The MMT Question – So, What Tax Rate Would Solve Zimbabwe’s 500% Inflation Rate?

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As we all know modern monetary theory gives us the out against austerity. No government needs to be constrained on what it spends because it can just print more money to spend. Government can thus provide us all with everything. And a pony.

Excellent, isn’t it?

The idea does come up against some real world constraints. We know that increasing the money supply leads to inflation. MMT is increasing the money supply, so the inflation turns up at some point. To which the MMT answer is increase taxes. That calls back in that extra money and so reduces the money supply and inflation.

OK, what’s the tax rate which solves this problem then?

The Zimbabwean economy already faces a crisis, with an inflation rate of around 500%.

That’s a pretty good performance really, they’ve only been using this new currency for a little while:

Zimbabwe will introduce higher denomination bank notes to increase the amount of cash in circulation, the finance minister said in a government notice on Thursday, at a time inflation is soaring and pushing prices beyond the reach of the majority.

The southern African nation brought back the discredited Zimbabwe dollar currency last year in June after a decade of dollarisation. The move failed to end severe cash shortages and unleashed inflation, which reached 676.39% in March, one of the highest in the world.

Less than a year to debauch the currency – impressive. And more cash always is the cure to inflation, isn’t it?

In its submission to the ministry of Industry and Commerce, titled High Level Summary of Submissions Regarding the Modalities of Industry Funding From The ZW$18 Billion Stimulus Package, the ZNCC warned government that funding the rescue package through printing of money will be more harmful to the economy than the impact of Covid-19.

And they’re about to stimulate the economy with more cash printing.

At which point we really do have to as the MMT crowd what the tax rate should be. Zimbabwe meets the conditions they say are necessary for MMT to work. It’s printing its own money, it is in control of tax rates, it can increase or decrease the money supply as it wishes. It’s funding necessary spending by printing money and there’s definitely slack in the economy. All those MMT conditions are met.

Thus that final stage of MMT, taxation to reduce inflation, will also be met. So, what’s the tax rate that should be imposed in Zimbabwe? Not that Mr. Wray or Ms Kelton are going to be willing to attempt and answer even as they urge the same policy on the rest of us. But we should at least ask, right?

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Spike
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Spike

How sad that a new regime, with a chance to start over, repeats the same mistakes. No home-grown currency will work better than dollarization did. It was not national pride that prompted Zimbabwe to create this currency but the chance to steal.

Pat
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Pat

The same tax rate as would have been needed to finance the spending in conventional monetary theory.
MMT merely provides a novel way of explaining how things work, it doesn’t change how things work.
I suspect in the case of Zimbabwe that would be be near 100% on everything, so they either cut spending or further inflate the.currency

Phoenix44
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Phoenix44

MMT doesn’t do that, it proposes that government spending (oddly not mine or yours) is not connected to the revenue that government raises from taxes. It can therefore spend what it likes. That’s not a different way of explaining how things work, its a claim that how we think things work isn’t right.

The fact is that it only exists because some people want governments to spend more without having to admit they will therefore have to increase taxes.

NDReader
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NDReader

I suspect that Pat is correct, and that conventional tax and spend is roughly equivalent to MMT spend and tax, except for the timing of the riots. Here we are pursuing a policy of borrow and spend. Don’t know how that compares.

Phoenix44
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Phoenix44

If we start with an ideal economy, with no state spending, no taxes and full employment, what happens with MMT? The state decides it wants to spend, so prints some money and spends it. On what? Stuff & people already being used. The existing employers increase pay to retain their workers, existing projects increase what they would pay for steel so they get it, not the state. Assume the state wins some employees, some steel. So now we have some state provided stuff but less private provided stuff and higher prices, maybe taxes. I’m struggling to see the benefit of… Read more »

Jim
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Jim

Because the usual suspects can get their hands on the money (and thus power via directing its spending) more easily. If you can obtain the money by printing it, the taxation that may or may not ensue to reduce inflation comes later, by which time you’ve used the money to get the power you want. Taxing people first means more opposition to your plans. Its just the usual Leftist power grab – its what they do.