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WHY TAXATION?

It seems to me though that this understanding of tax is one of the most difficult aspects of the MMT argument. At present the willingness of people to pay tax, and to be morally offended by (for example) big corporations that don't pay their fair share of tax is largely based on their belief that taxes are necessary to pay for public services. To present taxes as simply a means of depriving the non-governmental sector of resources to free them up for use by the pubic sector - and the idea that the taxes we pay go straight into the wastepaper basket - may be a difficult sell. On the other hand, on this understanding we may need to pay less in taxes than we would do otherwise. An early example of the argument for MMT comes in an essay published in January 1946 by Beardsley Rumi, then Chairman of the Federal Reserve Bank of New York, under the title Taxes for revenue are obsolete. (10)

(10) American Affairs, Jan 1946, pp.35-9. Rumi was a director from 1937 to 1947 and Chairman, 1941-6. Rumi was his father's surname. His mother's name was the rather evocative Salome Beardsley Rumi.

Writing in the aftermath of the war and with experience of the New Deal, Rumi says:

'If we look at the financial history of recent years it is apparent that nations have been able to pay their bills even though their tax revenues fell short of expenses. These countries whose expenses were greater than their receipts from taxes paid their bills by borrowing the necessary money ... 

'In the past, [my emphasis - PB] if a government persisted in borrowing heavily to cover its expenditures, interest rates would get higher and higher, and greater and greater inducements would have to be offered by the government to the lenders. These governments finally found that the only way they could maintain both their sovereign independence and their solvency was to tax heavily ...

'Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.

The first of these changes is the gaining of vast new experience in the management of central banks.

The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.

Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity ...

'It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes.'

There, laid out in 1946 by a Chairman of the Federal Reserve Bank of New York, is the core argument of Modern Monetary Theory.

He goes on to give examples of the proper use of taxes which include using them 'as an instrument of fiscal policy to help stabilise the purchasing power of the dollar' ie to control inflation. If the taxes are insufficient there will be too much purchasing power in the hands of the public - too much money chasing too few goods - and that will cause inflation; if the taxes are too heavy then too many goods will be chasing too little money, and that will cause unemployment. He also supports progressive income and estate taxes to bring about a greater equality of wealth. And taxes that will support: 

'some industrial or economic interest. The most conspicuous example of these taxes is the tariffs on imports. Originally, taxes of this type were imposed to serve a double purpose since, a century and a half ago, the national government required revenues in order to pay its bills. Today, tariffs on imports are no longer needed for revenue. These taxes are nothing more than devices to provide subsidies to selected industries; their social purpose is to provide a price floor above which a domestic industry can compete with goods which can be produced abroad and sold in this country more cheaply except for the tariff protection.' 

Another important policy tool that has been abandoned under the present doctrine of Neo-liberalism.

But he was strongly opposed to a type of tax that is in high favour among the Left at the present time, namely Corporation Tax which, he suggests:

'must come in one of three ways. It must come from the people, in the higher prices they pay for the things they buy; from the corporation’s own employees in wages that are lower than they otherwise would be; or from the corporation’s stockholders, in lower rate of return on their investment. No matter from which source it comes, or in what proportion, this tax is harmful to production, to purchasing power, and to investment.'

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