Chapter 7 - The Destruction of the Circulating Medium

The Destruction of Circulating Medium by Taxation

Tax is taken from Circulating Money as Income Tax, Company Tax, and Sales Tax. This table gives a breakdown of revenue sources for Greece. Almost all the tax is taken as the result of transactions. Almost all tax is taken from Circulating Money:

Personal income, profits, and gainsBad17%16%Taken from Circulating Money
Corporate income and gainsBad3%5%Taken from Circulating Money
Social security contributionsBad30%29%Taken from Circulating Money
Taxes on goods and servicesBad39%43%Taken from Circulating Money
Property TaxesGood8%4%Taken from Hoarded Money and Circulating Money

Only the last item, Property Tax is not damaging to the economy. Greece is clearly not taxing correctly. Property Tax has fallen drastically from 8% to 4%. Property Taxes needs to be increased significantly. Property Taxes do not damage the economy. Increased property tax allows economy-damaging taxes such as Sales Tax, Income Tax, and Corporate Tax to be reduced. Do not underestimate the importance of Property Tax. The fall in the Property Tax in Greece from 8% to 4% has the potential to be deadly for Greece. Property Tax tends to harvest money from Hoarded Money, thus causing a minor rise in velocity. A portion of property tax tends to be taken from those with property who are those that have ‘more money than they can spend’. Thus property tax tends to harvest Hoarded Money. The government then spends it back into circulation.

If half of the 4% decrease in property tax came from Hoarded Money, €1.2 billion would move into circulation. This has the potential to raise the Circulating Money by 8% with a consequent increase in the GDP of 8%. [1] [2] I have no exact way to determine what proportion of the Property Tax comes from Hoarded Money. However, the potential is there to significantly improve the economic figures with an increase in Land and Property Tax. When velocity is low, as it is in Greece, the economy is extremely sensitive to minor changes. This one fall in Property Tax from 8% to 4% could significantly affect this nation with such a low velocity.

Greece tax revenue components. by Andy Chalkley. Creative Commons Attribute.

The government spends the tax revenue back into society. The government taxes money from Circulating Money and spends money back into Circulating Money. A deficit is helpful in this regard. The government action is more helpful to the economy if some of the taxation is from Hoarded Money. Hoarded Money then moves from Hoarded Money to Circulating Money.

Tax is taken from Circulating Money by Andy Chalkley. Creative Commons Attribute.
The Destruction of Circulating Medium by Taxation

It is unhelpful if the government taxes and refuses to spend back into Circulating Money. This happens when the government imposes Austerity Economics. Under Austerity Economics, the government attempts to increase taxation and cut back on spending. In the above diagram, it is essential that the government spends the €5.3 billion that it taxed out of Circulating Money back into Circulating Money. If it does not do so, it will severely deplete the Circulating Money. This will severely damage the GDP.

Austerity Economics is the reverse of what is needed to make the economy thrive. The first mistake is to increase tax rates. This tends to be revenue negative. Increased tax rates tend to stifle the very transactions that the government is taxing. It is like an arctic explorer eating the dogs that might drag him to safety. The government collects plentiful tax from a thriving business sector and the employees of these businesses. The tax revenue of Greece fell dramatically after 2008 as business was depleted by lack of circulating medium. If the government destroys the productivity of business by harsh taxation, it destroys government revenue. It is not wise to kill the businesses that provide the government with taxation. The second mistake is that the Money Supply of a nation needs to be maintained or mildly expanded. Whilst governments continue to borrow money rather than create money, it is necessary to maintain the level of debt. If the citizens are not borrowing, it is necessary for the government to take on additional debt. The debts are not repayable and so it is pointless for the government to even try to repay debt. Inflation will tend to make the debt less significant with time.

This is a list of countries that will find it impossible to repay debt: Afghanistan, Albania, Algeria, Andorra, Angola, Antigua and Barbuda, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belgium, Belize, Benin, Bhutan, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Brunei, Bulgaria, Burkina Faso, Burundi, Cabo Verde, Cambodia, Cameroon, Canada, Central African Republic, Chad, Chile, China, Colombia, Comoros, Democratic Republic of the Congo, Republic of the Congo, Costa Rica, Cote d’Ivoire, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Eritrea, Estonia, Ethiopia, Fiji, Finland, France, Gabon, Gambia, Georgia, Germany, Ghana, Greece, Grenada, Guatemala, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, Hungary, Iceland, India, Indonesia, Iran, Iraq, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Kiribati, Kosovo, Kuwait, Kyrgyzstan, Laos, Latvia, Lebanon, Lesotho, Liberia, Libya, Liechtenstein, Lithuania, Luxembourg, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Malta, Marshall Islands, Mauritania, Mauritius, Mexico, Micronesia, Moldova, Monaco, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nauru, Nepal, Netherlands, New Zealand, Nicaragua, Niger, Nigeria, North Korea, Norway, Oman, Pakistan, Palau, Palestine, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Rwanda, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, San Marino, Sao Tome and Principe, Saudi Arabia, Senegal, Serbia, Seychelles, Sierra Leone, Singapore, Slovakia, Slovenia, Solomon Islands, Somalia, South Africa, South Korea, South Sudan, Spain, Sri Lanka, Sudan, Suriname, Swaziland, Sweden, Switzerland, Syria, Taiwan, Tajikistan, Tanzania, Thailand, Timor-Leste, Togo, Tonga, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Tuvalu, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States of America, Uruguay, Uzbekistan, Vanuatu, Vatican City, Venezuela, Vietnam, Yemen, Zambia, and Zimbabwe. Which just happens to be all of them.

Tax Cuts and the GDP.

Tax Revenue in Greece for 2014 was €63.5 billion. [1] There is €14.6 billion of Circulating Money. If tax was cut by 1%, €0.63 billion would remain in circulation. This has the potential to boost the Circulating Money by about 4%.[3] This has the potential to lift the GDP by about 4%. This would lift the tax collection by an unknown percentage which could be as high as 1% of tax revenue. Thus a reduction in tax rates has the potential to harvest greater tax revenue. This is the opposite of what one might expect using simple logic.

Only eight percent of the Money Supply is actually circulating. If tax is cut by one percent, there would be a boost to Circulating Money of €0.63 billion. This represents an increase in Circulating Money of four percent. The GDP should be expected to rise by four percent. Sales Tax and Income Tax have the potential to harvest some of this back. Tax revenue could rise by 25% of the rise in GDP which could be greater than the fall in Tax Revenue. My argument is that it is possible to harvest greater tax revenue through tax cuts to bad taxes such as Sales Tax, Income Tax, and Company Tax.

The Destruction of Circulating Medium by Repayments

It is a similar, but different issue with bank repayments. Repayments are taken from Circulating Money because those with Hoarded Money do not need to borrow. When the banks cut back on lending, the reduction is taken from money that is circulating in the real economy. This is often noticed as a slight fall in the velocity of money. Hoarded Money remains hoarded and money is removed from money that is moving in business transactions.

Bank repayments are taken from Circulating Money by Andy Chalkley. Creative Commons Attribute.

The fall in Circulating Money adversely affects business. The consequence is a dramatic reduction in the tax revenue because tax is taken from money when it moves from person to person. Tax is taken when money carries out its designed duty of enabling the very transactions that enable civilized life. Humans exist by trading with each other. Hoarded Money sits idle in bank accounts adding nothing to economic activity, yet it is not taxed.