Taxing Thoughts for Progressives
(Posted with permission of the author)
(Editor's Note: Warren Mosler is one of the three primary innovators most responsible for formulating the Modern Monetary Theory (MMT) Approach to Economics. Warren is president of the Valance Co. Inc. a financial research services company. He is also Co-Founder and Distinguished Research Associate of The Center for Full Employment And Price Stability at the University of Missouri in Kansas City. CFEPS has supported economic research projects and graduate students at UMKC, the London School of Economics, the New School in NYC, Harvard University, and the University of Newcastle, Australia.)
Many progressives have been raising concerns about tax cuts. They are particularly concerned about proposed FICA cuts, even though FICA is a highly regressive, punishing tax, that hurts those who can afford it the least and are also doing the real work that provides the real support all of us for far less compensation than most of us would consider equitable. No progressive should stand for it for a single second.
The problem is that the non-MMT world has tied Social Security to FICA, and looks to view FICA cuts as the defunding of Social Security. And while this is nothing more than empty rhetoric, propaganda, and, at best, counterproductive and innocent (?) fear mongering, it is widely believed and accepted by the voters.
So what to do?
My approach is to support a full FICA suspension as well as the strengthening of Social Security and Medicare with an immediate increase in benefits to levels of support for our seniors that make us proud to be Americans. I add a reminder that taxes function to regulate the economy, not to bring in revenue, and right now we are obviously over taxed for the size of government we have, as evidenced by the obscene rates of unemployment.
And the true losses from unemployment in a single year exceed the material costs of all the wars in the history of the world combined.
I also add that anyone who understands actual monetary operations knows that the US can't run out of dollars to spend Congressional Appropriations unless Congress decides not to let the Government fulfill its obligations, that federal spending isn't dependent on taxing or borrowing, and that demand-pull inflation comes from excess demand that exceeds the real goods and services that are there to be produced and bought.
Fighting against FICA cuts because of concern that they will lead to defunding Social Security has been the tactic of headline progressives who have thus far lost most every battle and now look to be losing the war to stop cuts in Social Security, as well. Conceding the principle that there is a long-term deficit/debt problem, and arguing out of paradigm- what's called violating 'Lerner's Law'- is at best a high risk strategy that carries a high probability of backfiring, as we've all seen. Some examples of failed headline progressive arguments about deficit spending include:
-- it's only x% of gdp,
-- we owe it to ourselves,
-- there should be a capital budget to fund certain expenditures,
-- the low interest rates are the markets telling us they want more debt, etc. etc. etc.
have all obviously failed as both sides of the aisle now agree we need $4-6 trillion of employment -- killing deficit reduction over the next decade, even in the face of the largest output gap/lowest levels of employment since the last great depression.
So the argument against FICA elimination both supports a highly regressive policy and doesn't work to support Social Security.
I know it's easier for me to say, than for all of you to do, but my immediate proposals for today's economy remain:
1. A a full FICA holiday
2. An immediate 150 billion revenue distribution to the state govs on a $500 per capita basis
3. An $8/hr federally funded transition job for anyone willing and able to work, to assist in the transition from unemployment to private sector employment
4. Universal healthcare. See details of my proposal at www.moslereconomics.com
5. A 'narrowing' of banking and the financial sector in general as per proposals at www.moslereconomics.com
A clear and working understanding of MMT is mandatory to support these proposals and the rest of the progressive agenda in public debate.
1. The state is desirous of provisioning itself
2. To that end, it levies a tax in its currency of issue
3. This creates sellers of real goods and services by individuals who now need that currency to pay the tax and net save.
4. These goods and services offered for sale in exchange for that currency cause others to desire the currency to be able to buy what is offered for sale
5. The government then can provision itself via the purchase of those goods and services offered for sale, as it spends the funds desired by the economy to pay taxes and fulfill desires to net save in that currency.
In other words, the function of taxes is to create what we call unemployment - people looking for paid work. Without taxes there would not be any unemployment as we know and define it. Non-monetary societies don't have any of our type of unemployment. Our type of unemployment is necessarily a monetary phenomenon.
And the purpose of taxing is the transfer of real resources, and particularly labor, from private to public domain.
So, knowing that, for a given size government there will always be a level of taxation that 'unemploys' approximately the number of people the government wants to hire. If taxes are more than government wants to hire, the result is unemployment. The government can then either decide to hire more people or cut the tax. However, a government that understands this, would decide how many employees it wants first, and then size taxes to unemploy that many people. In other words, a knowledgeable government. would use taxes as the thermostat, having first decided on it's desired level of provisioning.
I'll next address a common misconception. The following question has been asked more than once, "what if FICA is cut and the economy doesn't improve?" Yes, that could happen. But all that would mean is that the FICA taxes served no purpose in the first place. It's all about knowing that the purpose of federal taxation is to regulate aggregate demand, and not to raise revenue per se. That is, the federal government hasn't lost anything by cutting a tax that wasn't functioning to reduce demand in the first place, as evidenced by the fact that cutting it didn't restore any demand that it was presumably removing.
As a final point, let me address the use of taxation for social engineering. Yes, this is a perfectly legitimate thing to do, but most often it's 'second order' and used to address a presumed inequity that in fact is being caused by the existing institutional structure. That is, the reason one group or another, such as the financial sector, has income that is arguably disproportionate to any real contribution to the general welfare, is the institutional structure.
The most obvious example might be the US Treasury market, where incomes of those working in that industry often fall into the upper 1% of the population. The headline progressive response has been to hike tax rates progressively. My take is that historically those types of responses don't work particularly well to produce desired outcomes. So in this case, my proposal is to get at the root of the issue, and order the US Treasury to sell and issue nothing longer than 3 month T-bills. Likewise, I would not allow insured pension funds to buy any stocks, but be limited instead to government annuities, as per my article in the Huffington Post. For me, best to eliminate predators by cutting off their food supply.
So to conclude, the headline progressives, due to their lack of understanding of MMT, are losing the battles and the wars, at a time when, in fact, the progressive agenda has never been more affordable in every way. With MMT, and perhaps only with MMT, can the good fight be won.