This is another installment in the series on the MMT view of taxes. I\u2019m back from China, participating in the annual Hyman P. Minsky Summer Seminar at the Levy Economics Institute. Yesterday my colleague, Mat Forstater, gave a talk on the job guarantee and \u201cgreen jobs.\u201d Along the way he made two particularly insightful comments on MMT and taxes that I\u2019ll use to introduce this installment.<\/p>\n
First, he discussed the MMT view of \u201cmodern money\u201d\u2014that is to say, the money that has existed \u201cfor the past 4000 years,” at least, as Keynes put it in his Treatise on Money<\/em>. The money of account is chosen by the sovereign and used to denominate debts, prices, and other nominal values. It is the Dollar in the US.<\/p>\n It is like the inch, the pound, the meter, the kilogram, the acre or the hectare\u2014a unit of measure.<\/p>\n Mat put it this way: the sovereign can no more run out of \u201cmoney\u201d than it can run out of \u201cacres\u201d or \u201cinches\u201d or \u201cpounds.\u201d We can run out of land, but we cannot run out of acres<\/strong>. We can run out of trees but we cannot run out of the linear feet we use to measure them.<\/p>\n You cannot run out of a unit of measure!<\/strong><\/p>\n The \u201cdollar\u201d is the measuring unit in which we keep our monetary records. We cannot run out.<\/p>\n Second, and more relevantly for our story today, Mat said that a guiding principle for choosing what to tax should be \u201ctax bads, not goods<\/strong>.\u201d<\/p>\n We\u2019ve previously established that \u201ctaxes drive money.\u201d We\u2019ve also established that from the perspective of the sovereign that creates the money, the purpose of the monetary system is to move resources to the public sector.<\/p>\n Clearly we do not want to move all resources to the public sector; we want to leave some for the \u201cprivate purpose.\u201d Further, we want some \u201cefficiency\u201d (I\u2019ll leave the definition of that vague for now) in this process, in the sense that while we want to move some resources to the public sector we do not want to discourage useful private sector activity.<\/p>\n It would be even better if this process of taxing to move resources to the public purpose actually encouraged more activity that was beneficial for pursuit of both public and private purposes.<\/p>\n So we need to think about what kind of tax can \u201cdrive\u201d a currency, without diminishing private initiative.<\/p>\n For example: what if we taxed paid work at a rate of 15% in an effort to \u201cdrive the currency\u201d?<\/p>\n Let us begin with a nonmonetized economy (say, Tribal or Feudal). The newly formed sovereign state wants to move resources to itself by imposing a wage tax of 15%, spending its dollar-denominated currency to hire labor.<\/p>\n From inception of our monetary system, we could not \u201cdrive\u201d the currency because no one would work for pay. The Tribal or Feudal society members would go about their activities raising their crops and hunting their deer, with the shares of output distributed as prescribed by custom.<\/p>\n No one would need to work for money wages, so they could refuse the offer of currency for work. And they could avoid the tax by refusing the paid work. The optimal strategy is to avoid monetization.<\/p>\n The new state would offer its currency, and find no takers. It would have to resort to obvious force\u2014send in the troops\u2014to get resources for the public purpose.<\/p>\n A tax on monetary income will not \u201cdrive\u201d a currency unless the economy is already monetized.<\/p>\n This is precisely what the European colonial powers found when they tried to monetize Africa.<\/p>\n You need a reasonably broad-based tax that is hard to avoid. It is easy to avoid a tax on money income if people can live without money income.<\/p>\n So what the colonizers did was to impose either a head or hut tax. Everyone has a head and a hut. From inception, that kind of tax works well to drive a currency.<\/p>\n (Critics please note: I am in no way advocating colonization of Africa or anywhere else. This is an historic example used to make a point. Oh, I know the trolls are going to accuse me anyway.)<\/p>\n Now, once you\u2019ve monetized an economy such that a large portion of the members must work for money incomes in order to buy the necessities of life that are largely available only for monetary purchase, then you can move to other kinds of taxes.