How we are taxed, the level to which we are taxed and the kinds of tax which are imposed on the different sectors of the economy is not a static issue. There are serious debates about the relative value of income taxes, land value taxes, corporate taxes, indirect taxes but despite these arguments the principles behind these taxes remain the same.
The basic role of tax is to remove spending power from the non-government section of the economy so that the government can spend without inflationary consequences. Tax is a counter-inflationary tool in the economy.
Tax also has a redistributive effect. This is often interpreted as money being taken away from the rich to spend on the poor. In fact, the redistribution comes from using tax policy to leave the lowest income earners a larger slice of their earned income than the rich. That redistribution is not being effective when we see a situation such as we have at the moment globally. We can see that those at the lower end of the income scale may need two or three jobs to make ends meet whereas at the top-end the rich are making so much excess wealth that they can donate large amounts of money to political parties in order to influence their policies. Redistribution can either increase or reduce inequalities depending on how it is used.
Thirdly, taxes can be used to punish or reward certain behaviours. Tax credits such as family allowance or child benefit vary according to the government policy requirements for families to have smaller or larger families. Rates increase to encourage childbirth and drop to discourage it. Similarly, we have ‘sin’ taxes which are indirect taxes on such things as tobacco, alcohol and sugar. There is a popular belief that these taxes ‘pay’ for the additional burdens on our health services from smoking, alcohol and obesity related diseases but in fact, their purpose is to minimise these behaviours in the first place.
For MMT the question of taxing the rich and how much to tax the rich is a political question which is not directly related to the government’s ability to spend. Taxes do not fund government spending.
For more information, please see Public Matters’ articles on National Insurance and Taxation.