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MMT and tax: the reality is that there is much more to be done on this issue — Richard Murphy

Summary:
MMT has not developed a coherent theory of how tax fulfils the withdrawal function to control inflation it has prescribed to it, hence the papers by me and me and Andrew Baker. Hence too why we are also planning to develop this, considerably. We are seeking to develop theory on how tax does simultaneously have this withdrawal function, which does not fund spending but is an explicit part of the overall funding cycle, whilst simultaneously having a strong function in delivering social, economic and fiscal policy.…Richard Murphy has a point here. According to MMT 101, taxes function as a major factor in controlling inflation, and this sometimes gets interpreted by unsophisticated MMT proponents as "taxes control inflation," which is an over-generalization. But there is more to it than

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MMT has not developed a coherent theory of how tax fulfils the withdrawal function to control inflation it has prescribed to it, hence the papers by me and me and Andrew Baker. Hence too why we are also planning to develop this, considerably. We are seeking to develop theory on how tax does simultaneously have this withdrawal function, which does not fund spending but is an explicit part of the overall funding cycle, whilst simultaneously having a strong function in delivering social, economic and fiscal policy.…

Richard Murphy has a point here. According to MMT 101, taxes function as a major factor in controlling inflation, and this sometimes gets interpreted by unsophisticated MMT proponents as "taxes control inflation," which is an over-generalization. But there is more to it than taxation. For example, the MMT JG is a key piece in inflation control and maintaining price stability.

Since the publication of The Deficit Myth, the debate has shifted, for the most part, from solvency to inflation. MMT is now getting the blame for the increased inflation that most are obsessing over. 

A sequel to The Deficit Myth seems to be called for to address how MMT addresses growth, employment and price stability, the harmonizing of which is the "holy grail" of macroeconomics. Whereas most economists hold that only two factors in this trifecta can be balanced at the same time (thus NAIRU, for example), MMT holds that it is possible to address all of them simultaneously to maintain a dynamic equilibrium among these factors through efficient and effective us of the policy space that the present floating rate system affords currency sovereigns.

While tax policy is important it is not the only factor involved in fiscal policy, as well as wider policy choices, e.g., involving externalities, as well as opportunities and challenges (tradeoffs) in closed global economy in which the participants are open economies, e.g., concerted action versus free market capitalist competition. 

MMT includes an institutional description of the monetary system and how it operates, a macroeconomic theory, and an articulation of policy space and how it might be used to address various opportunities and challenges. 

Hopefully, MMT economists will come up with a popular book that explains how this works and gives an outline for how fiscal policy decisions should be approached from the point of view of the MMT lens, as well as the relationship of fiscal and monetary policy.

Actually, all this might take several books. But this is what public education is about. Since the Powell memo, there has been a forceful campaign to influence public opinion about economics and finance, and now an effective counter to this is long overdue. In fact, survival of the species seemingly depends on the success of it.

Tax Research UK
MMT and tax: the reality is that there is much more to be done on this issue
Richard Murphy | Professor of Practice in International Political Economy at City University, London; Director of Tax Research UK; non-executive director of Cambridge Econometrics, and a member of the Progressive Economy Forum

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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