What should the left think about tax?

This is the title of a decidedly odd article in ‘Tribune’ by Jo Michell, associate professor of economics at the University of the West of England.

He starts off by stating that taxes do not pay for public spending and saying that this idea might lead people to think that taxes are unneccessary! Not that I’ve ever heard. And most, when saying taxes do not pay for public spending usually finish by saying that they actually prevent inflation.

Indeed when public expenditure is usually a bit over one third of GDP it is easy to see that if you keep pumping money into an economy that in GDP terms is probably now static, at best, then after three years you will need a GDP to be about double the size it is now to soak up all the new expenditure. I know of no one seriously suggesting this as a sensible way to operate.

The piece continues:

…the conclusion that “taxes don’t pay for spending” is incorrect. This is because it conflates two different meanings of “pay for.” The first is the act of settling a transaction….

….What really matters are the goods and services that cash balances purchase. The government can purchase these by printing more money if two conditions hold. The first is that there is some “slack” in the economic system: in other words, there are unemployed or underemployed people who can increase their activity to produce the goods and services. The second is that the private sector (households and businesses) is willing to hold the extra money created by the government.

I don’t agree with the ‘print more money’ concept. If money is an IOU and the sentence ‘I promise to pay the bearer the sum of…’ on every banknote suggests that it can be nothing else, then all IOUs get cancelled once they are paid.

And the last sentence of the quoted piece is one I really struggle with – it is as if the government is issuing us all money to save. Something I’m not aware governments have done since Gordon Brown’s ‘baby bonds’.

In fact surely the author should be aware that the government can buy anything where the supplier is willing to accept government created money in payment.

He continues:

this capacity is not limitless.

I don’t know anyone who suggested it was?

He goes on

Likewise, the willingness to hold cash balances is not without limit: at some point, those holding newly-created pounds will use these balances to spend on goods and services, or to purchase assets such as houses or  stocks and shares. Investors may sell pounds in exchange for other currencies, reducing the international value of the pound.

Again I have no idea how these cash balances directly result from government expenditure? Meanwhile it is certainly true that ‘gambling’ investors can reduce the value of the pound but that has nothing to do with the government creating money – unless of course, in the unlikely event that it does so with such abandon that it causes rampant inflation, and it fails to tax sufficiently to prevent this.

There is, therefore, a limit to the extent to which the government can “pay for” its spending by printing new money. Beyond this limit, the government must either borrow, or tax. This is the sense in which tax “pays for” spending: it makes economic resources available to the government that would not otherwise be available.

How on earth does tax make economic resources available by ‘paying for’ spending after a certain point? To me it’s an incomprehensible concept. And when government borrows or indeed taxes it is just soaking up the money it itself originally created so the only way it can ‘pay for’ its own spending is by clawing back its own expenditure in order to prevent inflation. I wonder if this is what he means? If so, it is the most stretched, contrived and obfuscatory idea of ‘paying for’ something that I’ve ever encountered.

I similarly struggled when he espoused these thoughts on Paul Mason’s ‘Autonomy’ tax seminar.

Jo Michell agrees that MMT properly describes the monetary system but I suggest he really needs to discover how it properly describes the tax system as well…

Comments

  1. MigT -

    “Paul Mason’s ‘Autonomy’ tax seminar” – Yet another zoom conflab turns into an MMT discussion without an MMT economist.

    Ppl like Jo Michell largely paraphrase MMT proper as an argument against some oversimplified strawman. Their problem is that MMT exposed something hidden in plain sight, which they hadn’t really grokked, and is now entering public consciousness. So they’re trying to shoehorn it into their old narratives with sometimes uncomfortable results.

    1. Peter May -

      I think you are probably right…

  2. AMcG -

    “all IOUs get cancelled once they are paid.” – Yes that is what happens when tax is paid. But not in all other transactions.

    “I have no idea how these cash balances directly result from government expenditure?” – If companies paid to fulfil government contracts do not spend the profits from what they are paid then they have a cash balance. Likewise their sub-contractors and workers.

    “gambling’ investors can reduce the value of the pound but that has nothing to do with the government creating money .” – It does not stop the government creating money but it has consequences that the government should consider. The willingness of other countries to hold balances in Sterling is important.

    “How on earth does tax make economic resources available by ‘paying for’ spending after a certain point? – by removing money from the economy – the workers who would have been paid with that money are then freed to be employed to do something else. That’s what Mosler means when he says taxes create unemployment.

    1. Peter May -

      I broadly agree with all except the last point!
      Tax doesn’t pay for anything. It may remove money from the economy.
      It has however paid for absolutely nothing.
      Taxes create unemployment only if you think rampant inflation is fine.
      If you don’t then you need tax to prevent it.
      And then you need, for the sake of society, to get people to do stuff which we all need in our mostly specialist lives, which effectively creates employment.
      So ‘fraid I don’t at all agree with Mosler that tax creates unemployment.

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