The least bang for the buck the better- means taxes can be that much less for a given amount of gov spending.

UE Rate->FF Rate”>

78 Responses

  1. Wait, am I tracking you right Warren or is that a typo, accelerated depreciation (“the least bang for the buck”) is a better policy choice economically than food stamps?

    1. points i was trying to make included ‘bang for the buck’ tells you nothing about which is ‘better’ particularly as lower bang for the buck means you get to make a larger fiscal adustment which is in fact a good thing

  2. If the phrase “bang per buck” means “number of jobs created per $ of deficit” then BPC is nonsense. Two reasons.

    1. There are doubtless forms of deficit that result in SAVING (e.g. giving money to Wall Street) rather than SPENDING (which tends to create jobs). The former produces poor BPC. But if money is saved, that just means the deficit can be enlarged without inflationary consequences. Thus BPC is irrelevant.

    2. Some forms of spending APPEAR to create few jobs because the spending is in capital intensive or material intensive areas. The appearance is an illusion. That’s because such spending increases demand for capital equipment and/or materials which in turn also creates jobs. Indeed, a large majority of the cost of everything is ultimately the cost of labour. Thus it makes little difference jobs-wise what form the deficit takes.

    However, politicians (aka “idiots”) like BPC – (I don’t include Warren in the idiot category!). So unfortunately we’ll probably have to live with BPC. Destroying computers and doing all calculations with pencil and paper would do well on the BPC scale.

    1. “However, politicians (aka “idiots”) like BPC – (I don’t include Warren in the idiot category!). So unfortunately we’ll probably have to live with BPC.”

      Excuse me. BPC = Butterflies Per Cocoon?

      Too many acronyms! What does BPC stand for?

      Thanks. :{

    1. “With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt–and shred the bills. Since it is the source of money, government can’t run out.”

      Next he needs to get into exactly what ‘paying off the debt’ entails- just moving funds from savings accounts at the fed to checking accounts, etc.

      1. On the whole shredding cash thing: Does the treasury mark up their reserve account at the fed by X dollars when a taxpayer pays X dollars in taxes in cash to the treasury.

      2. Yes, the Fed marks up the Treasury’s reserve account by X, before shredding the cash.(I think that’s what you meant, right?)

        All vertical money is borrowed from the Fed, so the only way to make it disappear is by repaying it back to the Fed.

        Because taxes are payment to the Treasury and not the Fed, you are correct, the payment of taxes does not make the money disappear.

      3. the payment of taxes to the tsy reduces net financial assets for the non govt sectors which is what matters.

      4. Yes, but since the money doesn’t disappear (it is merely shifted from the taxpayer into the Treasury’s account), it will be spent (transferred back to the private sector).

        Thus, taxes don’t reduce aggregate demand at all. Taxes only change who the spender is (it becomes the Treasury instead of the taxpayer).

        What am I missing?

      5. Curious, it isn’t actually a transfer. For example, if the government decided to balance the budget or run a surplus, some of the tax goes to reducing the deficit (spending) and increasing the surplus. In both cases withdrawal of funds exceeds disbursement of funds into the economy, so there is no direct transfer of taxes to spending.

        The government does not tax to spend because that makes no sense operationally in a fiat system. So transferring taxes to spending isn’t a good way to express what happens. Taxation does reduce private spending power, but it does not affect government spending power in a fiat system.

        However, at the macro level creation and withdrawal of non-government net financial assets does affect the distribution of real resources between public and private use, and distribution within the economy between different income levels.

        For example, in a laissez-faire economy, the government would not create NFA through currency issuance but borrow from the private sector at the going rate. This would be a very different system, in which the government would be revenue constrained and would eventually have to tax to fund spending.

    2. Great to see such direct support!
      Now you need the thickheaded and/or conflicted pair of Stiglitz & Krugman to follow. Resp,

    1. JKH Thanks!
      Three weeks to go. IF the private mortgage market does not engage (things start to degrade again) after the Fed stops its average of $20B per week of MBS purchases for 15 mos now, do you think that Bernanke will demand a political “pound of flesh” before he would re-engage? ie for all of the abuse he has had to withstand from the monetary types over this time, will he require their complete capitulation, or does he just dive right back in the next week?!

      1. interesting question, Matt

        to borrow a curt phrase from one of the great monetary economists of the blogosphere,



      2. Matt, does Ben really have any choice, assuming that he realizes that the economy is still on the brink of debt-deflation, and housing is the driver? I don’t know whether he is going to risk his reputation to please the inflationistas. If mortgage rates rise, his strategy is in big trouble.

      3. Tom,
        To your point heres’ his most recent testimony: “We have been gradually slowing the pace of these purchases in order to promote a smooth transition in markets and anticipate that these transactions will be completed by the end of March. The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”…..So he has left the door open to continue this program IMO. Im disappointed they did not gun mortgage rates down to 4% over this time, instead the interest we pay to the Fed(w/ Treasury Guaranty!) on their now 15% of the MBS univ. is like a giant tax increase to me.

