Chapter 6 - A Search for a Cure.

After looking at the many graphs such as this one, you may make an inappropriate assumption.

Italy Money Supply. Graph by Andy Chalkley. Creative Commons Attribute

You, like most, might assume the need to raise the Money Supply. That may be a solution but it might not be. You might remember that Italy has a velocity of 1.2 and the money only changes hands once in ten months. We have worked out that only ten percent of money changes hands within one month. Thus 90% of money sits idle for extended periods of time. Only ten percent of money is doing the work of money.

The above graph suggests a need to increase the Money Supply. This can be a solution provided the fresh money does not get into the hands of the hoarders. The hoarders are very skilled at sniffing out new money to add to their hoards. A rise in the Money Supply may improve the economy if the fresh money moves into circulation. However, this is an expensive option. Governments no longer create the money of the nation since King Charles of England lost his head in preparation for the creation of the Bank of England. Governments and their people are now encouraged to borrow the money. Although money is a freely created commodity, borrowed money has a rental fee attached. There is an alternative.

In a nation such as Italy, with a velocity of 1.2, you can increase the number of transactions enacted by the available money. There is €1458billion of money in Italy but it only changes hands once in ten months. Much interest will be saved by making money move faster. You might travel to Egypt with one million dollars in a suitcase and buy one million dollars worth of shoes. To double your turnover, you could buy a bigger suitcase or you could travel to Egypt twice a year. We need to persuade money to enact two transactions each year. To that end, we need to encourage money to change hands more often and discourage money from hibernating.

Australia tax revenue components.

In the graph above, the red taxes stifle economic activity and need to be reduced. The green taxes do not stifle economic activity and need to be increased. It is not a straightforward calculation because, as the economic activity increases, the tax revenue will increase.

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

To bring money out of hibernation is necessary to make some minor adjustments to the tax regime. We need to reduce taxes on transactions and increase taxes on Hoarded Money and on money that has the potential to become hoarded. Create two new very small taxes. These taxes would be of the order of 0.1% which is one dollar in a thousand. The taxes are Demurrage Tax and Transaction Tax. It is also necessary to adjust some existing taxes to encourage economic growth.

It is correct that the economy could be turned round with an increase in the Money Supply. This is the obvious solution. The less obvious solution is to recognize that there are still great quantities of money in Greece but it has a velocity of less than one. This corresponds to an average holding time between transactions of one year. Grass has a stellar performance compared to money. Not all money is moving in the same manner, so this equates to 8% of the money moving within one month. All of the transactions within Greece could be operated with only 8% of the current Money Supply. The task is to make it move a little faster. About ten percent faster each year might be convenient. With such a low velocity, this is easy to accomplish. The task is so easy that the problem is restricting the increase.

Demurrage Tax

A typical Demurrage Tax is a small tax of 1% charged monthly on money holdings. In bank accounts, this is removed monthly. This tax encourages citizens to spend money in a short time frame. A Demurrage Tax is a strong disincentive to the hoarding of money. Citizens wishing to save are thus encouraged to save in any other medium except money.

In a steady state economy, Demurrage Tax is an excellent way of decreasing the volume of Hoarded Money. It is somewhat like a negative interest rate. If you spend money, there is no charge. If you hold onto money, there is Demurrage Tax to pay. The tax is typically charged on a monthly basis. There are numerous examples of Demurrage Money in history from the successful stamp scripts during the mislabelled ‘Great Depression’ to the Grain Banks and Grain Receipts of the Dark ages, Middle Ages and Ancient Mesopotamia, and Ancient Egypt.

In our situation, a Demurrage Tax would take the form of a monthly 0.1% tax on unused money in bank accounts. This is commonly called “minimum monthly balance”. This would raise 1.2% of minimum monthly balance which is approximately 1.2% of 92% of M3 Money Supply. This would raise the GDP by about 13% [1]. The problem with a figure of 0.1% is that it may be a little on the high side. It may have to be halved.

Transaction Tax

A Transaction Tax should be implemented on all transactions at about €1 per €1000 (0.1%) or less. This is much less than the current Sales Tax of €100 per €1000 and income tax of about €300 per €1000. Individuals already pay private transaction fees to banks on general transactions and credit card transactions at a higher rate than would be charged by a Transaction Tax. To ordinary people, the Transaction Tax would be all but invisible. The Transaction Tax is same as a Robin Hood Tax except that it is applied to all transactions.

To the cardholder, the transaction fee is mentally incorporated into the cost and this minor fee is considered a convenience fee. A Transaction Tax is of the order of one-twentieth of a credit card transaction fee. Transaction Tax would be of the order of 0.1% as against a credit card fee of 2%. The top line of this graph shows an almost invisible tax of 0.1%.

A diagram comparing a Transaction Tax at 0.1%, Sales Tax at 10% and Income Tax at 30%. Creative Commons Attribute - Andy Chalkley.
Adjustments to Other Taxes

Land Tax and Property Tax need to be a higher proportion of the tax mix. These taxes do not harm production but their increase allows harmful taxes to be reduced. Implementation is always unpopular.

Increased Income Tax tends to stifle business activity to the extent that no extra tax revenue is collected. Income Tax destroys the business activity which destroys the tax collection. It is better to keep the Income Tax rate moderate to maximize tax revenue. Income Tax tends to send businesses to the moneylenders.

Income Tax destroys the business activity which destroys the tax collection.

Company Income Tax tends to stifle business growth which destroys the ability to collect tax revenue. Never assume that a rise in Company Income Tax rate will increase the tax revenue. The opposite is likely to be the case. A decrease in the Company Income Tax rate may increase the tax revenue.

A decrease in Company Tax has the potential to increase the tax revenue.

Expanding businesses suffer from an accounting anomaly. Accountants calculate the profit of a business and record it as the income of the business. This is bad practice. Expanding businesses purchase equipment with income. The equipment purchase is an expense that is recorded as an asset. The money that would have been the income to feed the family is not deductible as an expense. This forces businesses that wish to expand to make a visit to the moneylenders. The tax ruling on depreciation discourages those businesses wishing to expand. Businesses should be encouraged to expand by removing the impediments to expansion.

Depreciation hampers business expansion.

There is another accounting anomaly in the treatment of inventory in a business. Inventory is an expense to purchase stock. No income is generated by the stock until the stock is sold. Tax rules treat inventory as an asset rather than an expense. Expanding businesses fall into a tax crisis if they try to expand.

The tax treatment of inventory hampers business expansion.

Sales Tax is a tax taken at the time of a transaction. It directly removes money when it is moving. Money that is not moving acquires no tax. Money that moves is taxed heavily. Some transactions escape tax. Sales Tax is charged on gold paint and gold-plated electrical connectors. No tax is paid on the purchase of gold bars or shares in a gold mine. The tax system has been distorted to favor those with ‘more money than they can spend’.

Sales Tax destroys the business activity which destroys the tax collection.

There is no way that repayments can be made on government and private debt if the Money Supply does not increase. Creative Commons Attribute - Andy Chalkley.