What defines income?
Note: this is a republication of the original version with some sections edited to better reflected the ideas and concepts addressed.
An Expensive Greeting
Let’s do a thought experiment here. Let’s say we decide to exchange a high five. But instead of a normal high five, this one is special, almost magical. We estimate that each of us is going to benefit from this high five to the tune of a billion dollars. Furthermore, we create all the buzz and hype and justification to make it clear that this high five is really worth a billion dollars. It will be broadcast in every country and streamed on every social media platform. I am providing you a billion dollar service, and you are providing me a billion dollar service.
Furthermore, we fulfill this payment in kind. So to pay for this service, you provide the same service to me, and I do the same, namely we give each other a high five. It would seem like our books are all done and settled. But alas, we forgot! Now we each have a billion dollars of income we need to declare on our taxes!
Frantically, we each need a way to come up with close to $370 million dollars for the tax bill. We offer to sell high fives to people who have high fives of lesser value, but no takers. It seems that no one can afford our high quality amazing service, even though they clearly would buy it if they only had the money.
Fortunately, you remember that you incorporated a business last year, called “high fives r us”, and I have a business called “all the way high fives”. We both realize that in order to give a high five, we must also receive a high five. So we simply decide to deduct the billion dollar high fives each of us received as a business expense. Phew! That’s a lot of taxes legally avoided.
What is MMT?
I would state the fundamental theorem of modern monetary theory(MMT) as “taxation creates unemployment”, and under certain assumptions, unemployment involves offering something for sale for money until it is purchased. So unemployment is “always and everywhere a monetary phenomenon”(originally, Milton friedman argued inflation was always and everywhere monetary phenomenon, but this challenges that idea). Unemployment could be land, labor, or natural resources, the principle is the same — there is some resource that is unallocated toward any purpose. You might take issue with the scope or definition of these terms, or the practicality of using such a framework for understanding the economy, but if it’s correct, then any monetary authority established must be concerned with how we tax and addressing the unemployment those taxes create.
The way I like to think of it, is that property rights and money both require some form of political and social recognition. We don’t necessarily need any explicit entity to define these things, but for the sake of uniformity and agreement, we create these institutions to address these definitions: “What is money?”, “What is income?”, “What is employment?”, and “What taxes do we owe?”
Now as I said, I expect that many people may take issue with this framing, and that is fine, and I welcome any debate or discussion of definitions and alternatives. But what you should notice, is that these assertions don’t require any particular political view. You could want to tax more or less, or none at all. You could want to eliminate all unemployment or think we should increase unemployment(of oil and carbon) to the maximum. You could support bigger or smaller “fiscal deficits”. These don’t determine your position on MMT.
Now I certainly will agree that MMT is incomplete. It’s not supposed to describe everything that happens in a society, and it’s not intended to be used for every economic problem involving prices and exchanges. It’s specifically relevant to the macroeconomics of governments, money, taxation and employment.
Instead of going super high value and using business accounting to set our tax bill to the level we want to pay for status reasons, we could simply go low value, and say our high five exchange is worth, perhaps a few pennies, and get away with almost nothing in taxes for exchanging high-fives.
However, there is a law designed to prevent this from happening: minimum wage. Because there is a minimum wage, we can’t set our incomes arbitrarily low to avoid paying income taxes.
Now it may not sound very nice to have a very-very low income just to avoid taxes, but if we work together on it, we can just lower prices to compensate. Indeed, this could theoretically be the natural course of modern economies without the minimum wage, even though significant in-congruence and unnecessary market antagonism might be more likely.
Already many companies do this effectively. They offer free or low cost services to avoid the income, and then launder the platform’s value through advertising revenue at whatever level of income they want, which the advertisers can induce from the captured platform’s influence and attention control. It’s basically holding people hostage in poverty to zero-fee but corporate controlled services and economic gig monopsonies on the other end.
The truth is, we could define what constitutes personal income as whatever we like, in other words, there’s not be a universal distinction between a business and personal endeavor, other than agreeing to undertake the accounting minutiae required by businesses and making those benefits available to anyone willing to pay for them. But why is a business expense somehow more worthy than personal expense? Do we really want to encourage people to spend more on business development than personal benefit and enrichment? Don’t all benefits ultimately have both a personal and a broader social impact?
Prices in our society are an increasingly poorer proxy for value and purpose, even though they were never meant for that, but only to allow us to distribute material and allocate resource in the context of value and purpose. I hope we can better understand these concepts and they help define our accounting of social relationships.