      4. some at the fed stated they would sell mtg backed secs only if they wanted mtg rates to go higher. otherwise they will keep them

  3. I’m glad to see the question of optimal tax policy in an MMT context on this blog.

    A while ago I asked a question about this, and it did not seem as if it’s been a focus of the MMT community. I’ll try again.

    In standard Micro, the best tax is one that changes behavior least. It has the lowest “dead weight loss” and so maximizes economic profit at an aggregate level. So, you want to tax at a low rate, on a wide base, something which cannot be avoided (thus maximizing tax revenue for least economic deadweight loss).

    In MMT, the purpose of taxation is not to raise revenue efficiently, but to control aggregate demand. Therefore you still want to tax on a wide base, as that may impact aggregate demand most effectively, but now maybe you want to target very discretionary behavior so you have the maximum impact on transactions? If you kill transactions, they you lower inflation as there are fewer bids.

    The payroll tax holiday is very broad and targets labor, and my feeling is that it’s effect is primarily through the wealth effect, not by pricing out (or in) hiring decisions. So, a payroll tax holiday works because everyone’s bank accounts are better, not because businesses find workers cheaper to hire so start hiring more (although some of that may happen too).

    Is there a broad tax that targets transactions and so, very explicitly, will work as an inflation control?

    1. “In standard Micro, the best tax is one that changes behavior least.”

      That assumes a lot, doesn’t it?

      1. Yes, standard micro assumes a lot. But this is the standard starting point. Welcome.

    2. Hmm, but standard micro also assumes that there cannot be any demand-led recessions or gluts. And that nominal issues don’t matter.

      But the government has been busy fighting said gluts via expenditures, which makes the case that we *do* want a Pigovian tax to combat the externalities of income concentration, as the government must then deficit-spend to combat this externality.

      In fact, given all the talk of carbon-caps and other Pigovian taxes for which the cost of the externality is difficult to define, here we have an externality whose cost is *easy* to define:

      All the counter-cyclical spending required by government to get us out of this crisis. This spending increased the wealth of asset holders not because they worked harder, or produced more, or met some need, but simply because they spent the last two decades seeking windfalls, and those windfalls were now put at risk.

      So the goal should be to change the tax code to discourage this type hoarding, because of the externalities on demand. This is another way that a progressive tax code regulates demand, other than reducing the overall wealth of the private sector.

      I think one of the reasons why, in the 1950s-1970s, we had robust growth with primarily supply-driven recessions (via Fed tightening or external shocks) instead of demand-led recessions was because the tax code was such that for compensation decision makers, the effect of a 90% upper bracket rate meant that they could hire 10 workers for the cost of giving themselves the salary of an additional worker. Or alternately, the incentive value of a wage increase diminished rapidly with income, and therefore it made “micro” sense to have a more even compensation distribution.

      Overall, it discouraged windfall seeking and encouraged expansion/empire building. These were also out periods of fastest productivity growth, and budget deficits were relatively stable in this time period.

      1. Tax policy is two pronged. First, it affects aggregate demand. Secondly, it affects incentives, positively and negatively.

        Since MMT shows that taxation is not related to funding in a fiat system, the approach to taxation should be to take these two factors into account in designing automatic stabilization that reduces the need for ad hoc fiscal measure, which require appropriation through the political process, and also institutes a system of incentives that promotes public purpose and does not detract from it. This needs to be a comprehensive approach.

        I haven’t seen this addressed by MMT’ers. Has anyone done any work on this yet?

      2. Thank you Tom Hickey for pointing out that tax policy has a two pronged impact.

        The argument about how taxes impact aggregate demand is a money supply issue, and after reading Warren Mosler and related collaborators for more than a dozen years I get it. However, I think that is only half of the equation as the after tax return on capital, labor and saving is an incentives issue which is the message that Supply Side economics teaches.

        If rising money supply is matched by rising demand for it there may be no inflationary consequences. Low taxes may leave more money in circulation to support aggregate demand, but it also provides greater incentives to work, save and invest, which brings forth supply.

        The Laffer Curve focuses attention on point “E” of the curve as the equilibrium tax level that maximizes revenue for the government.

        In connection with this, on July 21, 2009 Warren Mosler commented on the latest missive fro PIMCO, “What If”, in which he states that, “The idea is to sustain taxes at full employment levels, and not at some revenue target.”

        Isn’t it possible for point E on the Laffer Curve to be compatible with a tax burden that is low enough to sustain full employment? Logically, a full employment economy is one that is also likely to generate abundant tax revenue, and/or maximize it.

        Moreover, as a practical matter with regard to forging political alliances, a low tax burden on labor and capital also represents common ground with Austrian economics and Libertarians.

        Conceptually, in a dynamically changing economy, point E on the Laffer Curve need not be some fixed point, but one that is variable. Conceptually at least, there seems to be no fundamental conflict here with the Keynesian notion that that sole purpose of taxation is to regulate aggregate demand.

      3. Good point, Ed. Keynesians observe that Say’s law presumes a barter economy and that many proponent of supply side ignore the effect of money in an economy. However, at least some Keynesians concede that Say’s law is valid at full employment, if money is managed to insure price stability.

