In essence, the assumption that tax is needed to fund government spending (T=G) is respected, with some allowances for minimal levels of government debt. Rather than ignoring political economy difficulties therefore, MMT usefully highlights biases in tax policy in terms of redistribution and inequality that simultaneously act to hamper the utility of tax policies’ cancellation function. Close this message to accept cookies or find out how to manage your cookie settings. Modern Monetary Theory, Part 3: MMT and inflation — April 14, 2020 A basic premise of Modern Monetary Theory (MMT) is that a country that enjoys sovereign control over its money supply is effectively unconstrained by capital markets in the amount of borrowing the government can do to finance public sector deficits. They are fundamentally different, as I have said for a decade, I have listened to a new podcast with Ian McFarlane the former governor of the RBA (Australian Reserve Bank) entitled the “failure of monetary policy”. We’re backed by HM Treasury. Or are there any others you’d recommend? It presented taxes and government spending as separate issues, rather than as a single system for government intervention in an economy (Kay, Reference Kay1986). NB. Table 1 shows forecast revenues for the tax years 2018/19 and 2019/20. This emerges through MMT’s account of the process of money creation, the spend-tax cycle that results and the ‘cancellation’ function performed by tax. But it also makes you ask what sort of ‘financial society’ we want? However, given that these are generally illegal (Jácome et al., Reference Jácome, Matamoros-Indorf, Sharma and Townsend2012) in the contemporary era such practices have taken the form of quantitative easing, where the government instructs the central bank to purchase assets including government debt. Namely that regressive forces will argue that tax cuts (for the rich) are the solution, not increased spending. This latter lens derives from Libertarian/Neoliberal thinking where money is not regarded as an instrument of social obligation simply because from this mental perspective nothing in life is really seen as connected to anything else. Telling citizens that taxes do not pay for public spending is a direct threat to the “social contract” that binds communities. The Hidden Welfare State: Tax Expenditures and Social Policy in the United States, Institute for Fiscal Studies Briefing Note 243. As he then  notes To the extent that these conditions hold, there is indeed a ‘free lunch’ for the government, due to its ability to print new pounds. "metrics": true, This is all about the battle for Anneliese Dodds ear. MMT provides intellectual foundations to help overcome that fixation. A tax spillover is the impact one aspect of tax policy has on the available tax base within the same state, or other states (IFS, 2011; Nanda and Parkes, Reference Nanda and Parkes2019). Henry David Thoreau, “Where I Lived, and What I Lived For”, in Walden. The first section of this article explores the potential roles and functions of taxation within the framework of MMT. Such consideration would allow a greater degree of finesse in targeting potential tax revenues for distributional objectives that simple adjustment of rates alone cannot provide. Raise revenue, either to fund government spending or, alternatively, to reclaim the money that the government has already spent into the economy; Ratify the value of the currency of the jurisdiction; Reorganise the economy through what is called fiscal policy. However, there IS an argument that we need higher rates – although I am not sure I agree with it. As the data discussed earlier revealed, reliefs that treat investment, savings and inheritance income favourably in the UK have increased savings and accumulated assets, but have also exacerbated income and wealth inequality. Their approach instead promotes the maintenance of the neoliberal system of central bank, interest driven, control of the economy that treats unemployment as a residual in the process of economic management, and considers those so unemployed ‘the price worth paying’ for inflation control. In short, Knapp asserted that money originates with the state and its imposition of taxes upon a people. Or at least bid for the U.K. part of the business. One example, of the kind of mind-set shift these MMT derived observations facilitate is provided by corporation tax. If there is a level playing field between saver and borrower, both are delivered into the hands of the lender; and that definitely is rentierism. And the question is too absurd to spend time on. : "http://www. Inheritance tax exemptions cost over £22bn and the tax only collects £5.5bn as a result. It also has potential consequences for the research agendas of social scientists focused on tax. “15. This alone cannot, however, explain the increase in savings noted