Hacker News Reader

Comment by JumpCrisscross | Hacker News Reader

> reminder that taxes don't fund the government they curb inflation. The government funds itself by printing money and taking out loans

Sort of. Modern monetary theory ignores any stocks of money or money-like instruments at the government, focussing instead on flows. Spending and paying debt is inflationary, taxing and issuing debt deflationary.

As an economic model it’s nice. As a policy framework in a democracy it’s nonsense. Practically nobody during the inflation scare proposed raising taxes to destroy cash.

View on HN

> Practically nobody during the inflation scare proposed raising taxes to destroy cash.

They did though, they just don't call it that because it's implicit in the existing tax system and happens without any legislative action.

Capital gains tax includes a tax on inflation. If you own a $100 asset and its real value doesn't change but you have 10% inflation, its nominal value is now $110 and the next time you do a transaction the government will call this a $10 capital gain and collect tax on it, even though the real gain was $0.

> They did though, they just don't call it that because it's implicit in the existing tax system and happens without any legislative action

Those gains also fuel wealth effects. Our tax take as a fraction of GDP has been flat since WWII [1].

An MMT anti-inflationary cash-destruction programme would involve hundreds of billions, perhaps trillions, of borrowing or tax increases (with no increase in spending). That didn't happen for obvious reasons.

[1] https://fred.stlouisfed.org/series/FYFRGDA188S

"As a fraction of GDP" is kind of the point. If you have 10% inflation and taxes as a percent of GDP are flat, the inflation has increased nominal tax revenue by 10% and caused 10% more nominal dollars to be removed from the economy.

The part that didn't happen is that the government then needs to not spend that extra money, or else it goes back into the economy and continues inflating prices.

> part that didn't happen is that the government then needs to not spend that extra money

Sure. From a real (really real relative) frame, taxes stayed constant [1] while spending blipped up [2]. From a nominal frame, taxes rose and spending ballooned with it.

We tend to adjust in the real frame, i.e. raise taxes or cut spending, because it’s simpler to specify the state’s needs in real terms (we want ten artillery rounds) than nominal (we want to spend $20,000 on however many rounds that might buy).

[1] https://fred.stlouisfed.org/series/FYFRGDA188S

[2] https://fred.stlouisfed.org/graph/?g=8fX

But that's not as useful a frame when you're talking about inflation because in that case the number of nominal dollars matters. Saying that real spending is flat during a period of inflation sounds like something neutral is happening, when really you're increasing the number of nominal dollars being spent into the economy. Doubly so when you're running a deficit.

It's also implying that the government decides it needs ten artillery rounds and then allocates that amount of money, instead of determining how much money it can get away with spending/borrowing and then having various interest groups fight over who gets it. If it was the first one then there would be non-trivial periods when real government spending goes down because the need for some existing program declines and it gets reduced or removed without being replaced by anything, right?

What exactly is the government spending that money on makes bug difference on inflation, though

That doesn't matter a lot. They pay it to Lockheed who pays it to employees or subcontractors who buy stuff at Walmart and then prices at Walmart go up by supply and demand. The same thing happens if they pay it to General Electric or Pfizer.

To reduce inflation they'd have to throw it in a furnace or otherwise prevent it from going to anyone who would spend it.

> That doesn't matter a lot

Depends on what do you mean by “a lot”.

I don’t think that many people working at Lockheed spend their entire salary at Walmart every month.

and that's why it's valid to have a capital gains tax discount. It prevents you from making a loss in real terms due to taxes.

It doesn't actually do that though. It doesn't in the example above, for example -- the real increase in value is zero so any capital gains tax collected is a loss in real terms. And it would be trivial to fix it; just adjust the tax basis for inflation when calculating the capital gain. But reasonable tax policy is not a thing that we have.

> just adjust the tax basis for inflation when calculating the capital gain.

which is fine, except that it's a huge administrative headache, as inflation is not constantly measured, and you will have to estimate it for periods where it's not known. Not to mention that it takes a lot more effort to do this.

Simply discounting capital gains tax is sufficient as a simplification.

> which is fine, except that it's a huge administrative headache, as inflation is not constantly measured, and you will have to estimate it for periods where it's not known.

The BLS publishes the inflation numbers monthly. Higher granularity than that is negligible and hardly even measurable; the main issue is when you hold something for many years and the rate of inflation is in the double or triple digits.

Also, this stuff is already being done by computers. The computer needs the dates to determine if it's a short-term or long-term capital gain so it can use them to calculate the inflation using the official numbers.

> Simply discounting capital gains tax is sufficient as a simplification.

The difference is enormous. If you hold something for 18 months and the inflation was 6%, you get the same discount as if you hold it for 50 years and the inflation was 600%.

Also there is more than one government (and currency). And sometimes people would like to trade goods and services internationally...

> Spending and paying debt is inflationary, taxing and issuing debt deflationary.

Don't these pale in comparison on the flows created by Quantitative Easing?

No, not at all as QE didn't change the amount in circulation. From an inflationary standpoint they are mostly a no-op.

> QE didn't change the amount in circulation

Amount of what? QE/T changes the amount of money and government debt in circulation.

I don't think you're right here: according to MMT, removing money supply (I.E paying back debt and raising taxes) is deflationary,although raising taxes is preferred. I don't understand why strawmaning their positions is constructive (is it still strawmaning if you're saying the complete opposite). You can't make a good criticism of MMT while lying about their ideas.

I personally would prefer if MMT didn't exist. Or rather, I don't know. I had a marxist/neo-marxist critique of MMT, but I'm post-marxist now (for the dumbest Canadian psychoanalyst fans: it isn't the same thing, even though your idol seems to think it is).

> don't think you're right here

I am, but in a fun way.

> removing money supply (I.E paying back debt and raising taxes) is deflationary

Government paying debt is inflationary (in its own currency). Lender had a debt and not money. Now they have a money and not debt. More MMT ignores money stocks on the government side; we went from investor had paper asset to investor has money. The system has more money than before.

This, by the way, is how monetary policy works. The Fed buys bonds (and sells cash) when it wants to boost liquidity. It sells bonds (and buys cash) when it wants to drain it. The Fed has an infinite pool of notes, the Treasury of debt. MMT conceptually fuses these in an academically interesting and politically useless way.

Reply on news.ycombinator.com