        Then, increasing investment can create the increased production necessary to support growth in the workforce due to demographics, supported by an accommodative monetary/fiscal policy that balances positive changes in NAD and utilization of real output capacity.

        There is still the issue of endogenous money supply, which is under the control of private banking and finance, which needs to be dealt with, as well as financial cycles in contrast to business cycles. Can we overcome cycles? Maybe not, but the objective should be to flatten them out as much as possible through automatic stabilizers.

        But I, too, think that progressives and libertarians can find common ground in light of the operational understanding of the role of money creation, real output capacity, employment, and price stability that MMT provides. Disagreements often arise out of scarcity thinking, and ideological presumptions that don’t hold up under operational scrutiny.

        Then the question comes down to public purpose and the proper balance of government and the private sector relative to distribution of real resources, which constitutes the ongoing dialectic between left and right. But the independent voters that decide elections are centrists, so a balance generally gets struck instead of swinging between extremes.

        In my view, three factors are paramount for achieving this: values, incentives, and operations. Values determine policy in light of conditions. Incentives based on values motivate behavior. Operations achieve policy goals through strategy and tactics.

        So it comes down to articulating shared values for formulating policy in terms of incentives and then operational planning and implementation to achieve policy goals. This requires political vision, and vision is a sine qua non of successful leadership. “Visualize and actualize.”

        Nations that are effective in meeting challenges do this in a way that integrates public purpose with private purpose to promote personal liberty, equality of persons, and the common good and general welfare of the community. “Liberté, égalité, et fraternité,”

        Broadly speaking, most people get this, even though there are heated debates over the details, which is sometimes marred by excessive intrusion of interest politics. “We can do better.”

    3. winterspeak,

      Great question. I don’t have a good answer. Energy usage? But using more energy is one of the paths to real advances in the human condition.

      Then with MMT as a guiding force, the one point of taxation is to maximize the demand reduction impact – right? We’re trying to maximize deadweight loss on things, not minimize it.

      You really hit two different factors there – one was that taxes moderate aggregate demand, and the other was that taxes are related to moderating inflation.

      I think there is at least one more factor: the demand for money across different consumer segments is not equal and therefore the inflation in those segments is not equal.

      We have had deflation (or very low inflation) in many consumer goods for a long time – think anything you can buy at walmart. As a result, it is hard to make money providing these goods, and therefore not many americans want to make them.

      Creating a transactions tax that hits lower income americans probably would cause this group to be even less dynamic than it is. A progressive tax on consumption?

    4. RSJ: Micro actually has nothing to say about recessions, demand-led or otherwise. Standard macroeconomics, which builds on micro foundations, has a lot to say about it, all of it wrong.

      Mr E: Energy is an excellent target for AD taxes, as it has other positive benefits as well. There are many issues with narrowing the base (via progressive taxation or other methods) although your point about who is spending the marginal dollar is a good one.

    5. the payroll tax holiday is also for the business portion which reduces costs for business and in a competitive environment will lower prices. it also helps promote cost cutting investments which also keep a lid on prices.

      and my health care plan removes that cost from business which also helps keep prices in check.

      1. Warren:

        So are you saying that the payroll tax is the ideal tax mechanism to control AD? Should 100% of taxes be moved to payroll taxes?

        If the US only implemented 1 tax, and that was the tax it could alter to regulate AD, would you really pick the payroll tax (both sides) as it?

      2. Winterspeak, no matter how good an idea that might bel, it is political poison. The payroll tax is both regressive and hated by the middle class and business. Anyone who understands MMT should be for doing away with it altogether and forgetting the facade of “paying” for social insurance with taxation or “paying” into social insurance. Health care, the social safety net, and education are public goods, like infrastructure, and should be funded directly as public investment, without the facade of “paying” for them, which makes no sense in terms of MMT.

        As far as regulating aggregate demand, in my view consumption should be taxed instead of income, and ideally this should be done invisibly, e.g., through a VAT. While it’s true that consumption taxes are regressive, necessities can be exempted and their can be a tax rebate at the lower level. The well-off are responsible for a huge percentage of discretionary purchases, and a VAT could be scaled accordingly. I don’t see any difficulty in implementing a progressive VAT, but maybe I am missing something?

      3. Winter,

        No, I’d permanently eliminate payroll taxes and all transactions taxes unless the purpose is to reduce the transactions. Like tobacco taxes (which I would not include in CPI but that’s another story). Most of the transactions taxes, like income taxes, can’t be justified on compliance costs alone, never mind the negatives of restrictions of trade, etc.

        That pretty much leaves real estate taxes. Specifically, taxes on dwellings. These could be highy progressive to discourage inordinate resource consumption if so desired.

        And compliance costs are minimal- you don’t even have to know who owns the house- just sell it if it is behind on its taxes.