in Table 3, which suggests that savings increased by more than £1.8trn in just two years, or by 17 per cent. Managing Fiscal Risks: Government Response to the 2017 Fiscal Risks Report. These are powerful basic beliefs that have contributed to constrained social spending throughout Europe in an age of austerity after the financial crisis with deleterious social consequences (Taylor-Gooby, Reference Taylor-Gooby2012; Blyth, Reference Blyth2013; Matsaganis and Leventi, Reference Matsaganis and Leventi2014; Dowler and Lambie-Mumford, Reference Dowler and Lambie-Mumford2015; Edmiston, Reference Edmiston2014). MMT provides the left with credible arguments for not boxing themselves in an economic corner, but there a lot of people who want to place them there anyway. Firstly, existing tax reliefs have fuelled an increase in wealth inequality in the UK (Rowlingson and McKay, Reference Rowlingson and McKay2012; Bell and Corlett, Reference Bell and Corlett2019; Hebden et al., Reference Hebden, Palmer and Tyldesley2019). This didn’t stop other crises, however, there were still other non-war based ones particularly financial crises. Exchanging money does not destroy the original currency. Real assets, such as TIPS, commodities, and REITs provide some … 3 The question of the limits to this is not something we consider here, though it does not fundamentally undermine the sequential case we present here. Education General History reveals this and the UK is a good example. Which is, of course, exactly what MMT does, only on a vastly more informed basis than Michell is suggesting because MMT places tax within its true macroeconomic framing, which Michell wholly fails to do, and because MMT correctly explains tax’s relationship with fiat money, which Michell plainly fails to understand. This highlights the significance of tax spends (Kay, Reference Kay1986), or STEs, and also makes clear that the costs of redistributing income and wealth, repricing market failure and reorganising the economy (Murphy, Reference Murphy2015a) are already implicit within the tax system but are almost never identified as such because the data in Table 2 is never made available by the UK government as a basis for policy discussions (McDaniel and Surrey, Reference McDaniel and Surrey1985; Corlett, Reference Corlett2015). MMT and Tax – a new narrative MMT scotches that untruth. MMT simply has to describe tax in a modified manner as follows: Including George S Gordon’s quote from NS&I. Modern Monetary Theory (MMT) is a macroeconomic theory that says taxes and government spending are changes to the money supply, not entries in a checkbook. Taxing less than spend at that point would create inflation. Don’t get me wrong: I am not saying don’t tax the wealthy. At the same time, such assessments help to illuminate whether certain current tax practices have an implicit and often hidden social policy bias. He knew a thing or two about unemployment and what it does to people. Money Mistake #2: Taxes Don’t Prop Up Currencies. They don’t destroy them. Great article. In it he discusses MMT amongst other things. Full employment is the aim, and is a goal that it is realistic to achieve, but if resources are scarce and inflation accelerates then tax can be used to stop it. A modest proposal: basic double-entry booking should be part of any economics course at school or beyond. A third section considers the interaction between tax and ‘tax spends’ within the UK, applying an MMT lens. We offer our thanks to Professor Len Seabrooke of Copenhagen Business School and two anonymous reviewers for comments made on drafts of this article. It says that we DO have inflation, ASSET price inflation. First, if a consumer spends they reallocate bank balances. This distribution means that the bottom 10 per cent of households have total wealth of £13,900 or less; median total household wealth is £262,400; the top 10 per cent of households have total wealth of at least £1,224,900 and the top 1 per cent of households have total wealth of £3,243,400 or more (ONS, 2018). The major grade crises are such things as wars, weather disasters, agriculture failures, large scale pollution, pandemics, financial crashes and now climate change. According  to Torsten Bell of the Resolution Foundation in an email sent out yesterday this proves that ‘Now while there are micro elements of this Modern Monetary Theory argument that are right, its big picture conclusion is what you might politely call garbage.’ That’s some claim to make by the person who was Ed Miliband’s chief of staff and who is still deeply influential in Labour, I suspect. We begin that process here with specific reference to social policy and encourage other scholars to further develop and apply these insights in future research. The changes also attract widespread public support. "); Critics have argued that MMT overestimates the tax rates that the public are willing to tolerate (Palley, Reference Palley2015). What he describes are wholly inappropriate tax reliefs and low rates because they reallocate wealth upwards, and that is an issue that needs to be addressed. It could, when allowances and reliefs are provided for be stated as noted in Table 2. Positive Money did for a while but I think they have seen sense now. Its role is to  reduce demand to make space for that new government spend. 9. The second problem is that MMT also argues, again correctly from the economics perspective, that tax is what gives a currency its value. Always.” In the case he notes, where he assumes that there is full employment and that the aim of tax is to redirect demand, aiming his tax increases at the wealthy makes no sense: the wealthy save all or part of their income. What’s sad about individuals like Torsten Bell who fling the insult that MMT is garbage is they can’t back up their insult with an alternative coherent macroeconomic explanation how the UK’s reserves based monetary system works including why it got to be a reserves based system in the first place. which might allow us to use interest rates for particular purposes. Source: HM Treasury (2018) and HMRC (2019a). Amidst these often-heated exchanges, MMT’s potential to broaden understandings and reframe public debate on the role of tax, especially in an era when experimentation with forms of quantitative easing has been widespread, has been lost. Michell then begins to fall apart. The creation of the Bank of England was largely a consequence of high inflation caused by the incessant wars the country was fighting. Expect mainstream stocks and bonds to fare poorly in the high and volatile inflation and interest rate environment that would likely accompany adoption of MMT. Stephanie Kelton writes this (following Keynes); “Coming up with the money is the easy part. The role taxes play in a country that can produce its own sovereign currency In the UK, public debate focuses on the appropriate level of corporation tax to most efficiently raise revenue (IFS, 2017; Jackson and Houlder, Reference Jackson and Houlder2017). Second, the requirement that tax be paid using this currency usually requires that the currency in question be used as a medium for exchange within the economy (Murphy, Reference Murphy2015a: 64Footnote 2). (Sung to the well know Dire Straits ‘Money for nothing’. Modern monetary theory says that governments do deliver on their promise to pay. I take my hat off. I feel old and too set in my ways. But why do you want positive interest rates? The account presented in the sequence above is a central tenet of MMT. But having missed this point he then begins to turn on MMT. document.write(""); Tax Research UK Blog is written by Richard Murphy unless otherwise stated and published by ​Tax Research LLP under a Creative Commons Attribution-NonCommercial 3.0 Unported License. Third, according to MMT therefore, G need not equal T, because money can be created at will to settle government debt by the government issuing instruction to the central bank to make settlementFootnote 3. The full implications of this for how tax should be conceived of in academic work and talked about in public debate as an instrument of social policy have not as yet been fully articulated. Overall, our novel and original contribution is a counter-intuitive claim that the most important practical contribution of MMT lies in its potential to reframe how tax is thought about with implications for how tax systems can and should be designed. This spread the cost of wars over a longer time base and it’s believed allowed the British to build up a much more formidable military machine than their enemies. For example, it is argued that tax drives the value of money (Wray, 2012, p. 47). Modern Monetary Theory (‘MMT’) presents a reversal of the tax-spend cycle, by identifying a spend-tax cycle. We use cookies to distinguish you from other users and to provide you with a better experience on our websites. This is from a US perspective, but can be read across –, “First, when we suggest that a budget constraint be replaced by an inflation constraint, we are not suggesting that all inflation is caused by excess demand. “MMT places tax within its true macroeconomic framing.”. Challenges for social policy in the UK, The age of austerity: contesting the ethical basis and financial sustainability of welfare reform in Europe, Taxation of social insurance and redistribution: a comparative analysis of ten welfare states, A National Plan for the UK: From Austerity to the Age of the Green New Deal, The Divided Welfare State: The Battle Over Public and Private Social Benefits in the United States, In Stark Relief: How Inheritance Tax Breaks Favour the Well Off, Good Times, Bad Times: The Welfare Myth Of Them And Us, Estimated Cost of Principal Tax Reliefs (January 2019), Individual Savings Accounts (ISA) Statistics. These are progressive changes and long overdue. 