MMT and the need for taxing the rich

9 Mar, 2019 at 20:46 | Posted in Economics | 27 Comments

taxSome inflation might be good, in particular if it allows for higher real wages, something sorely needed. How much inflation? Difficult to say, but the structure of the Fed is not going to vanish, and higher rates would be used to discipline the labor class, with the support of many neoliberal Dems … The limits to fiscal expansion would be political, not economic, and there is no reason for the left to be up in arms against an imaginary enemy. Hyperinflation is like the the windmills for the Quijote. The giants to attack are actually the ones pointed out in the progressive agenda, like lack of spending on health, education and the environment, and MMTers have been instrumental in getting these ideas in the political discourse, and moving the Dems to the left.

But taxes matter too. Here is where the MMTers refusal to acknowledge that taxes on the wealthy are necessary is a political mistake … Tax increases on the wealthy should (and is) be part of the progressive agenda (here MMTers make a political mistake). It has an important distributive effect, and it makes the spending politically acceptable …

But the crucial point is that overall MMTers have been helpful in moving the Dems in the right direction (the right direction is to the left), and that is a good thing … The problem is the vast majority of neoliberals that still dominate the party. The same could be said about MMT. The problem is not the exaggerated propositions of MMTers, but the excessive fear of inflation when there are too many relevant problems to be concerned with.

Matias Vernengo

Important and far-reaching questions indeed. Taxing the rich is not only a question of raising revenue or counteracting potentially increasing inflation.

Inequality that undermines democracy is a dangerous thing. Without a conscious effort to counteract the inevitable forces driving our societies towards an extreme income and wealth inequality, our societies crackle. It is crucial to have strong redistributive policies if we want to have stable economies and societies. Redistributive taxes and active fiscal policies are necessary ingredients for building a good society. If the economy is overheating and we are afraid of getting too high inflation, the traditional Keynesian policy would be to pursue a contractionary fiscal policy and raise taxes. We need a policy that can tackle both inflationary pressure and outrageous income and wealth inequality.

What we have seen happen for decades now in the US, the UK, Sweden, and elsewhere, is deeply disturbing. Societies where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implode. The cement that keeps us together erodes and in the end we are only left with people dipped in the ice cold water of egoism and greed.

The tax issue is an important issue. Refusing to acknowledge that put us all in dire straits.


  1. The economy runs on bank deposits, not fiat, and while Federal taxation destroys bank deposits, the banks can replace taxed away deposits with new deposits (“Bank loans create bank deposits”).
    Moreover, Federal taxation destroys bank reserves and thus improves their (the banks’) Supplemental Leverage Ratio and thus allows banks to create even MORE deposits than were destroyed by taxation.
    So much then for using taxation to control price inflation. It’s also regressive since the rich are the most so-called credit worthy while the non-rich are the ones who must be taxed to curb their consumption.
    Otoh, de-privileging the banks in a responsible, just manner would be deflationary by itself and allow a huge amount of deficit spending without price inflation.
    But who wants to de-privilege the banks?

    • “Federal taxation destroys bank deposits”
      But taxes go back into the private banking system. Under the Treasury Tax & Loan program, taxes are deposited in private banks so how are bank deposits destroyed by taxation?

      • Those dollars are destroyed when they are removed from the TTL accounts. Those accounts are simply an accounting artifice for the Federal Reserve, Once the dollars have been removed, you will not find them in any measure of money in the economy.

        • “As of April 2, 2007, 8,950 depository institutions throughout the United States maintained TT & L accounts for the Treasury Department, taking in an estimated $2.0 trillion in tax revenue in 2006. These funds came directly from employee income tax withholding, Social Security/Medicare taxes (FICA) […]”
          If Social Security taxes get paid out to recipients, how is the tax money ever destroyed?

          • If Social Security taxes get paid out to recipients, how is the tax money ever destroyed? Robert S. Mitchell

            It’s not tax money that get’s destroyed (except for old paper currency) but bank reserves that get “destroyed” because the US Treasury is not a bank therefor its account balance at the Fed does not contain “reserves” and therefore bank reserves transferred into the US Treasury account via Federal taxation cease to be reserves and are “destroyed” from the viewpoint of the private sector.
            Confusing, isn’t it?
            And how much simpler things would be conceptually except for the privileged position of depository institutions – said privileges being a corrupt relic of the Gold Standard.

