He has, in fact, said it’s technically correct. The Left in this country is a busted flush. MMT postulates many things that appear rather obvious when we think about them seriously, but are often hidden from the broader public. Fifth, what would you like to ask them?? Participants on both sides of the Modern Monetary Theory (MMT) debate acknowledge that there’s no “free lunch” when a country’s central bank buys government debt directly and charges no interest on the debt. Currency campaigners ignore the importance of the Constitutional debate at their peril. Using the UK as an example, we highlight that one of MMT’s most important, but under-explored, … 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. And let me assure him, once more, that not a person in MMT would disagree. Public spending is not dependent upon revenues derived from taxation. What is more, if he understood these things he would appreciate something much more powerful, and that is that there is only one thing that does change the amount of cash actually in issue, which as he notes is all ultimately government created, and that something  is tax. Using the UK as an example, we highlight that one of MMT’s most important, but under-explored, contributions is its potential to re-frame the role of tax from both a macroeconomic and social policy perspective. “Modern Monetary Theory” (or MMT) is a new approach to monetary policy that advocates argue justifies massive government spending programs, including “Medicare for All” and the “Green New Deal.”But what is MMT, exactly?The core proposition of MMT is that a government that issues its own currency can always fund itself with that currency. 5 To the best of our knowledge it has not been to date. The government under a commodity based money system was either eroding the precious metal coinage content or crying the value of coinage and banknotes down. Managing Fiscal Risks: Government Response to the 2017 Fiscal Risks Report. This proposition is correct from the perspective of macroeconomics. you get no more foreign currency, MMT suggests money creation for a purpose on useful public spending, No one with sense says make money for its own sake. How else is demand stimulated? MMT economists use the logic of sectoral accounting balances to assert the non-inflationary nature of their case, but their relative lack of engagement with inflation as an expectations driven social phenomenon, rather than as a mathematical proposition, is a potential Achilles’ heel. Michell ploughs on. Real assets, such as TIPS, commodities, and REITs provide some … In whose interests should the public finances be managed, and with what goal? 1. 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. Tax, however, does not pay for that additional spend. So what did Michell say? This is because the central bank can, if necessary, “print” the money needed to pay the government’s creditors, a process called monetization. But Michell does not realise two things. It fulfils a social purpose distinct from revenue raising. First, lack of coverage of these allowances and reliefs prevents a full and proper consideration of their social implications and their appropriateness. The actual potential tax base created by UK tax law, based on this method of calculation, is almost £1.2trn per annum, or 56 per cent of GDP based on Office for Budget Responsibility data (Office for Budget Responsibility, 2019: 67). Their clinical staff are more than willing to supply market needs… Modern Monetary Theory (‘MMT’) presents a reversal of the tax-spend cycle, by identifying a spend-tax cycle. 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. 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. This cancellation process means that tax acts to reduce spending capacity in an economy (money withdrawal), simultaneously restraining demand (Fullwiler et al., Reference Fullwiler, Grey and Tankus2019) and contributing to price stability (Mitchell et al., Reference Mitchell, Wray and Watts2019: 323). "languageSwitch": true Awareness of tax and tax expenditures as social instruments in their own right does have some history (Surrey, Reference Surrey1974) but this is not how tax is commonly perceived. Cancellation refers to the fact that just as bank loan repayment cancels the money created by commercial bank lending, so too does tax payment cancel the money created by both government spending and private credit creation. : "http://www. From there its a short step to the right-wing (incorrect) framing of ‘sound’ money & ‘funny’ money and accusation of being ‘MMT loons’. Render date: 2020-12-05T03:56:35.874Z Tax is traditionally viewed as the main funding mechanism for government spending. It could, when allowances and reliefs are provided for be stated as noted in Table 2. It also means a range of tax practices, policies and reliefs need to be evaluated to assess whether corporate taxes fulfil this function (Baker and Murphy, Reference Baker and Murphy2019a). Money Mistake #2: Taxes Don’t Prop Up Currencies. 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”. It would not occur to many that it is their buying choices that are creating their debts. Of course the state could resort to various degrees of force in order to compel citizens to pay taxes. What is not made clear in the official data, such as that in Table 1, is that the stated figures are net of tax reliefs and allowances. We provide the first account of what MMT insights mean for a thoroughgoing tax policy agenda, including how this can inform the evaluation of STEs. A government can create as much money as it wants. Spending priorities can also be changed of course, and can be done rapidly if need be. I have to wonder if he has read it. Thirdly, no other part of the tax system is currently compensating for the resulting inequalities that these subsidies create. A public deficit has been the normal state of affairs for decades – but deficits cannot grow without limits. And they show no sign that he has read MMT. Michell needs to go for a walk in the woods in my opinion. Thank you very much for this forensic demolition of Michell, Bell, and the wrong-headed Left, and appreciate the comments. To put it plainly, too many would rather see tax go as an expenditure so that they’d have more money after dealing with their debts. The creation of the Bank of England was largely a consequence of high inflation caused by the incessant wars the country was fighting. Dalio's article, however, put