I like MMT, and I think this is a good presentation of it. But I would offer a few caveats.

First, I believe that controlling inflation is the only economic reason for taxation. Taxation is probably not necessary to make the king’s money viable. Legal tender laws take care of that. After all, a law requiring that taxes be paid in government money is just a special case of a law saying that all debts can be settled in that money. Private parties can agree on an alternative form of settlement, but in a complex economy with transferable debt, a common settlement medium, like a common day of rest and common holidays, is valuable enough to make the one decreed by the people’s representatives the obvious choice, so long as it is not created in excess quantities, i.e., so long as taxes are used to control inflation. I also suspect that the central bank’s willingness to transact only in government money is sufficient to establish the government’s money as the national currency, with or without taxation.

The monetary justification of taxation is a practical one, whereas the inflation argument is a necessary one. Since the difference between what is necessary and what is merely (and, perhaps, only temporarily) practical is key to MMT, I think the necessary linkage of taxation to inflation should be the focus of taxation’s role.

Second, whereas I agree that taxes are not necessary to fund government expenditures, MMTers tend to lead with the simpler claim that taxes do not fund those expenditures. But in the USA, because of the political decision to require that money be collected or borrowed to fund expenditures, the fact is that those collections and borrowing do fund expenditures. Moreover, we use “fund” almost simultaneously in its technical sense of providing necessary money for spending and in the metaphoric sense of making spending possible (e.g., by stifling inflation that would otherwise result). So, if we say that any given government expenditure would be unacceptably inflationary but for the levy of a tax, we should have no semantic problem saying that said taxes “fund” the expenditure, that they are “your tax dollars at work.”

Finally, I think of some government borrowing as a second way for the government to control inflation. Just as a government could spend without taxing or borrowing, it could borrow without spending. Every dollar lent to the government is a dollar not lent to a private user of money. That dearth may impact consumers who buy on credit, or it may affect businesses that borrow to buy capital goods that would increase supply. Whether the net result is inflationary or deflationary is a fairly complex problem. That’s why fiscal policy and monetary policy (which, respectively, make gross and fine adjustments to the inflation machine) don’t submit to simple nostrums about how some category of action will effect the macro economy. There is an optimal, if elusive, mix of taxation and borrowing. Few blanket statements can be made about the desirability of raising or lowering the amount of either.

Thanks again for the article. I’m sure some eyes glazed over at the first sign of T accounts, but there is no law that says anything has to be simple enough to explain simply.

Self-description is not privileged.

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