Originally published January 25, 2012 on the New Economic Perspectives blog.
OK there really were only two themes in the comments: first a question about sovereign vs nonsovereign issuers of IOUs and second questions about the MMT position on inequality.
The first has been dealt with all along in the MM Primer. The sovereign chooses the unit of account, taxes in that unit and issues IOUs in that unit that can be used to pay obligations to the sovereign. Q. E. D.
On the second: MMTers reject the notion that sovereign government uses taxes to “redistribute” income. No, taxes destroy income. If we want poor people to have income, we give them jobs and keystroke their bank accounts. If we think rich people are too rich we can reverse keystroke their bank accounts.
Here’s the problem. I suppose all of you looked at Mitt Romney’s (who on earth would name their kid after a leather implement used in a baseball game?) tax return. Q.E.D. Forget taxes. Ain’t going to reduce wealth of the rich. In truth, Romney pays way too much in taxes for someone in his income class—remember, he knew he would run for president and so avoided all questionable evasions. In spite of what the news is now reporting, most really rich people do not pay taxes. Don’t take my word for it. Bartlett and Steele (two reporters in Philly) got famous for going through the thousands of pages of the tax code and identifying thousands of exemptions for well-connected rich folks that exempted them from paying taxes. They actually figured out exactly who these people were. There were thousands more they could not identify—but the exemptions were so specific that it was obvious they were meant for some favored individual.
Anyway, suppose someone’s income is $20 million a year like Mitt’s (a piker by Bill Gates standards), what tax rate would we need to levy to significantly reduce inequality? Not 30%. Not 70%. 90%? Ain’t never going to happen. You will not pass a tax law imposing a rate of 90% much less actually make it stick. So here is what I wrote:
MMTers have written lots on poverty, inequality and the recent massive concentration of wealth income at the top, so I have no idea where you get the idea that we avoid these topics. Indeed, Kelton and I did a detailed study contrasting the War on Poverty (which did not reduce poverty at all) with the JG/ELR proposal which would have wiped out two-thirds of all poverty even if the wage was set at the minimum wage. I have no idea why you belive JG/ELR would lead to massive underemployment–it leads to full employment. So far as I can tell, the complaint is that we have not put them in the Primer? That does not mean we have ignored the issues.
For those who want to read our study, go here:
Twenty to 25 years ago, a debate was under way in academia and in the popular press over the War on Poverty. One group of scholars argued that the war, initiated by Presidents Kennedy and Johnson, had been lost, owing to the inherent ineffectiveness of government welfare programs. Charles Murray and other scholars argued that welfare programs only encouraged shiftlessness and burdened federal and state budgets. In recent years, despite the fact that the extent of poverty has not significantly diminished since the early 1970s, the debate over poverty has seemingly ended. In a country in which middle-class citizens struggle to afford health insurance and other necessities, the problems of the worst-off Americans seem to many remote and less than pressing.
Moreover, the welfare reform bill of 1996 has deflected much of the criticism of the welfare state by ending the individual-level entitlement to Aid to Families with Dependent Children benefits (now known as Temporary Assistance to Needy Families) and putting time limits on welfare recipiency, among other measures.”
Download: Public Policy Brief No. 78, 2004 at www.levy.org. And while you are there browsing the Levy pieces you will see I wrote many other pieces on related topics.
So: to reduce inequality, first you start at the bottom: give jobs. That eliminates 2/3 of all poverty. Then you gradually raise wages over time, by increasing the JG/ELR basic wage.
And yes, you tackle income at the top. And as some comments indicated, most of the increase of inequality inrecent years is due to the outrageous rewards in the FIRE sector (finance, insurance, real estate). So you must reduce the rewards in that sector. There is nothing “natural” about such high rewards. They are due largely to government policy. That is not the topic here, but it begins with the fraudsters and then changes compensations, incentives, and rewards. This is not difficult stuff—American management’s rewards are totally out of line compared with compensation around the globe. And financial institutions—where the biggest rewards are—are inherently public-private partnerships.
On progressive taxes, yes I propose a cubic-foot-of-dwelling space tax. It is also environmentally sound. However, we need to understand political economy as well as MMT. First we do not need to”redistribute” from rich to poor. We can give the poor any income we want (hint: “keystrokes”) and any income we take from the rich goes no where (hint: reverse those keystrokes). So that is a bogeyman. We can take BMWs away from the rich and give them to the poor, if you like. But don’t confuse that with taxes—which are imposed in monetary form. Taking BMWs away is confiscation.
Finally, Americans oppose high taxes on the rich. We may not agree with them but it is the truth. In the US taxes have never “redistributed” income–the rich just avoid and evade taxes and if that doesn’t work they hire Congress to give them loopholes. Forget it, it will not work in America.