a radical twist on the traditional zero-lower-bound calls for more government spending by endorsing a novel, heterodox economic theory known as "modern monetary theory," or MMT. Query parameters: { But why are savings more important than the interests of those paying interest? A further 42 per cent is in pension funds, which enjoy expensive tax subsidies. No I don’t. This is why change is such a slow process. I have been trying to persuade the group that a modified narrative about tax is required. I haven’t read , or understood enough about MMT. This, he says is because What really matters are the goods and services that cash balances purchase. In this section we examine how an MMT perspective can help to illuminate distortions within the UK tax system and point a pathway to reform. These examples illustrate how an MMT framing can inform the re-design of systems of tax reliefs on a more systematic basis so as to more effectively serve important social policy priorities. I am saying tax them for the right reason, which is that they are wealthy and that has harmful consequences for society, but don’t then think this will have much impact on consumer demand, because it will not. An MMT framing when harnessed with a direct application of spillover analysis to the UK demonstrates that this is a double ill from both a macroeconomic and social policy perspective (Baker and Murphy, Reference Baker and Murphy2019a, Reference Baker and Murphy2019b). And he hates modern monetary theory. Allowances are given for a great variety of reasons (Hills, Reference Hills2015; Xu and Joyce, Reference Xu and Joyce2019). Inheritance tax exemptions cost over £22bn and the tax only collects £5.5bn as a result. Yes, young/poor people spend it and rich people hoard it….. but why and what changes peoples propensity to spend/save? Likewise, their effectiveness in performing the cancellation function of tax by reducing demand and sectoral inflationary pressures is similarly obscured by the minimal oversight of STEs (Sinfield, Reference Sinfield and Greve2012). There is a danger that MMT’s correct view of money can be used for purposes other than intended. 15. 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. var sc_security="37fb5248"; It does seem to me though that as long as you don’t use the initials MMT there is not a lot between you. What I see is debt doing is what we’ve said it does here – destroying the value of money. Is Stephanie Kelton’s Deficit Myth a good book to begin learning about MMT? The level or rates and the amount of borrowing should rank fully alongside tax policy. Let be me be clear: to this point Jo Michell has not found anything to argue about with MMT. He then claims that some say as long as the Bank of England is willing to issue pounds on behalf of the government, the government can spend without needing to tax. Re-engineering tax systems to serve social policy objectives in the light of these insights is an interdisciplinary undertaking. But I like the summary, especially on tax. From an MMT perspective this omission is problematic for two reasons. Fourth, in answer to the question, “Will any major CB reverse QE (by selling from their bond portfolio or not rolling over existing holdings) in the next 10 years?” – the room was evenly split. 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. Concerns over reduced tax revenues have fed into reduced GDP spending on health and social security in the UK for example (IFS, 2019: 5). In public debate and to a lesser degree scholarship, these questions of designing and assessing taxes to fulfil a broader social purpose, remain marginalised and obscured by the fixation on tax as a revenue raising device. A government spending spree inevitably would lead to inflation. 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. In the United States, MMT has recently risen to prominence because of its role in shaping proposals for a Green New Deal resulting in a series of high-profile media exchanges between Stephanie Kelton (Kelton, Reference Kelton2019) and Paul Krugman (Krugman, Reference Krugman2019), as well as Simon Wren-Lewis (Wren-Lewis, Reference Wren-Lewis2019) and Bill Mitchell (Mitchell, Reference Mitchell2019). It is about getting as many people to subscribe to your point of view as possible, and seeking validation and self worth through this, often at the expense of other more important things in life. They were talking about Modern Monetary Theory, or MMT. There might be an obvious answer to these questions: As I say, not sure about this but I don’t reject it out of hand. Modern Monetary Theory (MMT) informs today’s progressive policy agenda, even though many prominent economists consider it flawed, nonsense, or just plain wrong. If only Michell knew some accounting and basic double entry, on which secure foundation MMT is built, he would appreciate this. In the United States, similar tax proposals have been developed under the Green New Deal proposals of Senator Bernie Sanders. MMT is an approach that has challenged conventional macroeconomic understandings of the relationship between tax and government spending. I only ever saw him really angry once; it was as he denounced the use of unemployment as a policy tool as EVIL (a very strong word for him to use). 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. What we have to do is get solid arguments why this is not a good idea, to counter this happening…or that is exactly what will happen. The second problem is that MMT also argues, again correctly from the economics perspective, that tax is what gives a currency its value. Expert tax activists have identified six possible roles tax can perform within an economy (Cobham, Reference Cobham2005; Murphy, Reference Murphy2015a). Feature Flags: { So, quite literally, to claim that MMT says that spend can continue without tax, or that at a particular point spend should not equate with tax, or that deficits can continue growing without limit, is simply to promote a falsehood. Not taxation. The governance of the UK tax system and the debates around it, as we have seen, focus largely on revenue raising. Bei der Modern Monetary Theory (auch: Modern Money Theory, oft abgekürzt: MMT) handelt es sich um eine Strömung des Postkeynesianismus. There are, I have to admit, those within MMT who still do not get the importance of tax. This alternative framing has considerable appeal for understanding and designing taxes from a social policy perspective. Third, the raw