Modern Monetary Theory, Taxes, and Inflation

Japan is examining MMT in its debate over its upcoming sales tax increase [emphasis added].

Some members of Parliament, led by ruling conservative-party lawmakers, argue Japan doesn’t need higher taxes because the country’s inflation is less than 1%. The theory suggests tax increases are needed only when inflation is out of control.

Notice that: MMT says increasing taxes is a means of controlling inflation.  The idea is that taking money away from the citizens reduces demand and so inflationary pressure.  There are a couple of problems with this concept.  One is that government revenue gets spent so Keynes’ aggregate demand goes unchanged, except for a bit of Government-as-middle-man friction.

The other is that, as our own Progressive-Democratic Party annually demonstrates, lowering raised taxes (or simply lowering taxes) is deucedly hard to do.

I offer an alternative solution to combatting out of control inflation, or even inflation that is simply higher than we want it to be.

To the extent Government (I’m omitting the Federal Reserve System on the naïve theory that it is independent of Government machinations—it is intended to be) intervention is useful at all in combating inflation (that utility is not established), here’s an intervention technique that any modern Keynesian should love: instead of raising taxes, cut Government spending.  After all, goes the Keynesian song and dance, Government spending is stimulative, so the increased demand is inflationary.  Cutting the stimulus ought to reduce inflation.

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