        Switching to this tax might free up maybe 15% of gdp as it eliminates untold hours that go into record keeping, tax court, much of the insurance business, off shore haven issues, etc. etc. etc. And the govt would never have to look at your books, which some might consider a step up in quality of life 🙂

        Any social issues that result are best dealt with in ways other than transactions taxes, again, apart from taxing transactions you don’t want to happen.

      4. Warren:

        Help me understand a progressive real estate tax idea. Would it be graduated based on the value of the dwelling, or on income of the owner, or on wealth of the owner?

        Also, how would you crank this up if AD increased too much and you got inflation?

  4. Warren, I see what you mean. Thanks for answering my question.

    As for Winterspeak’s point about “a broad tax that targets transaction”. Uncle Sam basically only targets income– they like it so much they do it with two separate two regimes, federal income (personal and corporate) taxes and the Social Security/Medicare FICA taxes. Of the two, we’d be better off dropping the convoluted income tax (with its $900 billion in tax expenditures) and turn the flat tax FICA system into a negative income tax (1. add capital income– something Obama has proposed to a limited extent as part of his HCR bill, 2. Give everyone a refundable credit, 3. increase FICA rates as necessary).

    Warren’s real estate tax makes a lot of sense, but runs into the Constitution’s limitations on “direct taxation”. Only workaround I see is giving a a federal tax credit for all state property taxes paid (like the old “sponge tax” credit given for state inheritance taxes). But I’m not a very good lawyer, so please don’t take my word for it. If you can find a tax law professor (the top guy in this area, I suppose, is Calvin Johnson at the UT-Austin law school) who can devise a federal property tax plan that’s constitutional, then run with it.

    Winterspeak’s wish for a broad transaction tax would mean one of two tax systems we don’t currently have– either a VAT tax (New Zealand’s is the broadest and most efficient in the world) or a bank transaction tax. As for the latter, last month I mentioned Edgar Fiege’s Automated Payment Transaction (APT) tax proposal. It would automatically deduct approx. one-half of one percent of every transaction that moves through the banking system. Here’s a link to the presentation Fiege made to President Bush’s Tax Reform Panel 5 years ago.

    Whichever tax regime is used, Congress typically orders the Sec. of Treasury to levy a tax at specified rates, I’m curious if there are any examples of variable rate tax. I can’t think of one except for the President’s authority to impose and set oil import and other tariffs on national security grounds. Congress could set a maximum rate (say. a APT tax of one percent or a VAT of 20%) but give the Secretary discretion to set the rate lower as economic conditions warrant. Congress could give this discretion subject to conditions (e.g. ‘if unemployment rate is X, then tax rate may be no higher than Y, etc.).

  5. a realestate tax could be graduated based on sq ft, or something along those lines. and it’s already based on market value locally, so I’d simply piggy back on that existing infrastructure.

    but that’s not the main selling point which is dramatically reduced compliance costs, and the elimination of a punishing transactions tax on labor. it also reduces the size and scope of govt.

    1. Another bonus as I see it, is it’s probably the fairest tax.

      Imagine two identical farms. Under a property tax system, they would have the same tax rate, but each farmer’s income is partially related to the work he puts into his farm. It’s turns the income tax on it’s head. If you work hard and make more money, you’re encouraged, because you can keep more of it. If you’re lazy, and work less hard, you’ll make less, and if you don’t make enough to cover your taxes, you’ll have to sell to someone who will do a better job.

      With a property tax, we can abolish estate taxes, since now there is no danger of unproductive land/resources being unfairly locked up in aristocratic families. If the children can run the business as well as their parents, they are producing just as many goods and services there is no reason to take away their property. Same goes for capital gains, corporate taxes, everything. There is a reason why the at the time of the constitution, the Southern states were opposed to a national property tax:

      They knew that property taxes promote efficient land use, and therefore are not in the interests of the wealthy slave owners.

    2. Warren:

      I understand why you believe a RE tax is a good idea.

      What I’m trying to understand is, why do you think this is a good tax to control aggregate demand/inflation?

      It seems difficult to raise/lower quickly and responsively to changes in private sector desire to net save.

    1. Well, I hope we don’t continue using automatic stabalizers and a 10% unemployment rate to control inflation.

      I’m assuming we don’t have ELR. I’m looking for what the best thing to tax is to control AD in a MMT world, and real estate does not seem adjustable enough to me. What is the tax equivalent of what the FFR is supposed to be?

      1. “What is the tax equivalent of what the FFR is supposed to be?”

        that’s a very interesting question

      2. “What is the tax equivalent of what the FFR is supposed to be?”

        I can’t think of anything better than a Feige-style bank transaction tax. Indeed, so far as it includes (or even perhaps is limited to) interbank transactions such as overnight market loan, setting the per-transaction charge would be economically equivalent to setting a FFR. In that sense, its a tax that would work simultaneously on the monetary side (by setting the cost of money) and on the fiscal side (draining reserves by transferring the levied tax to Tsy’s account). So it’d be important for Congress to allow a variable rate so Tsy (or the Fed?) could dial the transaction tax rate up or down as economic conditions require. To quote a 2004 CRS report on transaction taxes:

        “The Fed estimates the daily volume of payments at more than $3 trillion, which puts the annual total at over $750 trillion… However, this is the composite of all payments, including Fedwire and Clearing House Interbank Payment System, two payment systems used primarily by the banks and other participating institutions for large-value funds transfer and U.S. government securities transactions. In 2000 such payments totaled $671.9 trillion.

