If the tax rates on wealth and wealth increases were the same as those on income the UK might collect more than £170 billion of extra tax a year
Leave aside the problem with the taxation of unrealised gains. Further, leave aside the problem with tax refunds when asset prices fall.
Think about MMT. Which says that the purpose of tax is to reduce the inflation created by newly minted money being spent into the economy by the government. OK.
If £100 billion is spent in then the tax has to have an equal effect upon that inflation as the £100 billion spent, right? This is the multiplier as explained by the P³. That very same folks get money, spend it, it’s taxed at each stage, is also the same multiplier that creates the inflation. It’s the velocity of money again.
In the P³’s model – such as he actually thinks through one – money that goes into savings isn’t invested and thus has no multiplier effect. The flip side of this is that taxing wealth doesn’t reduce inflation. The two are the same statement.
Thus we get £170 billion of taxation that doesn’t reduce inflation and therefore also doesn’t increase the ability of government to spend newly created money into the economy. Wealth tax – in Ritchie’s model – therefore doesn’t work in an MMT sense. Because wealth taxation doesn’t reduce inflation and thus leave room for more government spend.
Reality says that of course wealth is invested, therefore does affect both the economy and inflation. But then if it does those things then why do we want to tax it so heavily?
We can use a milder – and accurate in fact – model. Yes, higher income people save some of their income. Lower in come people spend all. Therefore the multiplier – whether of tax or inflation – is higher for incomes going to poorer people. The direct corollary of this is that taxation to reduce inflation therefore needs to be of poorer people. Because, get this, richer people save some of their income which doesn’t affect inflation.