MMT and Tax : a new narrative – A guest post by Jim Osborne

I have been arguing within the Scottish Currency Group recently, through a number of OPs and comments, that the MMT narrative about taxation is incomplete and presents a serious weakness in the MMT proposition. I want to explain why this weakness needs to be addressed.

MMT is a description of what actually happens in the monetary system with a fiat currency. However it is an ECONOMIC description based on an economic definition of currency and money. This is only one dimension of the matter.

Money also needs to be understood and described in the dimensions of psychology, sociology and politics – taken together this amounts to an ANTHROPOLOGICAL dimension. This is where MMT’s weakness is located.

Let’s start from the MMT proposition that all fiat money is created by a Central Bank at the instruction of a sovereign government and that this is the source of all government spending. Public spending is not dependent upon revenues derived from taxation. This proposition is correct from the perspective of macroeconomics.

However, this immediately prompts the question “In that case why do I have to pay any taxes?” The standard MMT answer is that taxation is required to manage inflation risk by removing money from circulation in the economy.

The problem with this proposition, which is correct from the perspective of economics, is that it undermines whatever motivation citizens have for paying taxes. That motivation is required to overcome the natural instinct to “keep one’s own money” as much a possible. The motivation to pay tax voluntarily springs from the basic human characteristic that we are social beings and have both an individual and a collective identity. We care not just about ourselves but also about our community.  We pay our taxes (with varying degrees of reluctance) because this is our individual commitment to and contribution to the general well being of us all.

Telling citizens that taxes do not pay for public spending is a direct threat to the “social contract” that binds communities.

The second problem is that MMT also argues, again correctly from the economics perspective, that tax is what gives a currency its value. If citizens are persuaded that their taxes don’t fund public spending and resist payment of tax then taxation can no longer give value to the currency.

Of course the state could resort to various degrees of force in order to compel citizens to pay taxes. It is inevitable that this would eventually undermine the legitimacy of the state, lead to a break down in law and order, disintegration of the society into tribal groups, growth in the unregulated economy and the emergence of gangsterism. We usually call such a scenario “a failed state”.

If we look at these issues from the ANTHROPOLOGICAL perspective it is immediately apparent that both the legitimacy of the state and the legitimacy of the currency are based on TRUST and the formation of a web of mutual rights and obligations amongst citizens.  MMT starts from the premise that all money is a “promise to pay” – that means money is a matter of trust.

The economics of MMT cannot function unless there is a well developed web of mutual rights and obligations which bind the society and within this web resides the authority to require payment of taxes and the acceptance that tax is due and is paid voluntarily.  The “promise to pay” (money) also resides within this trust based social web and cannot exist outside of it.

Which brings me to the issue of democracy. Trust in the state, and the government, is based on an understanding that the state and government acts in the interest of all citizens individually and collectively and does not serve the vested interests of a minority. The promotion and maintenance of trust, therefore, depends critically upon the Constitution,  which must be designed to uphold fundamental individual and collective rights.

A democratic Constitution and a legitimate sovereign currency cannot exist separately and, within the resulting “social contract”, taxation has an important function in maintaining the web of mutual rights and obligations.

It is entirely possible for the MMT narrative to integrate this anthropological perspective into its propositions. MMT simply has to describe tax in a modified manner as follows:

“A sovereign government with its own currency does not require that taxation funds all public spending and in most circumstances the revenues from taxation cannot be sufficient to fund all the public spending that a society needs. Any shortfall can ALWAYS be covered by the ability of a sovereign government to create new money, subject only to the limitation imposed by the real capacity of the economy, which is limited by the physical resources available to it.”

It is also the case that the proponents of MMT must also be proponents of a democratic Constitution. Currency campaigners ignore the importance of the Constitutional debate at their peril.

Comments

  1. Peter May -

    It always used to be said that the two basic duties of a nation state were defence and justice.
    We can now add a third – currency creation.

    You point that the state COULD resort to various degrees of force in order to compel citizens to pay taxes. I’d suggest it actually DOES. If I refuse to pay any tax, eventually I’m likely to end up in jail.

    Also a democratic constitution and a legitimate sovereign currency can exist separately I suggest. In 1694 and for a long time after Britain was after all, no democracy, but had its own ‘sovereign’ currency.

    Also, for a shorter explanation, you could modify David Graeber’s “Taxes are just a measure of our debt to the society that made us” and say that
    Taxes are both a measure of our debt to the society that made us and the societal means of preventing inflation.