        “The total of these transfers is so large in part because many members engage in
        overnight transactions… Such transactions are performed every business day, and since every one of them would carry a tax or a fee, the effective levy rate may get prohibitively high, even though the nominal rate is set low. For example, at the nominal rate of 0.01%, the effective annual rate ends up at 5%, rendering many transactions useless.”

      3. Hmm, on second thought, I see that I’m making assumption that the lion share of interbank transfers are overnight market loans. If that’s not true, then a transaction tax would not be the equivalent of a FFR rate. However even if my assumption is true, then it’d be simpler to, as Warren has proposed, allow the Fed Discount Rate to replace the FFR. Using the Discount Window would mean– like the transaction tax– there’d be both a monetary (setting cost of money) and fiscal (Tsy via Fed gets interest payments) impact.

      4. Beowulf:

        Most interbank transfers are not overnight market loans. And yes, the discount rate could take the place of what the FFR is, but it cannot take the place of what the FFR claims to be. The discount rate is a very good substitute for the overnight interbank lending rate, but it is as useless as the FFR as an AD/inflation control mechanism.

      5. Winterspeak,

        I don’t know. I’ve been wondering exactly the same thing. Middle age? (although I strongly suspect he’s using a 1950’s definition of middle age). I prefer the analytical powerhouse of months past to the more recent muser.

  6. I have a great idea. Let’s cancel all taxes except for Warren’s real estate tax.

    Then, we offer all of the redundant tax accountants, tax lawyers, tax collectors, tax preparers, tax software writers, and tax legislators jobs at $8 an hour for anyone of them willing to do real work.

    I’ll bet all the streets will be swept clean, I can’t think of anything else these people would be qualified to do.

  7. good discussion!

    good question about regulating demand

    the elr pool might only need to be 3% of the labor force or less to act as a price anchor for the currency. Since it’s more liquid it will most likely be smaller than an unemployed buffer stock, which has functioned ‘effectively’ (ok, let that discussion slide for now, thanks!)down to sub 4% levels in the late 1990’s.

    the risk free interest rates are set permanently at 0

    if the elr pool is deemed too small to be an effective price anchor what’s wrong with maybe a 10% increase in the real estate taxes? Seems that will cool things down? If not, repeat? Pretty easy operationally?

    and the larger problem is what to do when the elr pool is deemed to be too large. Just start cutting the real estate tax.

    if it’s payable quarterly it should provide a reasonable rapid response to demand fluctuations? what’s faster? today’s auto stabilizers often take years to reverse cycles?

    and, and not that it matters, but technically inflation would be a change in the elr wage to get the pool to a credible level. all the rest is relative value

    1. I guess that’s my question Warren, do you really think a real estate tax is easy to crank up 10%, and if that does not work, repeat? This does not seem the case at all to me.

      In California, there was a max tax revolt on real estate taxes. I’d point to prop 13 as hamstringing the state ever since, but the problems are fundamentally one of Governance, not any 1 tax proposal or another.

      Raising RE tax is tough on those on fixed income who are land wealthy — namely, retirees.

      Making it a quarterly tax helps for sure, but FICA is weekly. Doesn’t get better than that.

      Finally, the most evil proposal for RE taxes is one where you set the %, and then people assess their own property. Post the assessment on Zillow. And you MUST accept an offer from a buyer if it is at your assessment price. Or you pay the % on your assessment.

      1. Raising RE tax is tough on those on fixed income who are land wealthy — namely, retirees
        That is a good point. Maybe we can give retiree’s a break.
        But I still agree with warren that punishing work is wrong.
        The federal real estate tax will make you think twice about how big of a house you want to live in.

      2. Winterspeak, I agree that a RE is politically difficult. There are four types of taxes, asset, income, consumption, and other transactions. I think that as far as tuning NAD is concerned consumption and other transactions are far more easily taxed variably than assets, and I think that taxing income, at least below a pretty high level, is politically wise and economically inefficient. But income taxes on wealthy households and large firms have proven pretty simple to work around. Taxing assets may have a place, but I don’t see its usefulness in tuning NAD.

        Moreover, I think that effective program has to be based on automatic stabilizers because the political process is too intractable to accomplish ad hoc in a timely way.

        There is also a need to tax externalities to establish true price relative to real cost and avoid socializing their cost and qualitative detriments. This amount would automatically increase as production ramps up and decrease as production declines.

        Similarly transaction taxes automatically go up as velocity increases and vice versa.

        This needs to be combined into a coherent, efficient, and effective tax and stabilization policy instead of the hodge-podge we now have. Coherence is important because the public needs to see how everything fits in order to get it passed into law, even if they don’t understand all the economic arguments in detail.

        Moreover, it has to be a compromise that the spectrum from libertarians to radical progressives can live with if there isn’t going to be constant jockeying to change it.