            • If the TT&L program keeps $2 trillion in private banks and the Treasury General Account at the time (before 2008) was pretty near zero, I doubt that private reserves were ever transferred to the TGA. I bet taxes were deposited directly in private accounts and then transferred to other private accounts as the Treasury disbursed the tax proceeds. If Treasury put FICA taxes in Citibank and paid Social Security to recipients who also banked at Citibank, no Fed reserves need ever be involved. The taxes would stay entirely within the private banking system.

              • If Treasury put FICA taxes in Citibank and paid Social Security to recipients who also banked at Citibank, no Fed reserves need ever be involved. Robert S Mitchell

                Good point and I think that’s the intent – to leave reserve management to the Fed and for the Treasury to be neutral wrt reserve levels.

                The taxes would stay entirely within the private banking system.

                On average yes but this does not rule out continual reserve creation and destruction as Federal spending is received and Federal taxes paid.

                Not that I support the TT&L or any other Treasury or Fed coziness with the banks; truly those should be abolished in favor of checking/debit accounts for all at the Central Bank and the elimination of all other privileges for depository institutions too such as government-provided deposit insurance, lender of last resort, etc.

          • Again, it’s just an accounting gimmick. There are actually two separate actions in the process. First, when the TTL accounts are emptied and the bank’s reserves decrease (see Andrew Anderson above) that money is destroyed. Then when the Federal Reserve sends instructions (not money) to my bank to increase my account balance by my Social Security benefit new money is created ad hoc.

            The Social Security Trust Fund is also an accounting gimmick created when Social Security was created. The purpose was to allow the public to see where their money was going and to keep Congress from messing with it.

      • But taxes go back into the private banking system. Robert S Mitchell

        Good point so in order to curb price inflation with Federal Taxes:
        1) The Federal government must run a budget surplus, i.e. super austerity
        2) The taxes must come, directly or indirectly, from those with a higher propensity to consume, i.e. the non-rich, while the spending must go to those with a lower propensity to consume, i.e. the rich.

        • I’m with Black, price inflation is “literally indeterminate”, not determined by money supply, interest rates, taxes, budget deficits, etc. Inflationnis psychological. If enough people think inflation is caused by budget deficits, that may well happen; but it is due to arbitrary psychology which could reverse itself in an instant.
          If taxes decrease inflation why was inflation higher with higher taxes under Carter than with lower taxes under Reagan?

  2. Thanks for this post, Professor. It is, indeed, very important that we do not ignore the social reasons to impose high taxes on the wealthy in an attempt to keep the public from thinking in terms of “taxes for revenue” or “pay-for’s”.

    However, I have a small quibble. I’m not sure that taxing away the purchasing power of the wealthy will have any effect on inflation because their propensity to consume is unlikely to be affected and their spending is unlikely to change. Unless, of course, taxes get to the confiscatory level like the Beatles line “95 for you and 5 for me”.

  3. I think before you talk about the rich you should talk about who is the rich and who is poor. Stealing money from hardworking Swedes and sending that money to ISIS soldiers cannot be viewed as constructive despite the wealth inequality between these groups.

  4. […] Cross-posted from Syll’s blog […]

  5. Rather than “the rich” per se, the target of taxation that best stabilizes the money system is economic rent. Economic rents are both the source and the object of private political power: the dynamics of economic development tend to drive “returns” to investment in public goods such as primary education and transportation infrastructure into the hands of those whom the rules of the competitive economic game allow to earn economic rents.
    If government builds a bridge to nowhere, converting nowhere to somewhere, reducing radically the cost of moving goods and people to and from the former nowhere, the value of real estate property in the new somewhere, rise with increasing rents and property values. Absent some serious congestion on the bridge, charging a toll for crossing the bridge as a means of financing the bridge, is inefficient. Much better is to charge a real estate property tax, clawing back some of the increment in wealth due to building the bridge.
    Similarly, if the government provides primary education for children for free, with the result that a literate and numerate labor force enables the success of commercial and industrial entrepreneurs, and a concentration of highly productive people in urban areas, the gains are bid away from the labor force and the public good of its so-called “human capital” into the profits of enterprise and the land rents of urban landlords.

  6. “It has an important distributive effect”
    Raising taxes also has the political effect of electing more Trumps and Reagans. Taxes backfire.

