So what level of taxation stops Venezuela's inflation?

Modern Monetary Theory is highly popular among those with a certain vision for government. Rightly so, for it says that a government can just print money to spend as it wishes. In a sovereign nation with its own currency there is no fiscal limit that is. To a certain type that’s very interesting indeed.

Leave aside the details of whether it all really works like that - standard economics has it well covered under the rubric of monetisation of fiscal policy, something the rules of the euro specifically bans* - and consider just two points.

The danger is that government will gaily go off and print lots of money, either on paper or simply electronically, and by spending it create inflation. That’s what many past episodes of such monetisation have led to after all. The glib answer is that the government just taxes more, sucks that created money out of the economy, and thus kills the inflation. Tax, in this theory, exists to stop the inflation caused by government spending.

Well, OK, but how different is this from old left wing policy? We end up in the same place don’t we? A high government spending and high tax economy. Sure, we’re now saying that the spending comes first, the tax second, but we’ve still got ever more of the economy being run by, flowing through, government. Obviously attractive to those who love big government but not so much to the rest of us.

That being our first point - how does this differ from any other method of giving the jackanapes in office more power over us?

The second is a little more detailed. Venezuela has been following just such MMT policy. It has been printing ever more bolivars to fund spending. As standard and MMT theory predict this has produced roaring inflation - 1 million percent by some estimations expected this year.

So, what’s the tax rate which would cure Venezuelan inflation?

Without knowing that we can’t evaluate the idea that tax can indeed be used to curb inflation, can we? Even if the political will were there - we suspect it never will be, political incentives always favour spending more, never taxing more and certainly not taxing to limit something as future tense as inflation - we do need to know that it is technically possible for tax to curb that inflation.

So, what tax rate should Venezuela have? We strongly suspect that it’s more than 100% of the economy.

Venezuela rather doesn’t have an economy these days other than oil. The oil is all government owned, all the revenue flows to government. In terms of any formal economy government really is rather some 100% of it already. The place still has that 1,000,000% inflation.

Our conclusion is that this fundamental assertion of MMT, that one can simply tax the spending created inflation out of existence, doesn’t in fact work. We’re back where we started, with those historical warnings - Weimar, The Hungarian pengo, the Zimbabwean dollar - against the monetisation of fiscal policy.

Unless, of course, some MMT proponent would like to come and tell us all what the tax rate in Venezuela should be in order to reduce that inflation rate? We’d like to see some workings, of course.

*In a shared currency you can’t let each component nation pursue such a policy. The money supply, the inflation, rises for everyone, whatever counteraction applies only in the one nation doing it. This is the mistake the late Soviet Union made, leaving each now independent republic with its own printing press printing the same rubles valid in all. Not the only mistake made of course.