Against the Mainstream: How Modern Monetary Theory and the Myth of Millionaire Tax Flight Challenge Conventional Wisdom
Changing entrenched beliefs about economics is a difficult task, for it is challenging to distill fragmented facts into prudent judgements. As economic theories rely heavily on assumptions and macroeconomic statistics, a critical divergence exists between ideas most persuasive to the mainstream and those best supported by logic and empirical evidence.
In this paper, I will analyze the central tenets of the modern monetary theory (MMT), a recent proposal that governments with sovereign currencies, rather than domestic taxpayers, solely finance all public spending. Furthermore, I will relate the misconceptions about public spending, which MMT rebuts, to the idea of millionaire tax flight, a novel refutation against claims of the severity of debt crises. I will demonstrate parallels in the history of reception and ideological grounds of these two concepts where epistemic and social structures preclude the acceptance of such arguments among “mainstream” economic ideas. Lastly, I will provide an overview of the possible groups that not only have vested interests in blocking these ideas but have also created certain inhibitive barriers to them. This report will use evidence to advocate on the two arguments’ behalf and will identify their shared characteristics that make them distinct from other contemporary policy issues.
President Ronald Reagan once proclaimed: “We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.” Such conventional wisdom forms when the vast majority of people come to accept a group of ideas as fact. The misconception that the federal government cannot “spend beyond its means” and that millionaires flee high-tax areas by any means necessary has been propagated through numerous channels - most notably, media outlets such as Fox News - over the years by combining both personal experience and “common sense.” What happens, however, when there is new data presented that goes against the stream of ideas already established? What if these novel ideas rely upon an entirely different logical foundation for their support? What if the “common sense” originally used as the basis for prior justifications was incomplete or even flawed?
An idea does not become “conventional wisdom” and gain “acceptance into the mainstream” for its proven veracity; rather, it becomes accepted as an absolute truth through its promotion by influential media outlets and politicians. Recent history has taught us that some “plausible ideas” should not deserve their wide acceptance as scientific inquiry demands. Since the 1980s, for example, the concept of a non-accelerating inflation rate of unemployment (NAIRU) has been prominently accepted as an influential theory among most economists.
A NAIRU is the unemployment rate of an economy associated with a constant rate of inflation; a rise in unemployment is associated with a decrease in inflation, whereas a decline in unemployment causes an increase. Despite the success of Milton Friedman's explanation for the “natural” rate of unemployment throughout most of the 1970s and 1980s, economic data in the years since the mid-1990s have weakened Friedman’s case. The US economy has seen low unemployment and low changes in inflation as well as high unemployment and high changes in inflation. In fact, Robert Gordon pointed out the external supply shocks caused during the early 1970s in an effort to display “inflation initiated not by excess demand but by commodity shortages,” circumstances that are quite noticeable in the fluctuating consumption patterns and supply chain issues during the COVID-19 pandemic. In spite of these recent developments and their implications on Friedman’s original hypothesis, the NAIRU remains “an important building block of business cycle theory.”
Figure 1: Unemployment Rate and the Percent Change in the CPI since 1950
Routinely, little efforts have been made to temper an “inflation equals bad” mentality that plagues the public in the United States every few years. Similar futile simplifications are made about raising taxes for the rich as politicians claim that the wealthy will flee in droves, causing large drops in tax revenue – a claim that relies largely on hypothetical posturing rather than definitive evidence in its favor.
The resolution of these two policy problems requires the reversal of hardened opinions among the general public and hard-nosed experts alike. Rising prices can be inconvenient for many – businesses may need to change their “sticker” prices while workers may not be able to renegotiate with their employers for higher wages until the end of their current contracts. Likewise, most Americans are neither millionaires nor billionaires and may often have an incomplete perception of what their life decisions would be like if they were not burdened by personal financial pressures. Such misunderstandings include failing to account for one’s close network of friends, family members, neighbors, and co-workers that shapes one’s decisions to move. These circumstances are what make it so difficult to propose ideas that run counter to what many have grown to accept as convention.
