The claim is being made that there should be a wealth tax to pay the expenses of the coronavirus. This is not so and it’s not so for the obvious reason that we’re not paying for the coronavirus through taxation, we’re doing so through creating new money. That’s what QE is and that also what Modern Monetary Theory is, neither of which say we should tax wealth as a result.
But still there are those insisting we should have such a tax:
Labour has called for the government to introduce a wealth tax if the economy fails to recover because “those with the broadest shoulders should be making more of a contribution”.
Anneliese Dodds, the shadow chancellor, said it was fair that the “very best-off people” should help to pay for the cost of the coronavirus crisis if the economic recovery stalled.
As a first pass of course the claim is idiocy. If there isn’t a recovery then increasing tax is the very last thing we’d want to do in the first place. And if there is a recovery then we’ve not got to have a new tax to pay for something that has already happened.
It’s also true that using the MMT – of monetisation of fiscal policy to give the old name, route doesn’t imply higher taxes either. Once the recovery has happened then we reduce the money supply to stave off the incipient inflation. The most obvious way to do this is to sell the QE bonds back into the market.
Certain MMT people say they don’t want to do this, instead they would tax to take that money out of the economy. But taxing the rich would be the wrong way to do that. As is well known the rich save some portion of their incomes and the poor spend it all. We need to suck money out to prevent inflation – we must obviously tax the poor then as it’s that consumption, not saving, which is creating the inflation.
So there’s no actual link between a wealth tax and paying for the coronavirus. So, why’s it being suggested?
Because standard economic theory says – shouts – that we shouldn’t tax wealth. We like people investing because that is what makes the future richer. We get less of what we tax so tax successful investments and we’ll get less investment. The future will be poorer, that’s a bad thing. Optimal taxation theory actually says that wealth – and the income from it – shouldn’t be taxed at all. So, the people proposing a wealth tax are running against that standard tax theory.
Not because they disagree with the theory, not in the sense that they say “Aha! There’s the fault!” but in the sense that they don’t like the prescription that arises from the theory. Thus they ignore it and ever try to find some excuse why the rest of us should.
There is no good reason to have a wealth tax to pay for the coronavirus. What is being essayed, the idea being floated, is that the coronavirus might be a good excuse to institute what we shouldn’t have, a wealth tax.
The correct response to this is that it’s not a sufficient excuse however much some drool at the joy of being able to tax the plutocrats.