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.