Friday 27 July 2018

The Case for Income Tax.


Claire Connelly is a young journalist specialising in economics and finance. An MMT sympathiser, she has written popular pieces about it.

She wrote “The Case Against Income Tax” about the need (or lack thereof) for income taxes. Although she has “no hard opinions on whether or not to abolish income tax”, as she says towards the end of her piece, it’s evident she finds that possibility attractive, particularly within the Australian context, where tax cuts have been a thing lately.

It’s understandable then that she produces a list of income tax criticisms (going as far back as Henry George, whom she mentions approvingly). A bit more worrisome is that she presents no argument in favour of income taxes.

Ironically, though, she links to an article of a leading MMT proponent, Prof. L. Randall (Randy) Wray, dealing precisely with the need (or lack thereof) for taxes. There Wray explains some misunderstandings about taxes in general and income taxes in particular, and their legitimate uses (because, against a common misunderstanding, taxes do have legitimate uses within MMT, beyond driving the demand for money).

To that end, Wray discusses the work of Beardsley Ruml (whom Connelly also mentions) and asks (my emphasis from here on): “Why, then, does the national government need taxes?”

Ruml -- Wray says -- gave four reasons:
  1. “As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
  2. “To express public policy in the distribution of wealth and of income as in the case of the progressive income and estate taxes;
  3. “To express public policy in subsidizing or in penalizing various industries and economic groups; and
  4. “To isolate and assess directly the costs of certain national benefits, such as highways and social security.”
And further elaborates: “The second purpose is to use taxes to change the distribution of income and wealth. For example, a progressive tax system would reduce income and wealth at the top, while imposing minimal taxes on the poor.”

Which, one gathers from Connelly’s piece, seems to be what Dr. Steven Hail, apparently a local MMTer, tried to tell her.

Without being an expert, I’ll try my hand at some answers to Connelly’s questions and comments.

Connelly asks: “If income tax were really important, how come those who make the most often pay the least?” The fact that those who earn (not make) the most often pay the least does not prove income taxes are unimportant. It is, instead, an argument for the closing of the loopholes in taxation law allowing that to happen and it’s a demonstration of the influence those who earn the most have on lawmakers and bureaucrats. Wouldn’t the elimination of income taxes only play to their hands?

“[Henry] George argued that a land-value tax” -- writes Connelly -- “should replace all other forms of taxation, ‘leaving labour and capital to flourish freely, and thus ending unemployment, poverty, inflation and inequality’.” If workers and capitalists don’t pay taxes wouldn’t their inducement to demand money be reduced?

Moreover, wouldn’t that increase inequality?

Which lead us to this comment: “In the current climate, with wages stagnating or in some countries even going backwards, it makes little sense to take money away from people already struggling to pay their bills for the sake of an almost permanent deficit.”

That’s all very truth. But there are tax cuts and tax cuts. The one already approved in Oz precisely cuts the taxes the least for people struggling to pay their bills as their wages fall, and the most for those whose salaries have been rising lately. These are tax cuts, the question is: are they good? I fail to see how inequality can fall with that.

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That is a misunderstanding that may come back to haunt MMTers: when they say “taxes drive the demand for money” people tend to hear “the only purpose of taxes is to drive the demand for money”. Often -- as I’m sure is the case with Connelly -- it’s an honest mistake which a little thought, hopefully, can correct, thus, this post.

I fear, however, sometimes there’s more than a little equivocation behind it; which may have something to do with its zombie-like resilience.

8 comments:

  1. Good post, Magpie.

    As you correctly point out, it is not only exogenous taxes that drive the currency. Income taxes drive the currency also, because income is assessed for tax purposes in the currency. Since people need an income, and since their income will be assessed for tax purposes in the currency, they will need to obtain the currency in order to pay taxes.

    Neoliberals will appeal to "incentives" to reward productiveness, but the postwar growth performance – which occurred in an institutional framework of very high and steeply progressive income taxes – was far superior to that of the neoliberal period. The comparison is not close, even if non-neoliberal China and India (who are responsible for most recent global growth) are included in the comparison. This should not be surprising considering that (i) endogenous taxes DO help to drive the currency for the reason already mentioned and (ii) a more equal distribution of income translates, for a given government deficit, into stronger private demand for goods and services.

    Another way of expressing point (ii) is that the same demand can be maintained with a smaller government deficit when income is distributed more equally. When this occurs, less financial wealth gets channeled to private households, and of the financial wealth that does get channeled to private households, a higher proportion goes elsewhere than to the very top of the wealth distribution.

    As far as I am concerned, deemphasizing income taxes -- especially the importance of the progressivity of income taxes -- is a very regressive stance. Relatedly, the metaphorical shrugging of the shoulders at extreme inequality of some MMTers (not all) is concerning. MMTers will sometimes say, "Get the JG in first, then go after the rich". I would suggest that we don't hold our breath on the MMTers ever getting round to the second task. Nor do I think it can credibly be suggested, as MMTers sometimes do suggest, that their own policy priority is a matter of pragmatism or political reality. There is currently more popular support for taxing the wealthy than a job guarantee, for instance.

    The arguments some are beginning to make for getting rid of corporate taxes also make me wary. For a group of people often quick to accuse others of wanting policies favored by a (very) small section of the elite (such as a UBI), the MMTers seem rather fond of low taxes on corporations, the wealthy and high-income households, which it is fair to say are embraced by a much larger section of the elite than the cohort open to a UBI.

