I disagree with parts of the Wall Street Journal’s editors’ reaction to talk of increasing taxes. As should not be surprising, they object to raising taxes:
The same policy wizards who brought you soaring inflation are now offering what they claim is a solution to inflation: Raise taxes. Our advice is to consider the source and the economic record their previous advice produced.
Democrats are desperate to salvage something from their Build Back Better agenda after Joe Manchin killed the original version last year. Sen. Manchin’s complaint then was that trillions of dollars in new spending would stoke inflation. Voila, Senate Majority Leader Chuck Schumer is now pitching a tax increase as a cure for price increases.
What do they think should happen? If you think, as the Congressional Democrats do, that there is an urgent need for additional government spending, there are really only three alternatives: cut spending somewhere else, borrow more money, or raise taxes. While I think that any inability to cut spending exhibits an alarming lack of imagination, the Congressional Democrats clearly don’t see it that way.
Borrowing more money is the way we got into the present fix. We have been borrowing at a prodigious rate, at an unconscionable rate for the last 15 years under Obama, Trump, and now Biden. That leaves raising taxes.
I think that they’re unfair to Modern Monetary Theorists:
“Coordinating higher government spending with higher taxes so that the rest of us are forced to cut back a little to create room for additional government spending,†as MMT evangelist Stephanie Kelton puts it. She says the trick is to “remove spending power from the rest of us†via taxes so the government can fund things like solar panels in California.
This is the same theory that told us the government can spend whatever it wants and not worry about rising prices. The Federal Reserve can simply keep suppressing interest rates and finance whatever politicians spend. Well, Congress and the Fed took Ms. Kelton’s advice, and here we are with the highest inflation in 40 years.
They left out the fine print of MMT: printing money for additional government spending won’t cause inflation as long as it is limited to the increase in aggregate product. What they’re describing is what I have called “folk MMT” and I doubt that Dr. Kelton has ever espoused that.
Where I’m in agreement with the editors is in their disapproval of increasing corporate income taxes:
But tax increases would make inflation worse by further suppressing the supply side of the economy. That’s especially true of the corporate tax increases that Mr. Schumer is pitching. They’d suppress productive investment precisely when the economy needs it to offset the Fed’s tighter money. This is what happened in the 1960s and ’70s when higher taxes on corporate profits and individual incomes contributed to inflation by depressing investment and productivity growth.
The economically most efficient rate at which to tax business is zero. Congressional Democrats’ relish for corporate income taxes is prima facie evidence that they care less for economic efficiency than for beating up on “greedy corporations”. But there’s fine print there, too. Not all business income is used to increase business investment. Indeed, I have claiming for decades that we need more business investment. American businesses should be producing more and taking less in the form of profits. If you’re determined to increase taxes on businesses, what we really need is much more narrowly crafted legislation which incentivizes businesses to invest more in things other than financial assets like factories while taxing away some of the rest.
And why not increase personal income tax rates on the top 5% or so of income earners? Taxing the top 5% would be a lot easier than taxing the top .5%. I mean and actually derive revenue from the increase. I’m sure that linguistic sleight-of-hand could frame it as satisfying Joe Biden’s campaign pledge.
“They left out the fine print of MMT: printing money for additional government spending won’t cause inflation as long as it is limited to the increase in aggregate product. What they’re describing is what I have called “folk MMT†and I doubt that Dr. Kelton has ever espoused that.”
No. If you go back to the original writing of Warren Mosler he describes taxes as the very mechanism that withdraws government printed currency from the economy, preventing inflation. There is no notion of a real match between currency printed and productive goods and services output. Its a straight handout for do good purposes. Chuck Schumer probably doesn’t understand it, although his research staff may have produced his remarks, but he’s citing the MMT orthodoxy.
The notion of a match is ludicrous. You could print a trillion dollars of currency and use it to build a half trillion dollar factory producing a half trillion cost basis of pet rocks (pretty much describing most government directed “investments”) and still have inflation. I’m open to examples of government driven output that is more efficient than the private sector, but I expect it approaches the null set. The private sector makes plenty of mistakes, but its AA ball compared to the pros in government.
“American businesses should be producing more and taking less in the form of profits.”
That’s your opinion, and you are entitled to it. But unless you are willing to buy the company and do what you say its not your call, and, if you attempt to enforce it, are just engaging in authoritarian hypocrisy.
That domestic production has declined (at least in relative terms), that more business “investment” is in the form of financial assets (generally referred to as “financialization”), and that today’s businesses are more profitable than those of years ago are statements of fact. Since money is fungible if you invest less (in the true sense) and realize more by doing that, if you invest more you will realize less in the short term. That’s axiomatic.
And I’m not arguing that businesses should be forced to invest more. I’m arguing that the incentives for them to invest more should be increased. That’s not authoritarian; it’s how markets work.
Dave Schuler: The economically most efficient rate at which to tax business is zero.
Corporations benefit from the infrastructure government provides, so placing some of that burden on corporations makes economic sense. Government needs to either shrink or taxes grow. However, most people want Social Security, Medicare, and recognize the need for the military. That’s most of it right there.
Take an economics class.
Whatever businesses pay in taxes is passed on to workers and customers. That hurts the poor the most. I don’t object to taxes but I do object to inefficient taxes and corporate taxes are terrible in that respect.
Dave Schuler: Whatever businesses pay in taxes is passed on to workers and customers.
Sure. ALL taxes distort markets. But if a corporation needs a road to their door, then it makes sense to place the tax at that point in the economic structure. Yes, the costs are passed on, but it is more efficient to pass them on in the cost of the products produced using that road. In the U.S., government will often pay for the road, then give tax breaks to attract new businesses.
Yes, our tax system largely exists as it does to increase the power of legislators. They use that power to line their own pockets and that’s happening to an increasing degree.