<\/p>\n It is very common to use wage taxes, sales taxes, profits taxes, income taxes, and wealth taxes in highly monetized economies. These will \u201cwork\u201d once you\u2019ve monetized the economy, although they would not \u201cwork\u201d in an economy that was not yet monetized.<\/p>\n Still, are they the best way to drive the currency?<\/p>\n Supply Siders like George Gilder and Art Laffer had a point during the era of Reaganomics when they argued that these sorts of taxes introduce a \u201cwedge\u201d that discourages work effort (or sales effort). If we tax wage income at a 15% rate (think FICA tax in the US), then \u201con the margin\u201d we\u2019ve made \u201cwage slavery\u201d less remunerating than leisure.<\/p>\n (Note that the wage tax is particularly pernicious because only human labor gets taxed, while the robots get off scott-free.)<\/p>\n I think the Reaganites grossly overstated the effect, but beyond some point it does seem reasonable to argue that a tax on wages and other nominal income will reduce the \u201cwork effort.\u201d In my own case, I have on occasion turned down extra paid work because the 50% or higher marginal tax rate (including all federal, state, social security, and city taxes) made leisure much more appealing.<\/p>\n \u201cWork effort\u201d from the social perspective is not normally a \u201cbad.\u201d Through work we can serve both the public interest and the private interest.<\/p>\n (Yes, people can and sometimes do work too much. But this is a problem that can be better treated in other ways. For example, requiring employers to pay time-and-a-half or double-time wages is a good way to discourage excessive\u2014involuntary\u2014overtime work.)<\/p>\n Apparently, the favorite tax among progressives is the corporate income tax. I read virtually every day another call to raise the corporate tax rate.<\/p>\n Given all the attention it gets, this topic deserves a separate treatment, so I\u2019ll save that for another installment. Meantime think about this: are corporate profits an \u201cevil\u201d that we want to banish? This is not obvious to me.<\/p>\n So. Tax bads, not goods.<\/strong><\/p>\n We\u2019ve long taxed various sins. While some confuse the purpose of sin taxes, it should be clear that the purpose of taxing bads is not to \u201craise revenue\u201d but to \u201creduce sin.\u201d We want to reduce the sin of smoking. Of polluting. Of high-speed trading.<\/p>\n I\u2019m always surprised when my progressive friends see the \u201cTobin Tax\u201d (financial transactions tax) as a potentially great source of tax revenue to \u201cpay for\u201d all the goodies they\u2019d like government to provide.<\/p>\n No, the purpose of a Tobin Tax is to reduce turnover and it would have achieved complete success in eliminating the sin of high speed turnover if it raised no revenue at all. Ditto the cigarette tax. Ditto the carbon tax.<\/p>\n Admittedly, perfection is very hard to achieve\u2014we\u2019ve still got smokers and we\u2019ll still have carbon polluters for a very long time.<\/p>\n Can we think of a tax on bads that can also \u201cdrive\u201d a currency?<\/p>\n Clearly if a cigarette tax was nearly successful, reducing smoking to just a handful of addicted abusers, it would not be a very good \u201cdriver\u201d of the currency. Only the addicts would need the currency to pay the tax, and while a few of us nonsmokers would still want to get the currency (knowing we can induce the addicts to work for us to get their means of tax settlement), most people would have no need for the currency.<\/p>\n But what about the \u201chut tax\u201d? Almost all of us need our \u201chut\u201d to live in. It is an exceedingly broad-based tax. It would drive the currency.<\/p>\n Where\u2019s the \u201csin\u201d in hut-living? The environmental \u201cfoot print\u201d\u2014the land that is cleared, the construction materials, the furnishings, and\u2014most relevantly\u2014the energy used to heat and cool our hut.<\/p>\n For that reason, a \u201csquare-foot-of-living-space\u201d tax on huts would base the \u201csin tax\u201d on a pretty good proxy for the \u201csin\u201d of hut-living.<\/p>\n Note we\u2019ve already got property taxes, but these are generally based on nominal value of the property. That might be a proxy for environmental \u201csins,\u201d but not necessarily a good proxy. A tiny flat in Manhattan will have a nominal property value greater than a 10,000 square foot spread in the wilds of Montana.