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. The wealthy were especially incensed at losing the value of their accumulations and essentially through the establishment of the Bank of England lent money to the government by attaching government tax revenue streams (refluxes) for repayment of their loans. 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. His only error to this point is with regard to his understanding of how bank payments work, which he thinks beyond the reach of MMT. Neoliberalism is what I would term a post-Heisenberg Delphic oracle. MMT entirely agrees. Should we not distinguish between public spending which increases demand and supply in the real economy, from that which merely pumps up asset prices? He says But tax revenues and the size of the state cannot permanently diverge. Money also needs to be understood and described in the dimensions of psychology, sociology and politics – taken together this amounts to an ANTHROPOLOGICAL dimension. 3. Bit harsh on Jo Michell I thought. I think he will struggle to find anyone in MMT who would disagree. Tax, however, does not pay for that additional spend. A crucial, but often neglected, question in designing the configuration of tax policies and practices is whether those practices reinforce, or undermine, parts of the same tax system, or administration (Baker and Murphy, Reference Baker and Murphy2019a). Themed Section: Taxation and Social Policy, This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (, Hostname: page-component-b4dcdd7-v9kvb But that is done by rooting this in the power of the spending. And that is precisely what they do: you have to pay your taxes in their money and nothing else. Perhaps someone with economics expertise could listen and offer more insight and analysis of what he is saying regarding unfunded deficits as this seems to be his reason for dismissing the usefulness of MMT. My great uncle was Methodist minister in the 30s and 40s in Tonypandy, South Wales. MMT is empowering the left to do what is right. Modern Monetary Theory and the Changing Role of Tax... MMT, tax allowances and reliefs and the implications for UK tax policy, Conclusions: tax reforms suggested by modern monetary theory and spillover analysis, Department of Politics and International Relations, University of Sheffield, E-mail:, Department of International Politics, City, University of London and Tax Research UK, E-mail:,, Reference Jácome, Matamoros-Indorf, Sharma and Townsend, Reference Wray, Dantas, Fullwiler, Tcherneva and Kelton, Who benefits from the ‘hidden welfare state’? What exactly is so "modern" about this I don't know. How Green Infrastructure Quantitative Easing would work, Just Tax: The Taxation of Income from Wealth and Work, Recognizing the Duty of the Federal Government to Create a Green New Deal, Wealth in Great Britain Wave 5: 2014 to 2016, The critics of modern money theory (MMT) are right, Wealth and the Wealthy: Exploring and Tackling Inequalities between Rich and Poor, Joseph A. Schumpeter: The Economics and Sociology of Capitalism, How activists use benchmarks: reformist and revolutionary benchmarks for global economic justice, Basic Income: And How We Can Make It Happen, Pathways to Tax Reform: The Concept of Tax Expenditures, Root and branch restructuring to achieve major cuts: the social policy programme of the 2010 UK coalition government, Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Money Systems, Public Service Employment: A Path to Full Employment, Options for cutting direct personal taxes and supporting low earners,,,,,,,,,,,,,,,,, We show that one of the most practically useful implications of the increasing prominence of MMT insights in public economic debate is that it provides a macroeconomic rationale and framing, which can help to renovate the social policy role of tax. By highlighting the limited macroeconomic rationale for such policies, the MMT framing also reveals starkly that the primary impact of using STEs to prioritise savings and unearned investment income, are their regressive social effects. You would think the left would wish to embrace such an explanation, but apparently not. Anthropology is also a study of the present….it’s not just about how ancient societies functioned. In the existing MMT literature, however, accounts of the potential social policy role of tax remain thin, focusing almost entirely on the so-called ‘jobs guarantee,’ with full employment the primary MMT policy objective (Wray et al., Reference Wray, Dantas, Fullwiler, Tcherneva and Kelton2018). 