        OK, this may not be possible to accomplish politically, but it is an ideal to use as a template.

      3. “I think that taxing income, at least below a pretty high level, is politically wise and economically inefficient,” should be “politically unwise.”

  8. should be a different story with most all other taxes eliminated?

    and the tax increase comes at the federal level an only if it’s deemed necessary to cool down an overheating economy. if the voters would rather take their chances with ‘inflation’ as the elr pool gets ‘too small’ it’s their call. right now voters are more anti inflation than anti unemployment, but i supposed that could change. but with elr ‘softening’ unemployment it’s more likely the pendulum would swing the other way?

    1. Warren:

      ELR changes the dynamics quite a bit, and as I mentioned earlier, I’d like to discuss this question assuming we do not have ELR. If we did have ELR, though, I think it might create the dynamic you describe.

      There are two channels I see by which taxation impacts private sector savings desire:
      1. Via an income effect, where either income is reduced via some vig (the way FICA acts now) or it loses purchasing power with a transaction/consumption taxes pushing prices higher.
      2. Via a wealth effect, where it drains private sector balance sheets.

      I am not considering compliance costs here, although I agree that are substantial.

      A consumption tax (or VAT) seems to be pretty easy to bounce around, and certainly a FICA holiday seems straightforward as well.

      A RE tax is going at things via the wealth channel, and although it has elements I like, doesn’t it seem weird to you to go after AD in such an indirect way? To put it another way, any microeconomist, who knows nothing about MMT and thinks like a goldbug, would think a RE tax is a good idea as it is an efficient way for the Govt to raise money. Doesn’t this suggest that it’s wrong for someone who is coming at it from an MMT perspective?

      1. The biggest channel is in managing inequality. That does much more for AG management than draining a certain amount or via wealth effects. High progressive rates is why the U.S. was supply constrained prior to our dismantling of these rates. It wasn’t to raise income or drain more money from the private sector — as we didn’t drain more. But we took certain payoffs and income distributions off the table — e.g. there were very few Warren Moslers in that era 😛

        As a result, we did not suffer from demand led recessions or the oligarchy we are under now. Our recessions in that era were primarily caused by Fed rate hikes to fight inflation. So the same revenue levels — about 19% of GDP, which is pretty much what we’ve always been collecting since WW2 but a completely different effect on AG, as well as growth, and a banking system under control.

      2. since taxes function to create a nominal demand for units of the currency why not a real estate tax?

        it’s much like the hut tax England imposed on its colonies.

        and i don’t see any problems adjusting it to suit should the elr pool get ‘too large’ or ‘too small?’

        it’s not that taxation alters savings desires as it offsets changes in savings desires.

        so yes, it may be a bit slow to offset those shifts at times, but doesn’t seem like it would be all that much slower than what we have currently, and the real resources freed up by the enormously lower real compliance costs should more than make up for any losses due to timing of the tax adjustments?

      3. I like the hut tax story very much, and it’s an excellent alternative to the benign barter evolution economists love.

        My question around the RE tax is two-fold:

        1. It seems to tackle excess AD via a wealth channel, and not by targeting transactions directly (or velocity, for those who prefer that term). This seems roundabout to me. Yes, I can see why this may still be better given compliance costs of transaction taxes, BUT, if we were to assume that compliance costs were the same, would we still target AD via this wealth channel?

        2. People seem uniquely unsuited to responding to changes in RE taxes because it’s common to get combinations of large RE wealth, low income. Now, you can say that this does not matter, and that people in that situation needs to cash out or something like that, which is a legitimate position, but it still seems like a poor match.

        RE taxes, or head taxes (which this is getting close to) are beloved of microeconomists because they raise the most revenue with the least impact on transactions. For MMT, since we don’t care about raising revenue, don’t we want to MAXIMIZE the impact on transactions?

        Anyway, I feel like I’m going around in circles here asking the same question again and again. WARREN: If you feel that RE is the way to go that’s fine. It just doesn’t seem right from an MMT perspective to me though, but I’m not sure what is. The FICA tax actually seems better to me as it’s really fast.

      4. Because creating demand for currency is not the sole purpose of taxation; moderating income inequality is also a key responsibility of government, as the private sector is not able to sort this out on its own except via painful deflations.

        Wages are not the marginal product of labor — there is enormous room for concentration as a result of institutional structures, and this lowers living standards for the average person much more than the overhead cost of having someone look at your books.

        For each firm, these income effects are an externality — top employees will not pay themselves less and their subordinates more for the “general welfare”, even though the cumulative effect of all these decisions can lead to a depression in which everyone suffers.

        Progressive taxation is required to counter these externalities, and r.e. taxes do not serve this purpose well.

