Government Spending and Taxation - On MMT (4)

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                                                                   Continued from Government Spending an Taxation - On MMT (3)

Taxing To Avoid Excessive Inflation, Booms and Busts

According to Warren Mosler, taxing is instrumental in regulating "aggregate demand," that is: the spending power exercised by society's economic subjects. If the economy threatens to overheat owing to too much spending, higher taxes will have a dampening effect. If the economy is sluggish, lower taxes leave the people with more means of spending.

Taxing is not being resorted to for the purpose of raising funds with which government is able to finance its expenditures. No such funding is required, as government can originated any amount of funds it deems requisite for its various tasks and projects.

An increased tax burden means people have a lesser ability to cause inflation by exercising their spending power. Lower taxes free resources to be spent so as to avoid unemployment and recessions.

The government taxes us and takes away our money for one reason - so we have that much less to spend which makes the currency that much more scarce and valuable. Taking away our money can also be thought of as leaving room for the government to spend without causing inflation.

Think of the economy as one big department store full of all the goods and services we all produce and offer for sale every year. We all get paid enough in wages and profits to buy everything in that store, assuming we would spend all the money we earn and all the profits we make. (And if we borrow to spend, we can buy even more than there is in that store.) But when some of our money goes to pay taxes, we are left short of the spending power we need to buy all of what’s for sale in the store. This gives government the “room” to buy what it wants so that when it spends what it wants, the combined spending of government and the rest of us isn’t too much for what’s for sale in the store.

However, when the government taxes too much - relative to its spending - total spending isn’t enough to make sure everything in the store gets sold. When businesses can’t sell all that they produce, people lose their jobs and have even less money to spend, so even less gets sold. Then more people lose their jobs, and the economy goes into a downward spiral we call a recession.

The source.

As we have already seen here, this regulating effect of taxation can also be interpreted as a way of balancing the competing appetites of the government sector (GS) and the non-government sector (NGS) for society's economic resources.

However, he advances another reason why taxes perform a seminal function in society.

Taxing to Motivate Resource Creation

Putting it less charitably, according to Mosler, government taxes people in order to make them work for it. 

Taxes create an ongoing need in the economy to get dollars, and therefore an ongoing need for people to sell their goods and services and labor to get dollars. 

With tax liabilities in place, the government can buy things with its otherwise-worthless dollars, because someone needs the dollars to pay taxes. [...]

Think of a property tax. [...] You have to pay the property tax in dollars or lose your house. [...]  So now you are motivated to sell things - goods, services, your own labor - to get the dollars you need.  (p. 25.)

The source.

In other words, modern taxation is the continuation of the age-old practice of forcing people to pay tribute to government.

Frankly, I feel somewhat reluctant to accept the idea that people only deign to work productively because government forces them to pay taxes. But that may not be what Mosler is trying to say. 

Logically, it is perfectly possible that people are motivated to be productive for other reasons, and practically the fact that people earn differential surpluses over and above their tax liabilities is indicative of complementary motifs for diligence. 

Historically, modern taxation may be a development toward greater efficiency in a tax-based society, at least to the extent that government policy is endeavouring to find the equilibrium point where the GS and the NGS jointly achieve optimal resource use. 

At any rate, Mosler makes his point by referring to 

what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crop.  (p. 26)