    You also touch on a kind of pro-capitalist sentiment that is sometimes expressed by MMTers that labor and capital should be privileged and it is only rentiers who are a problem. This reveals an essentially bourgeois predisposition common to reformist heterodox economists in general. Clearly, from a socialist perspective, the problem with capitalism is not just the rentiers. Without exploitation in production, there could be no rentiers.

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  2. Good post, Magpie.

    As you point out, it is not only exogenous taxes that drive the currency. Income taxes drive the currency also, because income is assessed for tax and other purposes in the currency. Since people need an income, and since their income will be assessed for tax purposes in the currency, they will need to obtain the currency in order to pay taxes.

    Neoliberals will object to high and progressive income taxes by appealing to "incentives" to reward productiveness, but the postwar captalist growth performance – which occurred in an institutional framework of very high and steeply progressive income taxes – was far superior to that of the neoliberal period. The comparison is not close, even if non-neoliberal China and India (who are responsible for much recent global growth) are included in the comparison. This is not really surprising considering that (i) endogenous taxes DO help to drive the currency for the reason already mentioned and (ii) a more equal distribution of income translates, for a given government deficit, into stronger private demand for goods and services.

    Another way of expressing point (ii) is that the same demand can be maintained with a smaller government deficit when income is distributed more equally. When this occurs, less financial wealth gets channeled to private households, and of the financial wealth that does get channeled to private households, a higher proportion goes elsewhere than to the very top of the wealth distribution.

    (continued below)

    ReplyDelete
  3. (continued from above)

    As far as I am concerned, de-emphasizing income taxes -- especially the importance of the progressivity of income taxes -- is a very regressive stance. Relatedly, the metaphorical shrugging of the shoulders at extreme inequality of some MMTers (not all) is concerning. MMTers will sometimes say, "Get the JG in first, then go after the rich". I would suggest that we don't hold our breath on the MMTers ever getting round to the second task. Nor do I think it can credibly be suggested, as MMTers sometimes do suggest, that their own policy priority is a matter of pragmatism or political reality. There is currently more popular support for taxing the wealthy than a job guarantee, for instance.

    The arguments some are beginning to make for getting rid of corporate taxes also make me wary. For a group of people often quick to accuse others of wanting policies favored by a (very) small section of the elite (such as a UBI), the MMTers seem rather fond of low taxes on corporations, the wealthy and high-income households, which it is fair to say is a policy position embraced by a much larger section of the elite than the cohort open to a UBI.

    You also touch on a kind of pro-capitalist sentiment that is sometimes expressed by MMTers that labor and capital should be privileged and it is only rentiers who are a problem. Clearly, from a socialist perspective, the problem with capitalism is not just the rentiers. Without exploitation in production, there could be no rentiers.

    ReplyDelete
  4. Thanks for your comments, Pete.

    Sorry I didn't approve them earlier. I'm still a bit unwell and I had neglected the blog. I'll reply later. Cheers.

    ReplyDelete
  5. Thanks, Magpie. Actually the first comment is basically the same as the next two, so feel free to delete it (and also this comment). The delay was not a problem at all. However, I thought the comment might have not got through Blogger, so I broke it into two and re-posted. Sorry for the double post.

    ReplyDelete
    Replies
    1. Very educative comments, Pete.

      Among Internet MMTers there's certainly a tendency to differentiate between good capitalists (you know, the guys who really deserve their profits), and bad capitalists. (The latter being demoted to "rentiers", lest people confuse the two groups). Capitalism, as you've seen one of them write, is not to play the game by its rules, but a morality tale: good capitalists choose to be good and deserve plaudits, bad capitalists -sorry, rentiers- choose to be evil and deserve damnation and the economy itself punishes them.

      But your comment is also quite apropos of something I wanted to have your opinion on.

      As is well-known, Marx never finished Das Kapital. Engels put together volumes 2 and 3 from notes Marx left. The point is that is not clear what Marx's crisis theory was exactly.

      Marxists after Marx developed their own crisis theories, all of them claiming their theories were the closest to what Marx would have thought. One of those crisis theories popular among older/earlier Marxists was the overproduction crisis.

      I won't claim to be an expert, but to me it sounds a lot like Keynes' own theory of recessions. One speaks of overproduction, the other speaks of underconsumption. One speaks of insufficient aggregate demand, the other speaks of non-realisation. I don't think overproduction Marxists would appreciate to hear it, but to me that sounds like the two sides of the same coin.

      But I wanted to have your opinion. What do you think about overproduction crisis theories?

      Delete
    2. Good question, Magpie. Unfortunately, the distinction between underconsumption and overproduction has never been clear to me. If anyone reading along has a good understanding of this distinction, I would also be interested to read an explanation.

      As far as I can tell:

      Underconsumption seems to refer to a situation in which the relative impoverishment of workers, by negatively impacting demand, discourages production. (?)

      Overproduction seems to refer to a situation in which production does proceed more or less in line with growing productive capacity but results in excess supply. (?)

      Delete
    3. Thanks, Pete.

      The way I figure, whether one calls it overproduction or underconsumption, the bottle neck seems to be in the demand.

      Delete