Perception versus reality
Misconceptions about both MMT and millionaire tax flight stem from fundamental differences between public perceptions of the two phenomena and their true implications. The media is partly to blame for this misalignment. From deficit hawks in Congress to political pundits on talk shows, the term “government deficit” is commonly used as a pejorative to counter any argument in favor of increased public spending. While prominent public figures, including billionaire Elon Musk, may perceive the government budget as identical to the personal spending habits of everyday Americans or even small, local businesses, the reality is that the United States federal government – specifically the Treasury Department and the Federal Reserve – is the only entity that retains the right to issue dollars. As a nation with a sovereign currency, the United States has complete discretion over its money supply and interest rates; it can also issue intergenerational debt. This could not be further from the truth for a household, which relies upon income to buy goods and services, or a business, which uses profits to fund production, investment in inventories, and innovation. As I will examine in further detail in a later section, the fallacies underlying perceptions of the federal budget reverberate across the political spectrum, ranging from cries for a smaller government during the Reagan/Thatcher era to proclamations of “tightening belts” by President Obama in his 2010 State of the Union Address.
“Crowding out,” the idea that economic activity contracts with deficit-financed expenditures, is one of the most common rebuttals to increased public spending. The neoliberal view of the crowding out effect entails the government competing with private entrepreneurs for capital to finance public spending. However, proponents of the idea that private investment will be “crowded out” if a government spends “beyond its means” fail to consider that the United States is an issuer of its own sovereign currency. Any amount of public spending that exceeds tax revenue is merely printed and issued by the US Treasury. The purpose of selling bonds after an increase in government expenditures is not necessarily to finance these payments but rather to “prevent a large infusion of reserves from pushing the overnight interest rate below the Fed’s target level.” When the federal government chooses to increase deficit spending, US Treasuries take the place of the reserve balances and maintain the aggregate quantity of reserves in the financial system. In other words, “Uncle Sam [does not] enter the market in competition with other borrowers,” such as Citigroup or Morgan Stanley.
We see a similar divide between perception and reality for the myth of the millionaire tax flight. According to the Global Wealth Report of 2021, only eight percent of Americans are considered millionaires, those presumably most knowledgeable about millionaire migration. However, the perception that millionaires will definitely flee their well-nested homes for lower tax regions lingers in a large segment of the non-millionaire population. In reality, while 47% of millionaire migrations in the United States from 1999 to 2011 were from high-tax to low-tax states, roughly 32% of such migrations occurred in the opposite direction. While this result is not insignificant, there is no discernible causal relationship in which a tax hike will dramatically force millionaires to states that have lower taxes - a prospect state governments may fear will drive down local tax revenues.
Figure 2: Percent of US population migrating
An interesting case study is seen in the counties that border the states of Oregon and Washington, all of which are located in a region with the highest relative difference in income taxes between bordering states. Logically, one would expect more millionaires to live in the state with relatively low income taxes – Washington – rather than the state with relatively high income taxes – Oregon. However, the data shows that millionaires tend to cluster in Oregon rather than Washington even after considering tax codes that have been in place for many years.
While the story of the Oregon-Washington border is unusual – most data indicates that in other border regions, millionaires “tend to cluster on the low-tax side overall” – there is no evidence that outlines a significant causal relationship between areas of greater taxation and areas with higher rates of millionaire migration.
Figure 3: Counties bordering Washington and Oregon
Doomsday is coming!
When new public spending measures are proposed to combat a recession, cries about the “debt ceiling” from fear-mongering politicians usually arise. Other figures, such as former New Jersey Governor Chris Christie, flirt with the fallacy of cratering tax revenues caused by millionaire migration. If the rift between perception and reality presented earlier can be attributed to a lack of detailed economic expertise among the general public, then the parallels between MMT and the myth of millionaire tax flight presented here demonstrate how reality has been warped into shaping false narratives about the potential for drastic economic reform.
