Modern Monetary Theory and taxation

Gregory John Olsen (ERA FB Discussion Group)

The Federal Treasurer’s Economic Reform Round Table has missed the most important fact about taxation. Only Modern Monetary Theory (MMT) can illuminate that.

Here’s a practical MMT-aligned way to think about tax at the Round Table.

What tax is for (in MMT terms)

For a currency-issuing government like Australia’s, tax is not primarily about “raising money to spend”. It is about: 1) creating demand for the currency; 2) keeping total spending in the economy in line with real capacity (i.e. inflation control); and 3) shaping who gets to use resources (equity, incentives, and “price the bads”). That framing is standard MMT: spend-then-tax, not tax-then-spend. (Cambridge University Press & Assessment, Funding the Future, era.org.au)

Design goal for Australia

Use taxation to:

(a) relieve cost-of-living pressures without stoking inflation,

(b) free up real resources for social priorities (care, housing, climate), and (c) fairly share the nation’s common wealth (especially land and minerals).

Below is a concrete package consistent with that goal.

1. Keep progressive income tax, index by default, and use targeted surcharges only when inflationary pressure persists

(a) Default indexation limits bracket-creep as a stealth drag on real wages; surcharges on very high disposable incomes can be a temporary anti-inflation tool when demand is hot.

(b) The redesigned Stage 3 changes (from 1 July 2024) already tilted relief toward low- and middle-income earners; keep that spirit if further tweaks are needed. (Treasury, Wikipedia)

2. Don’t hike the GST; if anything, reduce its regressivity

GST is a broad 10% consumption tax; lifting it would shift the burden on-to households least able to pay and risks dampening needed consumption. If fiscal space must be created, prefer progressive bases (below) over a higher GST. (Australian Taxation Office)

3. Shift housing taxation toward land and away from transactions

Replace stamp duty with broad-based land value taxation (LVT) over time, following the ACT’s 20-year transition (abolishing inefficient duties and lifting general rates). This improves mobility, lowers barriers to downsizing, and taxes unearned land rents rather than work. (ACT Revenue Office – Website, Prosper Australia, Grattan Institute)

4) Strengthen resource rent taxation

Australia’s petroleum resource rent tax (PRRT) should capture super-profits from finite resources more reliably (i.e. tighten deductions, align transfer pricing rules, consider uplift limits). Recent guidance has moved in this direction; keep going so that resource extraction frees space for public investment without burdening households. (Australian Taxation Office, KPMG, The Australia Institute)

5) Re-price carbon — pair it with visible household compensation

Carbon pricing is a textbook “tax the bads” instrument. Evidence shows emissions fell when Australia had a carbon price (2012-2014).

Re-introduce a carbon price or equivalent, with a per-capita dividend or targeted bill relief and strong industry transition support. That curbs emissions while protecting household purchasing pow-er. (Australian Bureau of Statistics, Australia Institute, Treasury)

6) Close high-end concessions that inflate asset prices

Tighten concessions that fuel speculative demand (e.g., design settings for capital gains and loss-offsets on investment property) to cool housing inflation and improve fairness. From an MMT lens, this isn’t about “funding” spending; it’s about dampening excess private purchasing power in overheated markets and improving distribution. (General principle; complements the LVT shift.)

7) Maintain a competitive company tax while targeting economic rents

Keep the two-tier company rate (25% base-rate entities; 30% otherwise) while ensuring multinationals and rent-seeking sectors can’t undercut the base — again, aim at rents, not productive reinvestment. (Australian Taxation Office, Taxrates.info)

How this manages inflation (the key MMT test)

When the federal government wants to expand public services or green investment, pair the outlays with taxes that withdraw private spending where demand is tight: land rents, resource rents, luxury consumption, and high disposable incomes are better targets than broad consumption. This frees labour and materials for useful work -exactly how MMT says tax helps keep prices stable (Funding the Future).

Why this is “good for everyone”

Fairness: shifts burden from workers and essential consumption toward economic rents and pollution.

Efficiency: LVT and rent taxes are among the least distortionary; replacing stamp duty reduces lock-in and improves housing mobility. (ACT Revenue Office – Website, Grattan Institute)

Climate & productivity: carbon pricing plus reinvestment speeds the energy transition and cuts long-run costs. (The Australia Institute)

Stability: progressive, automatic stabilisers and targeted anti-inflation taxes make the macro mix more resilient.

A note on today’s context

The Federal Treasurer’s economic reform round table has been explicitly canvassing productivity, budget sustainability and tax. An MMT framing helps keep the focus on real constraints and distribution, not on a false household-budget analogy. The agenda listed “Budget sustainability and tax reform” for debate on Thursday, 21 August 2025. (Treasury, ABC, The Guardian, The Australian)

A short “round table” checklist

(a) Use tax to manage inflation and distribution, not to “fund” spending. (Cambridge University Press & Assessment)

Prefer taxing rents (land, resources, monopoly power) and “bads” (pollution) over labour and essential consumption. (ACT Revenue Office – Website, Australian Taxation Office)

Index brackets; keep GST at 10%; compensate any carbon price visibly. (Australian Taxation Office, Australian Bureau of Statistics)

Keep company tax stable but close loopholes and capture super-profits. (Australian Taxation Office, KPMG) Communicate clearly: we are optimising real capacity, living standards and fairness — not chasing a financial constraint Australia does not face as a sovereign currency issuer. (Cambridge University Press & Assessment)

 

Source: Posted in the ERA Facebook Discussion Group;

Gregory John Olsen, Facebook Groups, 21 Aug 25 https://www.facebook.com/groups/964374837074171/user/651604520/