mechanics of government spending when a national sovereign currency and national central bank exist, involves crediting the accounts of actors in receipt of that government spending. It says that we DO have inflation, ASSET price inflation. “We’re 100% secure I worry that we could see sudden changes in spending/saving behaviour that might need a swift and large response to control inflation. Little did I realize when I first encountered double-entry book keeping as a graduate trainee 30 years ago that I was acquiring essential knowledge for some understanding of macro-economics and so much more. But this also puts other claims that Michell makes into context. MMT is obsessed by inflation risk and that the consequences that failure to understand this risk might create. This reflects the most prominent critique of MMT that it places too much faith in governments to exercise restraint (Epstein, Reference Epstein2019) and ignores ‘political economy difficulties’ where politicians are tempted to use monetary policy for electoral purposes (Palley, Reference Palley2015). "lang": "en" One of the reasons I suppose they are so hostile to tax is that so many are up to their ears in debt- property debt mostly as well as car debt (those nice Audi’s and Range Rovers are very expensive after all). The difference to me is that saving is a form of liberty. And it assigns to tax, for the reasons I have already noted, the task of countering that risk by withdrawing demand from the economy if it were to arise. What exactly is so "modern" about this I don't know. Nor do these objections detract from the fact that some STEs can have destabilising macroeconomic effects. Now. Table 2 Tax revenues for 2018 – 19 tax year taking the cost of tax reliefs and allowances into account. 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. Yet the UK tax system is designed to incentivise savings with a consequent considerable increase in the value of those savings, as Table 3 shows: this savings wealth is very concentrated within society (see Figure 1). Secondly, MMT sees this as misguided because it is largely based on a premise that savings are required to fund investment. Previous advisers need to continue to discredit MMT ; otherwise they expose themselves as being wrong in the past for preaching various brands of conventional economic responsibility. So, extra taxes on the wealthy will reduce their wealth (which is an excellent reason to tax them, if that is an issue, and might also reduce their excess cash holdings created by government spending, which is, again, another excellent reason to tax them) but it will not have much, if any impact on changing demand. Other tax reliefs for savings, such as those on Individual Savings Accounts, cost £4.6bn in income tax foregone, and more when capital gains tax is allowed for. But for the lack of understanding of the very basic issue of double entry book-keeping (a failing he has in common with many economists) he misses that quite essential point, which means MMT breaks economics from the shackles of neoliberal central bank, interest rate driven, inflation focussed control that does not only not work now (if it ever did without also destroying employment) but also destroys democratic accountability for economic management and passes it to the banking system. 13. At the same time, a whole range of exemptions, allowances and reliefs were found to provide favour to income earned from wealth rather than from work, further incentivising the under reporting of income (Baker and Murphy, Reference Baker and Murphy2019b: 4). 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). I want to explain why this weakness needs to be addressed. If all countries used MMT, what’s to stop the British government getting the bank of England to issue a few billion pounds and then using it to buy Amazon off Jeff Bezos, for example? 8. For example, he argues that The changes mooted by the UK Treasury include aligning capital gains tax with income tax, removing additional pensions relief for the better off and increasing corporation tax. But this is a limited way of assessing the merits of particular policies. For social policy researchers the challenge arising is to use these insights to re-engineer tax systems and redesign social tax expenditures (STEs) for creative social policy purposes. At which point Michell comes to what I presume he thinks to be his killer argument. In other words, it empowers the state. 2020. Including George S Gordon’s quote from NS&I. Third, quite a lot believe in MMT although they never used that label – and nor did I (I still want to invited back!!) This didn’t stop other crises, however, there were still other non-war based ones particularly financial crises. So next he says The public deficit will remain large until the crisis is over and the debt to GDP ratio will rise – that is exactly as it should be. An exploration of the claims of MMT provides the macroeconomic foundations for such an alternative framing (Wray, Reference Wray2012; Murphy, Reference Murphy2015b). Tax revenue is consequently not prior, but subsequent to spending. However, of this sum at least 35 per cent (and maybe more) is then forgone by government choice. Second, very few understand the plumbing of the money system. So all the money you invest with us is 100% secure. There are thought to be more than 1,000 of these allowances (National Audit Office, 2014), the cost of which are estimated to be at least £425bn in 2018/19 (HMRC, 2019a). "metrics": true, For example, taxing capital gains at the same rates as in the 1980s and similar moves to restore corporation tax to pre-2010 levels would discourage the diversion of income into company structures, which undermines both income tax, and potentially the cancellation or withdrawal function of the tax system as a whole. To put it another way, his very obvious lack of understanding becomes clear. It is rentierism for the uncompetitive, who rely on Government for special privileges to operate faux-capitalism, assisted by tax havens, Government contracts and weak financial regulation to obfuscate the endemic uncompetitiveness. This is not to say that the two should be equal: they should not. May I suggest the title for a simple book: ‘The Plumbing of the Money System’. The role of tax in society is complex. 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. I very much your blog and feel more informed than I’ve ever been but I feel like I’ve so much still to learn.