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I understand this part of MMT: From 100 USD that the Fed prints, the state can get back (or destroy) 10 - 90 USD back in taxes. But what is the effect of taxes on the economy:

  • A household buys food for 50 USD incl. 10% tax - what is the effect of the tax here?
  • A private person buys a luxury item of 80 USD with 25% tax - what is the effect of the tax then?
  • A foreigner buys the same luxury item of 80 USD but requests tax free discount (as he has an account on the Bahamas ) - how does tax discount and avoidance show up in MMT ?
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    $\begingroup$ I'm not sure if there is a direct answer but this looks like it may be helpful: neweconomicperspectives.org/2014/05/taxes-mmt-approach.html $\endgroup$
    – Brian Z
    Jun 29 '20 at 17:54
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    $\begingroup$ As a proponent of MMT, I cannot see what the relationship is between the question and MMT. The MMT argument is that taxes create demand for a currency, and help determine the price level. But this shows up in aggregate, and what happens in particular transactions tells us nearly nothing. $\endgroup$ Jun 29 '20 at 19:29
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The key aspect of taxation is, that it creates a demand for the currency. This is the main reason why we need taxes. Nobody would accept the worthless paper of a free floating currency in payment for work and goods unless the government imposes a tax. The tax creates the demand for it. This is what always has been done in history by kings and governments. It's a way for the sovereign to create unemployment (people seeking to work for the state money) and bind resources to meet its state obligations (building roads, public health, education and so on).

Without taxation there wouldn't be a functioning monetary system to begin with.

Warren Mosler likes to give this example in some of his lectures: He asks the audience if anybody wants to stay late and clean up the room after the lecture. As payment he offers one of his business cards. Of course nobody is willing to work for his, in their eyes, worthless peaces of paper. Then he adds another detail to the situation. He explains that there is only one exit from the room and behind that door is a guy with a 9mm working for him. The guy will only let the audience leave in payment of one of his business cards. Suddenly he created a lot of unemployed people in the room that all seek for work paid with his business cards. This is exactly how public money works too.

Apart from that taxes have other important uses for the government and the economy itself. First and most importantly they reduce aggregate demand (spending power). If the government just spends without ever taxing anything back the money would pile up in the economy and at some point lead to inflation.

Anther important use is the re-distribution of wealth. In capitalism wealth has a tendency to concentrate in the hands of few without any benefit for the economy or the public good or even creating a financial crisis. Taxes help to remove spending power where is piles up.

And last but not least taxes are a way to influence behaviour. Think of a tabacco tax or a CO2-tax and the like.

Note that taxes do not act as way to finance the government. It has a public monopoly on the currency and is not in any way restricted in spending power. The government is way more like a scorekeeper or the bank in the game "monopoly". It is not a household and it doesn't need to borrow its own money from its citizens.

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    $\begingroup$ Well... I live in Europe and believe me, taxes do finance our government. :-) $\endgroup$
    – tdm
    Oct 4 at 11:50
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    $\begingroup$ @tdm Well, this is a self-imposed political constraint, not a technical one. The ECB could make sure the governments can fund themself and I believe that the central bankers know they need a better fiscal policy. Monetary policy has repeatedly shown to be very ineffective in the last decades. Greetings from Berlin, Germany. $\endgroup$
    – trixn
    Oct 4 at 12:03
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    $\begingroup$ Hi, welcome to Economics:Stack Exchange. Please consider improving the answer by adding references from reputable and scholarly sources. As many other science stacks do, we require formal proofs, statistical evidence or links to external sources for answers making claims which are not common knowledge. Unsourced material can be edited or deleted. For more details see our help center and FAQ on community standards for answers $\endgroup$
    – 1muflon1
    Oct 4 at 16:56
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    $\begingroup$ @1muflon1 Okay thanks for the pointer, I will add references as soon as I have some spare time. $\endgroup$
    – trixn
    Oct 4 at 16:57
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    $\begingroup$ @WilliamT It's already taken way more seriously than you think. For example Randall Wray was invited to speak in a hearing before the House Budget Committee in 2019. So it's actually considered. Ignoring MMT is a big mistake. Mainstream economists are well advised to take it seriously. $\endgroup$
    – trixn
    Oct 5 at 15:40

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