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Friday, December 30, 2011

Modern Monetary Theory: Are We Overtaxed?

     Until I got into MMT I would have thought this was a Right wing question. I mean what seems obvious is that we-or at least some of us-are undertaxed. It seems that Bush’s tax cuts were what put us into huge deficits that are now being used as an excuse to cut spending even further.

    Yet I think I’m beginning to understand the MMT line. We are overtaxed relative to government spending. Of course by “we” I mean the non-rich. So it is doubly ironic that we have had such regressive tax proposals out of the Republican candidates this year.

   I would agree that non-rich Americans-the 99%-are overtaxed based on what we get for our dollars. The non-rich need a tax cut. However this tax cut can come in the form of lower taxes and/or more government spending that benefits the non-rich.

   According to MMT theory in a fiat money system we need taxes to regulate demand, to avoid inflation. For this reason the taxes on the rich-the 1%-are too low. How high they should get is debatable. I don’t know that we necessarily need the 70% top rate we had when Reagan came in. But the 35% current top rate is too low and the talk of cutting it further means that the rest of us will continue to be over taxed.

   One of the cruelest pieces of ideology is that conservative canard that “50% of Americans don’t pay taxes at all.” This is what Galbraith called “an innocent fraud.” First of all everyone is liable for the sales taxes within their state. Beyond that there are parking fees, parking tickets, traffic tickets, and tickets on my Long Island for example, that charge $12 just to on the beach.

    Not surprisingly this is not the kind of  “double taxation” that bothers the conservatives, they’re worried about a few extra dollars in taxes on capital gains.

    Then there’s the 16.5% payroll tax-between the employee half and employer half. Just take a look at your latest pay stub and what you’ll find is between the federal income tax, the state income tax, and Fica, 30% of your money is gone every week.

  The difference between our claim that “Americans are overtaxed” here and the Reaganites, is that while they desire only supply side tax cuts the focus should be demand-which means cutting taxes on the non-rich. Where would these demand side tax cuts come from? On the national level a start was made by cutting payroll taxes-typically the GOP killed Obama’s idea to increase this temporary tax cut to 3.1%.

  Something like what Mosler discussed about cutting the entire payroll tax would be very good. For those who worry this would bankrupt Social Security, this is an illusion. The government can print it’s own money so there is no reason it should ever stop sending out SS checks unless it consciously decides to, a position which would be political suicide.

   Still much of our high tax burden is at the state level as we saw above. On a state by state level cuts to many consumption taxes are in order. To make up the difference some tax hikes on the wealthy are in order, along with debt financing. I also think that such consumption tax cuts would “pay for themselves” as the supply siders put it as this would stimulate consumption and the overall economy.

   For more on this please see here

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