174bn to tackle Covid-19, expert says"

As I understand it, MMT would dispute the proposition that a tax rise could raise any amount of money at all, because, according to MMT as I understand it, taxes don't raise money; they destroy it. So when it says this:

"The government has the potential to raise up to £174bn a year to help cope with the Covid-19 crisis if it taxed wealth at the same rate as income, a UK tax expert has said."

I wonder how a MMT proponent would comment on that. Presumably " help cope with the Covid-19 crisis" means paying doctors and stuff. But taxes don't pay for doctors, right?

[Wossname]

Steve3007 » Today, 3:47 pm

Buying shares in a company is supporting business isn't it?

I believe that share prices can rise as demand for them increases (though something called “market sentiment” is key and demand can reflect this). I am no expert on the stock market but Max Keiser (RT channel) claims that some institutions and some wealthy individuals sometimes use computer algorithms to buy and sell (he claims to have written such if I recall correctly). The motive is not so much to support a business, but just to make money. If you buy enough, or sell enough, I believe you can affect the price either way and make money either way too.

y Steve3007 » Today, 3:47 pm

As far as I can see, the fundamental problem is that, by definition, tax havens are not under the legal jurisdiction of other countries. Abolishing something generally means passing laws to remove it. I presume other means would have to be used.

You are right. International co-operation is needed to abolish tax havens and secretive offshore accounting. I think some attempts have been made to reduce levels of secrecy, but it is up to the country concerned. International co-operation might be hard to find, especially since some heads of state are implicated in using secretive offshore accounts for their own gain. For example:

https://www.theguardian.com/news/2016/a ... n-offshore

Steve3007 » Today, 3:47 pm

"The government has the potential to raise up to £174bn a year to help cope with the Covid-19 crisis if it taxed wealth at the same rate as income, a UK tax expert has said."

I wonder how a MMT proponent would comment on that. Presumably " help cope with the Covid-19 crisis" means paying doctors and stuff. But taxes don't pay for doctors, right?

This is a Grauniad article for public consumption and written by one of their journalists, and many journalists seem not to understand MMT, which may be why it is so rarely discussed in most daily newspapers or TV news channels. Richard Murphy is very much an MMTer, as a quick visit to his blog reveals. Do note the sentence:

Murphy said even if it were decided that the government and borrowing could pay for the whole coronavirus crisis the issue of the different taxation of income and wealth would not go away.

You might expect a switched on journalist to ask just how the government could decide to pay for it given the deficit. Professor Murphy’s intent in the article, I think, was to highlight inequality and suggest solutions. Borrowing incidentally, refers to selling government bonds, which is not borrowing in the sense people normally think of it (I think I explained this somewhere already). In any event, QE just creates the money electronically to buy these bonds back. There is some £200 billion of QE currently underway I believe.