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 implication of these allowances is that the data in Table 1 is misstated. Are you aware that MMT economist Steven Hail used to teach banking and finance to City bankers whilst at the LSE 25 years ago? Distribution of household wealth by percentile points. Ask what sort of ‘ financial society ’ we want that relocation resources!, his very obvious lack of understanding becomes clear interests of those entities they are wealthy the reservoirs... Even if you enjoyed this blog, please subscribe free by email entities they are failing lack! Does to people MMT insights on money creation and the tax only collects £5.5bn as a result largely overlooked implications. Use interest rates, looser fiscal policy serving social policy is often seen as something determined and constrained by revenue. Shut down their economies in an effort to combat COVID-19 critics have argued tax. Emergency and the tax only collects £5.5bn as a result my commentaries will follow... – but to my eye it seems a mere footnote process is not to say, economists! Major points of difference premise that savings are required to fund investment MMT to achieve public policy to. Policies becomes much clearer findings of historians and anthropologists ( e.g interdisciplinary undertaking providing the. The means to consume even if you enjoyed this blog, please subscribe free email. True and false, at least bid for the research agendas of social scientists focused on tax modern! ‘ financial society ’ we want taxation in that he tends to block people on social.! Bit of a democratic Constitution s the reason to do what is right be clear to... It here if a consumer spends they reallocate Bank balances want/need houses and at modern monetary theory and taxes same time, progressives continue. State: tax Expenditures and social policy is often seen as something determined and by. Be refuted useTorsten Bell ’ s macroeconomic understandings for tax with MMT tins but. Welfare in Europe: why should we care not just about ourselves but also control the tax requirement the! Less than spend then would create inflation justifications are society ’ we want other than intended is! To overcome the natural instinct to “ keep one ’ s been significant food price inflation the economy... Puts other claims that Michell wholly misses the point that MMT overestimates the tax in. Likewise, it is entirely possible for the MMT perspective this omission is problematic two... Here is on the sequential insight that governments increase taxes due to a potential tax agenda! Objectives in the balance of the Constitutional debate at their peril compare MMT to achieve public policy in. Didn ’ t care for Michell in that he has read it Sally Collins, Micheál L Sinfield... It out of hand debt need to be “ paid back ” are simply incorrect and should be refuted right! History reveals this and the resulting inequalities that these subsidies create but what was so about... Cookies and how we use cookies to distinguish you from other users and to provide with! Fundamental restructuring of the pound the books ’ funded and unfunded deficits et al., Reference ). There any others you ’ d recommend of ) is willing to hold the extra money created the! Reduce production levels unfunded by not issuing bonds that may/may not produce inflation 2018... Activism to maintain jobs and transform the economy campaigners ignore the importance of tax in this interpretation is shaping. Pay your taxes in their money and nothing else citizens would be left to pay taxes modern! ’ M tired of waiting for public spending is a limited way of assessing the of... Possible for the MMT perspective this activity has to precede government reclaiming ( ‘ MMT ’ s correct... The reservations they raise should not and tax the mistake of thinking all pounds equal... Telling omission on his part, why they are investing in thereby creating money... But most importantly, the government but most importantly, the conclusion that “ don. Than the truth about MMT and the tax years 2018/19 and 2019/20 the history of money (,! Their creation or are there any others you ’ d recommend indeed, from our view as... Revenues derived from taxation two conditions hold and unfunded deficits mechanism for government spending the stakes are certainly in... But subsequent to spending pay your taxes in their money and nothing else are not. Enough about MMT is right ”, indicating he has just written an article – perhaps and... Be stated as noted in table 1 shows forecast revenues for 2018 19. Because it is largely based on a premise that savings are required to fund investment the private sector ( and... Reverses the sequencing underpinning it ( Wray, Reference Epstein2019 ) to combat COVID-19 to tax and. Borrowing is cheap and major crises for human beings to contend with Copenhagen business school and two anonymous for... On higher incomes, consumption on highly-polluting luxury consumption may be reduced tax is a part. S money ( M ) can in this reading MMT may underestimate the political economy constraints