<\/p>\n Of course, the nominal property value tax also hits a proxy for \u201cability to pay\u201d\u2014it is a somewhat progressive tax because higher income people live in more valuable property. Thus, the property tax also assesses the sin of excessive riches.<\/p>\n However, the \u201csquare-foot-of-living-space\u201d tax on huts will also tax the sinfulness of high wealth and income, since richer people tend to have bigger spreads. It is perhaps as good as the nominal property tax in taxing the sin of wealth. Worth considering, anyway.<\/p>\n I have long advocated a more progressive hut tax: a \u201ccubic-foot-of-living-space\u201d tax. It will also tax the sinfulness of environmental impact (since there is a bigger volume to heat and cool). And from casual observation, what I\u2019ve noticed is that rich folks like really high ceilings\u201430 foot high in the case of entry ways.<\/p>\n The cubic foot tax would be highly progressive\u2014that 10,000 square foot spread becomes 150,000 cubic feet if it has high ceilings. There\u2019d be a strong disincentive to building the monstrosities.<\/p>\n We can tinker with the tax, encouraging more outdoor living if that seems to be in the public interest\u2014more open porches equipped with rocking chairs. Or giving a break for enclosed space that is not air-conditioned.<\/p>\n To reward energy efficiency, there should be adjustments for going solar, wind-driven, and geothermal.<\/p>\n We probably also need to think about different tax rates for different parts of the country. If we want people to live in\u2014say\u2014Chicago, we might want to provide a lower tax rate there than in San Diego or other places with moderate climates. It depends on how environmental we want to go\u2014I\u2019m not sure we should have humans living in places where humans probably should not be living, but that is a matter for public discussion. We can have a higher rate in Chicago to encourage smaller spaces that need to be heated in winter and cooled in summer\u2014but I suppose it’s already hard enough to get people to live in the cold\/hot places as it is.<\/p>\n Note that the sin tax on huts will reduce the sin of living in high cubic foot dwellings, but it does not suffer from the eventual elimination of tax receipts that a cigarette or financial turn-over tax will face.<\/p>\n We can live in smaller dwellings but as long as humans have more than a virtual existence, we\u2019ve got to live somewhere.<\/p>\n It is, thus, a tax that will continue to \u201cdrive\u201d the currency. I\u2019m not saying that we should move to a \u201csingle tax,\u201d but Henry George was sort of headed in the right direction. Once we understand what taxes are \u201cfor,\u201d we can start to think about what kinds of taxes make sense.<\/p>\n More next time.<\/p>\n","protected":false},"excerpt":{"rendered":" This is another installment in the series on the MMT view of taxes. I\u2019m back from China, participating in the annual Hyman P. Minsky Summer Seminar at the Levy Economics Institute. Yesterday my colleague, Mat Forstater, gave a talk on the job guarantee and \u201cgreen jobs.\u201d Along the way he made two particularly insightful comments […]<\/p>\n","protected":false},"author":208,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[112],"tags":[916,151,1135,413,915,914,142],"class_list":["post-10812","post","type-post","status-publish","format-standard","hentry","category-modern-monetary-theory","tag-henry-george","tag-mmt","tag-modern-monetary-theory","tag-money","tag-property-taxes","tag-sin-tax","tag-taxes"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10812","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/users\/208"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/comments?post=10812"}],"version-history":[{"count":7,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10812\/revisions"}],"predecessor-version":[{"id":10819,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10812\/revisions\/10819"}],"wp:attachment":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/media?parent=10812"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/categories?post=10812"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/tags?post=10812"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}