by Mitchell, Wray and Watts Macroeconomics p 323, give a the correct version of the #MMT position on budget aggregates . Taxes create real resource space in which the government can fulfil its socio-economic mandate. Taxes reduce the non-government sector’s purchasing power and hence its ability to command real resources for the government to command with its spending. Take a situation where the national government is spending around 30 per cent of GDP, while its tax revenue is somewhat less, say 27 per cent. The net injection of spending coming from the national government is thus about 3 per cent of GDP. If we eliminated taxes (and held all else constant) the net injection rises towards 30 per cent of GDP. That is a huge increase in aggregate demand and could cause inflation.
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John Quiggin considers the following as important: Tax and public expenditure
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Mitchell, Wray and Watts Macroeconomics p 323, give a the correct version of the #MMT position on budget aggregates .
Taxes create real resource space in which the government can fulfil its socio-economic mandate. Taxes reduce the non-government sector’s purchasing power and hence its ability to command real resources for the government to command with its spending.
Take a situation where the national government is spending around 30 per cent of GDP, while its tax revenue is somewhat less, say 27 per cent. The net injection of spending coming from the national government is thus about 3 per cent of GDP. If we eliminated taxes (and held all else constant) the net injection rises towards 30 per cent of GDP. That is a huge increase in aggregate demand and could cause inflation.
(I’d say would rather than could, but otherwise spot-on)
Ideally it is best if tax revenue moves countercyclically, increasing in an expansion and declining in a recession.
(This exactly matches Keynes’ position “the boom, not the slump is the time for austerity at the Treasury”)
3 per cent average deficit over the cycle is consistent with debt averaging 60 per cent, nominal growth g and nominal bond rate r averaging 5 per cent. In this case, primary deficit is zero on average.
But if r<g (desirable), can run a primary deficit as well as a total deficit.