MMT and Taxing the Rich

16th February 2019 Off By binary
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(This post first appeared on my Patreon page.)

I don’t consider myself an MMTer, but there is a basic Keynesian concept which has been associated with MMT, which is both true and important. For the federal government, taxes are not about raising revenue, taxes are about reducing consumption to prevent inflation.

The point is that the federal government does not need taxes for revenue, since it can just print money. It instead taxes to create the room in the economy for government spending. This view is sometimes wrongly taken as a “get of jail free” card, where the government can spend whatever it wants without worrying about raising revenue.

That could be true in a deep downturn. However, if the economy is near its full employment level of output, where additional demand will lead to rising inflation, we are pretty much back in the world where we need taxes to offset spending. Any major increase in government spending will lead to higher inflation, unless we have higher taxes or have some other mechanism to reduce demand in the economy.

We can of course argue about how close the economy is to its full employment level of output. This is not easy to determine and the mainstream of the economics profession has badly erred on the high side in arguing that we were near full employment, when in fact the unemployment rate could (and did) go much lower.

But leaving the argument about where we hit full employment aside, we still have the basic truth that when we are near full employment, we do need higher taxes to offset additional spending. A small qualifier is worth adding here. We have a $20 trillion economy. We don’t have to worry about inflation because we spend another $2 billion or $5 billion a year on some program we think is important. (That would be 0.01 percent to 0.0025 percent of GDP.) We do have to worry about inflation if we want to spend another $200 billion a year on a big education or health care program.

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