The Struggle Over The Role Of Taxation

Garth Brazelton's article "The Purpose of Taxation" discusses the purpose of taxation, together with this has generated a fair position out of comments on the Mike Norman MMT website. His article discusses regime finance from the betoken of persuasion of Functional Finance. In this article, I desire to laissez passer on a high degree give-and-take of the tilt some the Functional Finance viewpoint on the role of regime taxes.


Garth Brazelton's key declaration is every bit follows:

So what purpose does taxation at the federal degree serve?  Well, largely it's to modulate private spending demand.   (I would debate a secondary but meaning purpose is income redistribution to regulate economical inequality)  When taxes rise, resources are taken from me, Indiana, together with other entities that possess got express funding sources because nosotros don't command our ain currency.   Because of that, our spending need shrinks.  Contrarily, when taxes fall, resources are given to me, you, together with Indiana, together with our need to pass some or all of that coin rises.  The fact that the regime has changed the taxation degree at the federal degree need non possess got whatever bearing whatsoever on the federal conclusion to pass - it effects the private conclusion to pass greatly however, together with inwards that way, regulates spending need together with inflation.   This is a key departure betwixt the United States regime compared to individuals together with States (and fifty-fifty the EU countries similar Hellenic Republic that besides create non possess got command of their ain private currency).   

This is a restatement of Functional Finance, which was developed past times the economist Abba Lerner (for a longer discussion, run into my primer).

However, inwards the comments Ramanan countered:

Imagine a economic scheme amongst the regime expenditure most $15 together with average taxation charge per unit of measurement some 15% together with the gross domestic product some $100. And some other amongst $20, 20% together with $100. And both at nigh amount output. For the showtime to possess got regime expenditure at $20, it may possess got to hold off for a piece for productive capacity to larn higher piece the regime increases expenditure from $15 to $20 over time. The other road is increment average taxation rates, hence that the regime tin sack pass more. So inwards that feel taxes fund expenditure. There is no need for making counter intuitive claims that taxes create non fund expenditure together with hence on. [emphasis added -BR]

In other words, the Modern Monetary Theory version of Functional Finance is simply "word play".

What Are The Operational Differences?

I create non intend the observation that taxes create non "fund" expenditures is simply intelligence play. However, I create non intend verbal argumentation volition Pb anywhere, rather nosotros possess got to await at the operational differences betwixt the points of view.

I forthwith provide to the article "Functional Finance vs the Long Run Government Budget Constraint" past times Nick Rowe (which he wrote almost precisely iii years ago, when this dispute previously rolled over the blogosphere).

Functional Finance says yous exclusively utilization taxes if yous desire to cut back Aggregate Demand to preclude inflation. The Long Run Government Budget Constraint says yous utilization taxes to pay for past, acquaint or hereafter regime spending. They audio rattling different. They aren't.
There's a full general regulation inwards economics: showtime yous consume the costless lunches; hence yous  look at the difficult trade-offs. Functional Finance says "first consume the costless lunches". The Long Run Government Budget Constraint says "then await at the difficult trade-offs".
...
That's the underlying marrow of truth inwards Deductions for regime pensions are exclusively disguised taxes, every bit I beak over here.

See Also:

• My listing of articles on Modern Monetary Theory.
• One of my complaints most the long run budget constraint.

(c) Brian Romanchuk 2014