    1. Jim Osborne -

      a couple of thoughts on your comments Peter:

      Yes, I agree that some degree of force already exists…but it is not applied sufficiently to tax avoiders and evaders and tax havens are on continuing problem that governments are not dealing with. This undermines the legitimacy of the tax system and the government and is corrosive of trust and the social contract.

      There is a difference between the 17th century and now – currency used to be backed by some commodity or other – with a fiat currency the only backing for a currency is trust.

      I rather like your suggested shorter explanation

      1. Peter May -

        I entirely agree that force is not much applied which, as you indicate undermines legitimacy and trust. But it does exist as a potential consequence….

        Agree too, that currency was generally gold/silver backed – though in hard times this backing was suspended of course!. But your assertion was simply sovereign currency not sovereign ‘fiat’ currency…

  2. Jim Osborne -

    I haven’t read David Graeber yet but the book should be waiting for me when I get back home after a short motor home trip. Your shorter explanation has certainly got me thinking.

    I think a qualification is required because the debt we owe cannot be repaid in full (with the possible exception of the wealthy). Rishi Sunak is saying that we will all have to “repay the debt” we have run up dealing with coronavirus and that position is not tenable. Some more thinking about this needed…..

    1. Peter May -

      I think David Graeber was simply thinking of the debt in very general terms – basically that we are all effectively standing on the shoulders of our predecessors who have invested in the infrastructure – physical and creative and – particularly perhaps – medical.

  3. Mike Wolstencroft -

    A very interesting & largely overlooked dimension to money & tax – social psychology. I think there may actually be politicians now who understand the MMT description of reality, but are frightened of the possibilities you outline. Similarly with money and banking. As Ha-Joon Chang says: ‘Banking is a confidence trick (of a sort) but a socially useful one (if managed well)’ It’s the last bit in brackets that’s the important thing. The money system is now socially dysfunctional & the COVID crisis is fast making the ‘no magic money tree’ argument used by the government to dismantle public services untenable & patently cruel. A new social construct could be in the making – as scarey as that might be.

    1. Peter May -

      Agreed entirely. If you read / have read Stephanie Kelton’s ‘the Deficit Myth’ you will know she tried to persuade her local senator of MMT.

      Eventually, he was at great length persuaded – but said he couldn’t say so in the house.
      It has become in effect a religious taboo…

    2. Jim Osborne -

      “social psychology” may be a better term than “anthropology” but it reflects the same meaning I had in mind

  4. Michael G -

    I think trust is too emotive and a difficult nut to crack.
    I prefer absurdity.
    Conventional economists argue that tax and spend versus spend and tax is purely academic. What is important is that the Government must “balance the books”. It must use tax to cancel out all the money it creates.
    So what happens when a member of the Bullingdon Club burns a £50 note in front of a homeless man? To balance the books the Government must either raise an extra £50 in tax, or spend £50 less on services.
    £50 may be trivial, but other processes destroy money all the time. If a Government were to “balance the books” long enough, eventually its currency would disappear.

    1. Peter May -

      Excellent point!

      1. Andrew -

        I may have got my receivables and payables the wrong way round, but doesn’t a £50 note represent a government borrowing or debt, owed by the government to the bearer of the note? (Which can be settled by the issue of a further £50 note, but let’s not worry too much about that.)

        So if the note is burned, the government unexpectedly finds itself with £50 less debt owed, and so in its so-called sacred duty to “balance the books” it must immediately give up £50 of tax, or spend £50 more on services?

  5. Bill Hughes -

    People in general do believe that taxes pay for expenditure so will continue to pay tax if they think this will go on NHS, education, social security etc. If by some miracle the general population come to believe in MMT (a long shot) they will then believe that paying tax to control inflation is a good thing so will still comply with tax paying rather than face going to jail.

  6. Peter May -

    Andrew – you’re right of course. But that is exactly the point! Burn all the money and we have no debt – but we then have no currency.
    Michael G stupidly thought that the government might like us all to have some currency in our possession!
    These days that’s something I’m not at all sure can be regarded as a given for the current government….

  7. MigT -

    Great article, thx.

    I think Jim’s ‘modified’ description of tax is the where you end up after a lot of enquiry and thought. To yer average punter who still thinks tax is just the govt equivalent of household income, it might be a bit opaque, and go in one ear and out the other. Gotta draw ’em in with something challenging like “taxes don’t really pay for govt spending” – which they don’t in the way people think – then lead up to the more nuanced view.

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