      5. It is inequality as such, not only of income, that progressive taxation can and has previously proven to curtail (my assertion). While a hut tax may have an effect on use of limited land resources (it would have to be punishingly progressive, I guess), targeting just one channel will inevitably cause wealth to concentrate in other areas. I interpret from Warren’s proposals – correct me if I’m wrong – that he sees no problem in such concentrations. But isn’t it precisely these clusters of wealth – whether real or financial – and thus (political) influence and power that caused this and all other economic crises in the first place? I know all bashing is now focussed on banks and bankers and the public / private role they play certainly deserves all regulatory attention, but isn’t it the impermeability of elitism itself, whether as plutocracy, theocracy, timocracy or whatever that by institutionalising inequality and prohibiting any sense of fairness is at the root of all economic and social instability?

        ELR / JG might be a start and what has remained of income tax is certainly more re- than progressive nowadays, but just introducing the prior and eliminating the latter surely can’t be sufficient political tools to engineer a modern society no matter where AD lands in the process. IMO a dichotomy of unemployment vs. inflation is a gross simplification of any society and its predicaments and the fact that income tax has devolved to its current state says more about political impotence re globalisation than about its theoretical efficacy as a policy tool.

        While I agree that MMT as I’ve understood it makes an important contribution by freeing economic policy from self-imposed and thus sometimes self-defeating constraints, this cannot be reciprocally interpreted to mean that all such constraints are per se evil or counter-productive. And while main stream macro is pretty obviously built on simplistic or even false theoretical assumptions, I’d say just rebuilding the foundation without regard to the entire building is just as incomprehensive.

        You’ve probably guessed by my rant that I’m from the other side of the Atlantic :-).

        I came across this thanks to commentator extraordinaire Tom Hickey (I think):
        And his ‘about’ statement which I fully agree with:

      6. Oliver, I was unaware of this until you mentioned it, so you must be remembering wrong. But thanks for the kudos anyway.

  9. Winterspeak,

    Not my area, but I don’t see an RE tax as a wealth channel tax so directly.

    RE inflation has no direct effect on RE tax, other things equal. E.g. if I have a $ 300,000 house, and my neighbour has a $ 1 million house, and both values double, tax assessments will remain the same because proportionality has been preserved, assuming the government budget doesn’t change otherwise. The rate on assessed value will decline, if there is no government budget need for an aggregate tax increase. If my neighbour’s house doubles in price, but mine remains the same, the distribution of taxes will change in my favour, since there has been a change in the distribution of inflation across different price levels. It’s the change in government budget requirement that drives absolute dollar tax increases, not real estate inflation per se.

    An increase in RE taxes hits household budgets with an absolute dollar tax delta proportionate to their RE investment. The question becomes what is the correlation between that effect and aggregate demand. The tax is proportionate to RE wealth, so even though the rich generally have a lower propensity to consume (I think), they will still be hit with a wealth proportionate tax increase, so it may well have a reasonably proportionate aggregate demand effect across the income spectrum.


    1. This applies to the other posts here as well.

      the question is why we want progressive taxation.

      the answer is to adjust the consumption of real resources.

      so having a hoard of dollars per se is not the issue.

      the woman with 100 million in the bank living in a tiny house with 25 cats isn’t causing the kind of problem that makes us want to take her dollars away from her. we know it’s not a case of ‘that money could be going to…’ as might have been the case with a gold standard or other fixed fx regimes.

      however, the person with the same wealth who’s cutting down the rain forest to build is 350 ft super yacht’s deck and has a crew of 100 taking care of his houses and his toys could be consider a problem as he is consuming what might be considered a disproportionate amount of scarce resources, which are being allocated by price and therefore available in reduced amounts for those actually working for a living as well as the elderly, the disabled, bloggers, etc. etc.

      The real estate tax does not address this. The income tax takes dollars from both about equally, gets both mad, and probably doesn’t do a lot for reducing actual consumption, as people in that income group have a relatively low marginal propensity to consume to begin with, making reducing consumption problematic though not impossible, if you are willing to go to the 70%+ marginal tax rates and enforce it, which of course has other consequences as well and always seems to be less effective than hoped for.

      so my ‘answer’ is to attack disproportionate consumption directly with ‘luxury taxes’ targeted to the offending consumption that are high enough to make sure the tax collects very little. if the tax collects a lot it means it’s not effective in curtailing the undesired consumption.

      by the way, most of this is covered in ‘soft currency economics’ on this website that I wrote sometime around 1973 as well.

      1. Warren: This is quite brilliant. In an MMT world, of course you want taxes to be on the far right side of the laffer curve, generating maximum distortion, while generating minimum income.

        JKH: Not sure how your taxes are working. Usually, RE tax is assessed as a % of property value, so if property value doubles, the tax obligation doubles. Your income may be the same, your wealth is higher (as your property is worth more) and your tax obligation is higher. That’s why I say it works through the wealth channel.

      2. Mine certainly don’t work that way. Taxes depend on the assessment and the rate. There’s nothing preventing a downward adjustment in rate in the face of an outsized increase in assessment due to a strong real estate market. Revenue depends on what the government needs/wants. Rate is then a plug depending on assessment and government revenue requirements. Revenue is not necessarily a linear function of assessment.

      3. OK.

        I don’t believe I’ve ever seen the rate be adjusted downward in the face of strong property appreciation.