    • That depends on whom you are raising taxes, I would think. I suppose some people will believe the lies of the conservatives about who taxes the middle class, but you should know better

      • Taxes are about control. Lars admits he wants to control the behavior of the rich by taxing them. But this is using the threat of state violence to change nonviolent behavior by the rich, and it is recognizably unfair to me and to enough other voters that Trumps and Reagans keep getting elected. Instead of using money to control behavior, use money creation to establish a floor on inequality, then teach the rich by your own example how to change the behaviors you don’t like …
        C. H. Douglas wrote of Dictatorship by Taxation in 1937:
        “In fact, the whole theory of taxation as a justifiable expedient rests
        upon two propositions; first that the poor are poor because the rich are
        rich, and therefore that the poor would become richer by making the rich
        poorer; and secondly, that it is a justifiable procedure to have a
        system of accumulating riches, and to recognize that this system is
        legitimate, while at the same time confiscating an arbitrary portion of
        the accumulated riches. The latter proposition is very much the same
        thing as saying that the object of a game of cricket is to make runs, but if
        you make more than a small number they will be taken off you.
        Please allow me to emphasize the point that I am in complete
        agreement with those who contend that some individuals are unduly
        rich, just as I am absolutely confident that taxation is not the remedy.”

        • First, I think that Douglas’ theory of taxation is bogus. His propositions are demonstrably false.

          The reasons the rich are rich and the poor are poor are due to the advantages that the rich are born with that the poor don’t have, the ability to extract economic rents due to control over productive assets that the poor don’t have, etc., and, yes, occasionally due to their hard work and persistence.

          For me and many others, including, I believe, Prof. Syll, the reason to tax the wealthy is to inhibit the political and economic power that their wealth gives them. This power most certainly is a form of non-state violence as it forces politicians to act against the best interests of their constituents who elected them, for example.

          “…then teach the rich by your own example how to change the behaviors you don’t like …

          Seriously? Do you honestly think that the rich will follow or even notice anyone’s example other than their wealthy friends? If so, I have a bridge I’d like to sell you.

          • In my story, the rich are rich because finance firms have figured out how to securitize real assets such as mortgages, multiplying the price value in the process. In other words, a mortgage-backed security is worth more than the sum of the prices of the underlying mortgages. The extra, created, money is returned to investors in the form of interest on money market funds, for example.
            Thus the rich get most of their money by growing their slice of the money pie faster than other slices, rather than solely by extracting rent from the poor (some of that goes on of course but it is really icing on the cake slice that is growing due to financial sector money creation).
            I think you have a better chance of changing behavior by example than through taxation …

            • In the US:
              The rich enjoy too many tax breaks.
              The rich take more than their fair share of the economic spoils.
              The rich have political power well beyond their numerical proportion, having influence in both the major parties.
              The rich remain in control because the redneck poor stupidly vote Republican.
              The rich have NO intention of modifying their behaviour.
              All in my humble opinion, of course.

              • Right, my claim is that taxing them only makes them double down on their efforts to expand their power, because from their point of view taxes are manifestly unfair. I’m willing to concede the fairness argument because there is a better way to fund something good like a basic income: print money faster than prices rise.

                • I’m willing to concede the fairness argument … Robert S Mitchell
                  Why should you? Who do government privileges for private credit creation, i.e. for “the banks”, favor if not the banks themselves and the rich, the most so-called “credit worthy”?
                  And who do they screw if not the least so-called “credit worthy”, the poor, whose jobs are automated or outsourced away with what is, in essence, the public’s credit but for private gain?
                  Concede nothing. If the rich want flatter taxes then let them fully support de-privileging the banks and, by extension, themselves. And also let them support asset redistribution and/or a Citizen’s Dividend since it was the public’s credit that built the economy.
                  There’s nothing to concede except that two wrongs don’t make a right.

  7. @ Andrew Anderson My bargain is: make taxes voluntary or at least do not raise taxes further, in exchange for the concession that we can print digital money for a basic income and other good ideas …

    • Nice bargain, if you don’t like paying taxes.
      I think you should throw in an all expenses paid holiday to Acapulco, just to further ease the pain of paying taxes.

      • Taxes are about control. You should use words and example to change behavior. Using the threat of state violence to enforce an involuntary forfeiture of assets is immoral. There is a better way: print money faster than prices rise. The existing world central bank unlimited currency swap network eliminates foreign exchange risk.

        • “There is a better way: print money faster than prices rise.”
          Or, the government could declare tickets to Acapulco to be legal tender, then we could forget about money all together.

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