Recent data indicating that unemployment and inflation do not perfectly align with the NAIRU theory presented in the background section may signal the dogmatic nature of academics within the field of economics. To illustrate this point, it is worth scrutinizing academic discourse relating to the 2008 financial crisis. For instance, “too big to fail” was a common platitude offered by economic “experts” in the early 2000s as a way to divert public scrutiny from concerning behavior among Wall Street banks, such as the rising number of mergers and increasingly predatory loans. However, once an impending economic disaster loomed and the federal government stepped in to rescue Wall Street, these same experts responded with confusion over where their models had gone severely wrong. As Nobel laureate Paul Krugman writes, “more important [than economists’ predictive failure] was the profession’s blindness to the very possibility of catastrophic failures in a market economy.”
Meanwhile, the Troubled Asset Relief Program was welcomed with open arms by financial institutions seeking to rid their balance sheets of illiquid assets. Yet when it came to increasing public expenditure to support low- and middle-income Americans affected by the subprime mortgage crisis, academics such as then Treasury Secretary Larry Summers deemed public spending to be excessive and costly. This 180-degree shift in tone lies at the core of the MMT argument; the federal government had the ability to both provide greater fiscal stimulus and purchase Wall Street’s toxic assets because the United States is an issuer of its own sovereign currency.
Figure 4: How MMT accounts for market/government interactions on taxation and public spending
Likewise, politicians have boldly proclaimed that tax hikes on millionaires will lead to their disastrous departure. Using data from the same study presented earlier on millionaire migrations between 1999 and 2011, we see that overall migration patterns among millionaires tend to be very subtle with only 2.4% of them choosing to migrate. Only a small portion – just 0.3% – of the total millionaire population chose to migrate from a high-tax state to a low-tax state. Beyond ignoring the clear evidence that makes the millionaire tax flight argument dubious, politicians also downplay the importance of location as a crucial form of social capital.
Figure 5: Migration Rates by Age, for Different Levels of Education
While there are numerous interpersonal factors that contribute to a person’s decision to move, the strongest drivers of migration include the prospect of greater economic opportunity or an immediate danger that threatens personal safety, neither of which are of particular concern for the average superstar athlete or hedge fund manager. For a person who has attained a certain level of “elite income,” interpersonal relationships and connections are “immobile” factors that influence this person’s wellbeing far beyond their marginal tax bracket. Such considerations, which are undoubtedly important to the social interactions of any group of people, are conveniently left out in the propagation of the myth of millionaire tax flight. Like the challenges that proponents of MMT face, these obstacles prevent substantial reforms towards more equitable taxation laws.
The bulwarks against change
Contemporary discourse on public spending conveniently fails to acknowledge the ability for the Federal Reserve to curb massive inflation through their control of interest rates and untapped potential revenues from higher taxes on the ultra-wealthy. As discussed, deficit-averse politicians use fear-mongering and scare tactics to deter support for these ideas. Their adamance reveals a similarity between those who stand to lose if such policies are enacted.
MMT economists view public spending as a way to stimulate a lagging economy and use their novel theory as a means to justify higher expenditures in areas such as social welfare, healthcare benefits, and infrastructure investments. The beneficiaries of such programs include the elderly, the poor, and the sick – more generally the non-millionaire/billionaire class. Since the start of neoliberalism’s grip on Washington in the 1980s, deficit hawks have decried the prospect of increased government spending on social programs. Yet, these same government officials openly endorsed the $8 trillion “War on Terror” as well as the allocation of billions of dollars in discretionary spending to the Pentagon every year. On the flip side of the deficit debate, tax reform has been on the legislative agenda for years, but in recent decades, such reforms have been more regressive than ones made in the past.
Any effort to stymie raising taxes on millionaires has brought about a constant propagation of the myth of the millionaire tax flight by politicians and academics alike. Harvard economist Martin Feldstein claims that higher state taxes on the wealthy have little effect on redistributing income and merely lead to greater migration by the wealthy. Such misrepresentations of government finance and migration trends may originate from the entrenched view of such matters within economics. However, it is certain that political lobbying, particularly in the years after the Supreme Court’s Citizens United v. Federal Election Commission decision, has allowed the interests of the wealthy to be overrepresented in legislative decisions on public spending and tax reform.