      4. people in that income group have a relatively low marginal propensity to consume to begin with, making reducing consumption problematic though not impossible, if you are willing to go to the 70%+ marginal tax rates and enforce it…

        Robert H. Frank has pointed to precisely this point in advocating his own tax reform idea:

        As taxable consumption rises, the tax rate on additional consumption would also rise. With a progressive income tax, marginal tax rates cannot rise beyond a certain threshold without threatening incentives to save and invest. Under a progressive consumption tax, however, higher marginal tax rates actually strengthen those incentives.

        Looking through Frank’s column archive, he’s a sharp guy and seems like a good fellow (for a deficit dove). :o)

      5. Exactly — it is all about income distribution.

        That is why we are demand constrained. There is no shortage of money, and neither is there a shortage of credit. There is a shortage of high paying jobs for the bulk of the nation, and excess of pay for a small group.

        As a result, we can deficit spend until the moon is blue, and still not get inflation. We can spend a trillion dollars of stimulus, and end up with high corporate profits but no gains to employment — because the money will not find its way into increasing living standards for the bulk of the nation.

        That is the problem with aggregating the entire private sector into one unit, and declaring that it has a desire to net save. There is no aggregate desire to do anything, only the competing desires of different people within the private sector, and when the economic payoffs are fundamentally misaligned, then that is what the government should fix, rather than just supply the private sector overall with more income, and keeping the current misalignments going a bit longer.

      6. “the answer is to adjust the consumption of real resources.”

        No — that is *not* the purpose of progressive taxation. Counter-cyclical fiscal policy addresses wild consumption swings, not progressive tax rates.

        An overall progressive tax-rate is to counter income accumulation.

        The private sector, left to its own devices, constantly promotes income concentration due to the asymmetrical distribution of power. It is generally the case that you can afford to pay someone less than they need to earn in order for demand as a whole to be maintained. So left to itself, this trend is only counteracted with deflations and depressions, in which top incomes rapidly shrink and median incomes rise (due to deflation).

        We would like to control income concentration (and the corresponding decline in quality of life that results from shrinking median incomes) in a less severe way than allowing depressions and deflations.

        And for this reason, we have progressive taxation — to change the incentive structure in such a way as to impose additional costs to the private sector for supplying very high incomes to top earners, and tilt the playing field in favor of median earners, to counteract the natural tilt the playing field has in favor of top earners.


    My question around the RE tax is two-fold:

    1. It seems to tackle excess AD via a wealth channel, and not by targeting transactions directly (or velocity, for those who prefer that term).



    This seems roundabout to me. Yes, I can see why this may still be better given compliance costs of transaction taxes, BUT, if we were to assume that compliance costs were the same, would we still target AD via this wealth channel?


    2. People seem uniquely unsuited to responding to changes in RE taxes because it’s common to get combinations of large RE wealth, low income.


    Now, you can say that this does not matter, and that people in that situation needs to cash out or something like that, which is a legitimate position, but it still seems like a poor match.

    RE taxes, or head taxes (which this is getting close to) are beloved of microeconomists because they raise the most revenue with the least impact on transactions. For MMT, since we don’t care about raising revenue, don’t we want to MAXIMIZE the impact on transactions?


    Anyway, I feel like I’m going around in circles here asking the same question again and again. WARREN: If you feel that RE is the way to go that’s fine. It just doesn’t seem right from an MMT perspective to me though, but I’m not sure what is. The FICA tax actually seems better to me as it’s really fast.



    1. This is very helpful Warren, thank you.

      It raises another question around velocity.

      As we know, the size of the deficit, and even the size of household bank accounts, need to create inflation. What creates inflation is excess AD, or people buying and selling at ever higher prices, or people wanting to net save less. All of these concepts are similar to me.

      I understand wanting to maximize internal free trade, but isn’t it exactly an excess of those internal trades the “velocity” i mentioned above, which is inflationary? So, if you want to control inflation, isn’t it broad economy-level transactions you want to target, since you cannot have inflation without transactions?

      1. More to the point its easier to reform what already exists than to create something new.

        Besides the constitutional impediments of a federal RE tax that I’ve already mentioned, you can’t imagine the political pushback that state governments will offer if Uncle Sam steps on their two big tax revenue sources– property and sales.

      2. at the end of the day the price level is a function of prices paid by govt.

        your causes of inflation imply a govt that only buys at mkt prices continuously etc.

      3. No, the market sets prices, and the government sets the rules of who has an advantage in the market, as well as *influencing*, but not controlling, the overall supply of money, which is primarily endogenous.

  11. In Ohio, there’s a rule that says that property tax levies are supposed to be for a fixed dollar figure, so if the local schools want to collect 1 million dollars, they’ll set a rate for 1 million. If property values rise, the rate is reduced automatically by law. At least that’s my understanding. But that’s not inherent to the nature of the tax, that’s just a rule they made up. Sort of like California’s proposition 13 which prevents reassessment of value until you sell the house, I think.

Leave a Reply

Your email address will not be published. Required fields are marked *