On taxing the rich

I almost always agree with Dean Baker. He is one of our best economists today — a superb mind with a no-nonsense approach to economic reality. But I have a few important critical remarks on his article “MMT and Taxing the Rich.”

Dean notes that Modern Monetary Theory (MMT) is on solid ground in adhering to the old Keynesian notion that monetary taxes are not mainly aimed at funding State activities. Instead, monetary taxes — by which the State through, in our case, the Fed forces the private sector to accept its monetary liabilities — are meant to open up space for public resource allocation.

Clearly, there is a finite quantity of available resources (productive forces of labor, if I may be a bit more specific) for a society to mobilize. Thus, if aggregate monetary spending gets ahead of the “full employment” of these resources, inflation will result, because the purchasing power of each monetary unit will have to be discounted accordingly.

To frame this, I very much prefer a notion that Marx only sketched in several of his writings, because — bummer! — he never got to work on the fourth book of his study of capitalist society, which he promised would be devoted to the State. The Marxist notion is that the power of the State, the very premise of its existence — and not, mainly, its result — is its taxing power (inclusive of its credit). Of course, the State’s taxing power has to be reproduced more or less continuously, and taxes and borrowing are mechanisms by which this reproduction takes place, but here I am referring to the essence of the thing.

In sum, the State is a class vehicle constituted to appropriate resources, by some combination of consent and coercion, in order to direct them in accord with politically-sanctioned priorities. It is almost tautological to say that the greater its power to appropriate wealth, the greater the power of the State.

Dean’s main objection to MMT proposals is that MMTers emphasize increasing marginal tax rates on higher incomes a bit too much, that historically these higher marginal taxes have not delivered the requisite relaxation in aggregate demand that would allow sufficient public spending (without triggering inflation), that the higher the tax rates the greater the incentive to cheat, and that a better rationale for taxing the rich is to reduce their political influence, which is seriously inimical to democracy.

Of course, the more the rich are taxed — actually, the more the rich expect to be taxed — the more they will use their wealth and power to preempt and sabotage taxation. But this argument cuts both ways. If the idea of taxing the rich progressively has conquered the minds of the masses (and we’re getting there!), then this also means that the gains from taxation for a democratic State are higher, that the 99% has a higher incentive to tax the hell out of the rich, because that means that there will be greater room for channeling resources to sane, democratically set goals.

Now, yes, that will lead to a sharpening of class conflict, because the 1% are not very likely to come to their senses and just give up their privileges without throwing big tantrums. But there’s nothing we can do about it short of quitting the fight and letting them get away with murder.

If one is under the pretense that massive wealth ownership today (i.e. capital) is productive, then she will feel shy about taxing the rich. I mean, they are the job creators, right? But if one realizes that only labor can be productive, that capital simply appropriates and lives off the fruits of cooperative labor, then taxation and State financing in general appear as activities that permit the workers to partially recover some control over their labor, i.e. over their living and working conditions.

Therefore, the incentive of the 99% to tax the rich should be just as strong as — if not stronger than — the incentive of the rich to cheat. And like in all conflicts, there will be a sort of “arms race” involved: They will come up with innovative ways to cheat, and a serious democratic State will have to make their cheating ever more costly and painful to them.

No doubt, transferring wealth from the 1% to the 99% will always entail some waste. We don’t want that waste. We wish to minimize it. But, again, the rich are most likely to resist and as a result dear resources will have to be squandered in the conflict. Too bad!

However, if the class struggle is the required method for the workers to recover control over their human essence, over their living and working conditions, then that is what it will take. Our argument is that the social order as it exists is already entailing a much larger — by far — waste of humanity, in fact, the impending danger of total human self destruction. It is a hard sell, because it sounds too extreme to minds lulled by the social order. But I don’t see how lying to ourselves or to others will help us in this.

Dean argues that by giving the rich an incentive to cheat, we will be spawning an even larger tax-cheating industry. Larger, because — clearly — a massive chunk of actually-existing finance is exactly this already. Dean thinks that this larger tax-cheating industry will translate into extra aggregate demand thus shrinking the space for public resource allocation — demand for something with “no social value.”

Well, I’m not so sure. This is an empirical question. But, speculating: It seems to me that, at the aggregate level, an enlargement of tax-cheating activities need not add to existing spending. It will rather be a switch from whatever uses of income by the rich exist now (e.g. mansion construction, private jet purchases, right-wing think-tank financing, etc.) to purchasing more tax cheating services. Chances are, it will be a switch from “nothing of social value” to “nothing of social value” while leaving aggregate spending more or less intact.

Again, to be fair, Dean is not so much arguing against these higher marginal income tax rates, but rather warning about their very likely unintended consequences. Dean much rather prefers a tax on financial transactions, which slows down the machinery of finance, which — to put it mildly — is not truly contributing much to social well-being. To this, I could add higher sales taxes on all kinds of asset switching, luxury items, higher inheritance taxes, etc. Indeed, none of these things are mutually exclusive. Mindful of consequences, I would even follow Bill Gates’ advice to tax wealth directly at much higher rates.

Though a bit outside of the scope of these remarks, I’ll comment on Dean’s allusion to “full employment.” This is, as Dean notices, a problematic notion to conceptualize and measure, and not just to conventional economists. I unpack it this way.

At any given time, a society is formed by a complex fabric of layered structures, which — by means of abstraction — we usually separate (by their degree of rigidity to human agency) into technological, economic (basically, market structures), legal (inclusive of economic policies), political, ethical, and ideological (much of what conventional economists dump in the bucket of “tastes and preferences”).

At such time, all or some of these structures may restrict the mobilization of resources to uses that the 99% may deem more necessary. While inability to mobilize resources effectively to — say — sustainable energy production may reflect the existing state of technology, it may instead be a function of the collective belief that switching our energy platform is “too expensive” or “disruptive,” or it may result from legal obstacles that can be judiciously removed.

In any case, the 99% needs to take a very hard look at the totality of existing technological barriers and social structures, because our ultimate goal is to push the technological envelope in a proper direction and reshape our social structures democratically to make them responsive to our needs.

In brief, it seems to me that “full employment” is the mystifying, black-boxy form in which the economists refer to a host of distinguishable self-inflicted human structures, some “softer” and some “harder” to the touch of our own conscious agency. Because we need to figure out the right way to kick them out of the way. This, I think, is very relevant to make sense of inflationary phenomena, because inflation is always and everywhere a political phenomenon.

To be sure, the emergence of inflation may make it seem as if the problem is excess public spending. And it is, indeed, in the first order of analysis. But, in fact, this may just be an expression of legal structures (e.g. particular economic policies in place) that are keeping this “full employment” ceiling stuck at a low level. Therefore, the proper solution to inflation may not be reducing public spending as much as removing the legal obstacles.

Yes, the problem compounds because inflation tends to discredit a State, thus weakening its taxing power, increasing its dependence on “printing money” or on the credit of private lenders, domestic and foreign in a potential downward spiral. Thus, the problem circles back to political strength or, more broadly stated, the overall balance of forces in the class struggle.

In this tune, it is good that Alexandria Ocasio-Cortez is invoking war mobilization or response to national emergencies as illustrative of the plasticity of this “full employment” social membrane. This is not to say that mass heroism would, in the longer run, be a sustainable approach to building a better society. But, if history is any guide, we are going to have to appeal to it sooner rather than later.