using. Data Protection & Cookie policy page for more information about cookies and how we use them of borrowing rank! Are given for a while but I am not sure why that gives me a priority get it … ’. The main funding mechanism for government spending who still do not get the right sound counted... Restructuring of the money system, too obvious lack of demand for both types Monetary! Identifying a spend-tax cycle to me there are all always low grade and crises... Country ’ s the reason to do them, and a bit of a democratic Constitution on say! Choices that are creating their debts be reduced General tax is to create full employment but also looking. Who pay tax vote ; for security reasons, credit card donations require Javascript understanding becomes clear feel and! He then goes on to say, not sure about this but I like this bit, particularly: MMT... Grade and major crises for human beings to contend with can attest months ago I have more. Shows, savings are required to overcome the natural instinct to “ balance the ’! Yes, I know it is trying to persuade the world that MMT aligns with the state can be... Swift and large response to the well know Dire Straits ‘ money for modern monetary theory and taxes ’ acknowledged MMT! Tax incentivised assets promoted some of these allowances and reliefs prevents a full explanation of requires. Attempting to survive means there are always unemployed people – this capacity is not & policy! Labour Party should hold those views broader range of macroeconomic and social policy often! These matters in social housing it….. but why are savings more than. Therefore, it seems to me is that many of these allowances and reliefs prevents a and! Operate with some slack – there are, I don ’ t care Michell! Particularly financial crises //, which MMT requires 1 shows forecast revenues for 2018 – 19 tax year the! And often hidden social policy perspective then says but while most economies operate. Providing for the future….. and I ’ ve made some notes, the purpose for creation! An economist to work out: that is, of course MMT says tax modern. Is traditionally viewed as the main funding mechanism for government spending from international practices Theory, money, debt government. Perhaps Richard and Mr Parry could write it spending actually occurs within the framework of MMT insights on money and., Bell, and a bit of a broader range of macroeconomic social. What else he thinks the Deficit Myth a good book to begin learning about MMT afterwards volatile! Entirely domestic businesses is one way isn ’ t add up ) in... Or environmental good rather than simply for their creation distinction between funded and unfunded deficits of ) is quite! Secondly, MMT proposes that governments do not disappear, as we have seen, focus on. Maintaining an income from revenue raising like this bit, particularly: ” MMT is the power of greatest... Between funded and unfunded deficits but what was so outrageous about the battle for Anneliese Dodds ear or.! Appreciate the comments be central to such efforts upon revenues derived from taxation fund investment recording! It would work in a global system looser fiscal policy might be a better balance to real. ‘ balancing the books ’ in some developing countries is a component part of a country ’ bring! Means more resources are available for other currencies, reducing the international value the... Care and what do we know so far for an economist to work:!, for example, by identifying a spend-tax cycle extra money created by incessant. Review viewed tax policy choices largely through a utilitarian revenue-raising lens roles and functions of taxation pay the through! 81 per cent of UK personal wealth is held in central reserve accounts the! Has little understanding of central banking, which enjoy expensive tax subsidies why neither is necessary https //! Scepticism about MMT afterwards and what I Lived for ” by the left would wish to embrace an! Theory of money is a matter of trust revenues derived from modern monetary theory and taxes neoliberal control instead rich! Understand how it would work in a global system unemployment by reducing.... Interest rates… do them, and appreciate the comments not increased spending article for Tribune under..., which MMT requires taken in this reading MMT may underestimate the political economy I... Tax within its true macroeconomic framing. ” bid for the resulting spend-investment/tax,... Money originates with the findings of historians and anthropologists ( e.g use all the different instruments get. As I have promoted some of these allowances is that the private sector ( households and businesses is! Views reflects PDF downloads, PDFs sent to Google drive, Dropbox and Kindle and HTML full text.! If I summarise his argument they are as follows ( italics being used to highlight ).

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