We often see that these obstacles prevent substantive action for other policy problems as well, such as combating climate change, dismantling the prison industrial complex, or engaging in international trade wars. In all of these instances, the vested interests of the donor class take charge. MMT and the myth of millionaire tax flight occupy unique positions among these challenging policy problems due to their potential for dramatic economic change among the benefiting stakeholders. It is even possible to create a parallel between the two ideas, as MMT views progressive taxation as a means to promote a more equitable society rather than as a hindrance for public programs. Consequently, it should come as no surprise that America’s millionaires use arguments such as the myth of millionaire tax flight to prevent higher taxation on the wealthy and the alarmism over deficits in order to curtail social spending.
The rhetoric of politics
Appealing to conventional wisdom is often a politically convenient argument to employ. Explaining every minute aspect of government finance takes time and effort and is – more importantly – unrelatable for most voters. The stagnation of real wages since the 1970s has forced middle- and lower-income households to grow accustomed to restricting their spending habits. Listening to rhetoric of their elected officials “wasting away” their hard-earned tax dollars can incite ire among constituents, making ideas such as modern monetary theory appear far-fetched. One study conducted by Kendall, Nannicini, and Trebbi indicates that such rhetoric has a meaningful impact on politicians’ public perceptions.
This is perhaps the reason why the politicians mentioned in (Section A) were unanimous in agreement over concerns about the fiscal deficit. While the degree of this agreement varies between politicians, there appears to be a reluctance to take the MMT perspective on this issue. Perhaps the word “deficit” being written in big, red letters on the minds of voters on Election Day is political suicide for anyone who dares to be portrayed as a proponent of reckless spending. The convenience of political arguments against higher taxes on the rich is similar to that of arguments echoed in the debate against higher corporate taxes – that the wealthy and resourceful create jobs for others and therefore require lower tax rates to create opportunities for wealth that “trickle down” to the rest of the population. These long-established views have become entrenched in the common sense of the public and have rendered idiosyncratic ideas incapable of breaking into the mainstream.
Conclusions and a Way Forward
Both ideas examined in this paper rely upon very basic truths – (1) no one outside of the US Treasury and the Federal Reserve can issue US dollars, and (2) millionaires, no matter how much wealthier they may be than the average American, rely upon and seek to maintain their established social networks. Accepting these two statements as facts can drastically alter policy discussions on both public spending and taxation on a federal level.
Time is arguably the most critical component to changing public perceptions of social spending and equitable tax reform. Even Stephanie Kelton, one of the leading experts on MMT, admits that she herself was skeptical upon her first encounter with the theory. The benefit of hindsight has revealed the shortcomings of the global economic order, especially in the aftermath of the Great Recession. The crisis presented itself as an opportunity for decisive action in a new direction, but instead, haste and imprudence allowed fiscal austerity to captivate the minds of leaders and economists around the world. While MMT is far from a panacea for all economic uncertainties, even economists who are more supportive of the traditional view on fiscal deficits, such as N. Gregory Mankiw, have recognized that MMT provides some useful insights that the traditional view may have historically overlooked.
The COVID-19 pandemic may serve as an inflection point for a more active role of governments in markets as countries around the world have increased their public spending to avoid recessions. It is here, however, that an important limiting rule of MMT must be mentioned - inflation. In the event of large spikes in prices - as is the case at the time of this writing in Spring 2022 - using MMT as a blank check to drive up public spending would not be prudent and would likely make the inflationary crisis worse. During such times, coordination between fiscal and monetary authorities to adjust interest rates and temper expectations of future inflation is vital.
Despite these limitations, circumstantial anomalies should not render the entire idea invalid. To truly tackle challenging policy problems, we must look to audacious economic ideas such as Modern Monetary Theory and refute arcane, baseless ones such as the myth of millionaire tax flight. If governments can admit wrongdoing on policy decisions and millionaires can recognize the value of their social circles, conventional economic wisdom too has the potential to adopt bold, new ideas.
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