This is another instalment in the series on the MMT view of taxes. I’m 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 “green jobs”. Along the way he made two particularly insightful comments on MMT and taxes that I’ll use to introduce this instalment.
First, he discussed the MMT view of “modern money”—that is to say, the money that has existed “for the past 4000 years, at least, as Keynes put it in his Treatise on Money. 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.
It is like the inch, the pound, the meter, the kilogram, the acre or the hectare—a unit of measure.
Mat put it this way: the sovereign can no more run out of “money” than it can run out of “acres” or “inches” or “pounds”. We can run out of land, but we cannot run out of acres. We can run out of trees but we cannot run out of the linear feet we use to measure them.
You cannot run out of a unit of measure!
The “dollar” is the measuring unit in which we keep our monetary records. We cannot run out.
Second, and more relevantly for our story today, Mat said that a guiding principle for choosing what to tax should be “tax bads, not goods”.
We’ve previously established that “taxes drive money”. We’ve 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.
Clearly we do not want to move all resources to the public sector; we want to leave some for the “private purpose”. Further, we want some “efficiency” (I’ll 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.
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.
So we need to think about what kind of tax can “drive” a currency, without diminishing private initiative.
For example: what if we taxed paid work at a rate of 15% in an effort to “drive the currency”?
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.
From inception of our monetary system, we could not “drive” 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.
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.
The new state would offer its currency, and find no takers. It would have to resort to obvious force—send in the troops—to get resources for the public purpose.
A tax on monetary income will not “drive” a currency unless the economy is already monetized.
This is precisely what the European colonial powers found when they tried to monetize Africa.
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.
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.
(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.)
Now, once you’ve 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.
It is very common to use wage taxes, sales taxes, profits taxes, income taxes, and wealth taxes in highly monetized economies. These will “work” once you’ve monetized the economy, although they would not “work” in an economy that was not yet monetized.
Still, are they the best way to drive the currency?
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 “wedge” that discourages work effort (or sales effort). If we tax wage income at a 15% rate (think FICA tax in the US), then “on the margin” we’ve made “wage slavery” less remunerating than leisure.
(Note that the wage tax is particularly pernicious because only human labor gets taxed, while the robots get off scott-free.)
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 “work effort”. 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.
“Work effort” from the social perspective is not normally a “bad”. Through work we can serve both the public interest and the private interest.
(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—involuntary–overtime work.)
Apparently, the favorite tax among progressives is the corporate income tax. I read virtually every day another call to raise the corporate tax rate.
Given all the attention it gets, this topic deserves a separate treatment, so I’ll save that for another instalment. Meantime think about this: are corporate profits an “evil” that we want to banish? This is not obvious to me.
So. Tax bads, not goods.
We’ve 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 “raise revenue” but to “reduce sin”. We want to reduce the sin of smoking. Of polluting. Of high-speed trading.
I’m always surprised when my progressive friends see the “Tobin Tax” (financial transactions tax) as a potentially great source of tax revenue to “pay for” all the goodies they’d like government to provide.
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.
Admittedly, perfection is very hard to achieve—we’ve still got smokers and we’ll still have carbon polluters for a very long time.
Can we think of a tax on bads that can also “drive” a currency?
Clearly if a cigarette tax was nearly successful, reducing smoking to just a handful of addicted abusers, it would not be a very good “driver” 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.
But what about the “hut tax”? Almost all of us need our “hut” to live in. It is an exceedingly broad-based tax. It would drive the currency.
Where’s the “sin” in hut-living? The environmental “foot print”—the land that is cleared, the construction materials, the furnishings, and—most relevantly—the energy used to heat and cool our hut.
For that reason, a “square-foot-of-living-space” tax on huts would base the “sin tax” on a pretty good proxy for the “sin” of hut-living.
Note we’ve already got property taxes, but these are generally based on nominal value of the property. That might be a proxy for environmental “sins”, 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.
Of course, the nominal property value tax also hits a proxy for “ability to pay”—it 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.
However, the “square-foot-of-living-space” 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.
I have long advocated a more progressive hut tax: a “cubic-foot-of-living-space” 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’ve noticed is that rich folks like really high ceilings—30 foot high in the case of entry ways.
The cubic foot tax would be highly progressive—that 10,000 square foot spread becomes 150,000 cubic feet if it has high ceilings. There’d be a strong disincentive to building the monstrosities.
We can tinker with the tax, encouraging more outdoor living if that seems to be in the public interest—more open porches equipped with rocking chairs. Or giving a break for enclosed space that is not air-conditioned.
To reward energy efficiency, there should be adjustments for going solar, wind-driven, and geothermal.
We probably also need to think about different tax rates for different parts of the country. If we want people to live in—say—Chicago, 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—I’m 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–but I suppose it’s already hard enough to get people to live in the cold/hot places as it is.
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.
We can live in smaller dwellings but as long as humans have more than a virtual existence, we’ve got to live somewhere.
It is, thus, a tax that will continue to “drive” the currency. I’m not saying that we should move to a “single tax”, but Henry George was sort of headed in the right direction. Once we understand what taxes are “for”, we can start to think about what kinds of taxes make sense.
More next time.