Chapter 4 - Taxation is Good

A Taxation Example

There are ten people in a room and I represent the Treasury and the National Public Bank, working on behalf of the people. I create money tokens on an as-needs basis and spend them into society. Firstly, notice that the money tokens have no value to the creator, but immediately get value when they are spent into society where there is a demand for them. As the creator of the money tokens, I create them for nothing. They obtain a value to the people in the nation at the time I, the creator, spend them into society. This is important. You really cannot understand money, if you think money has value. Items only have value if humans desire them. Whether it is cricket balls or gold or bits of paper printed with images of dead presidents, the value depends on how much humans desire them. Gold has no value in a sinking lifeboat. Cricket balls have no value in France. Printed dead presidents have no value on the collapse of currency.

   You cannot understand money if you think money has value. Money has value only because it has the potential to perform transactions. Remove the ability to transact and it loses all value. Hoarded Money does not have full potential because, if it were all spent, the purchasing value would fall to around one-sixth its current value. The Hoarded Money is the build up of snow on a hillside that be turned to an avalanche by a light trigger.

During the first year, I spend $1000 into society. There is $1000 debt-free money in the society and people are happily trading with each other. During the second year, I spend another $1000 into society, the volume of money tokens will dramatically exceed the available goods and services. I will need to remove some money tokens from circulation by a clever process called taxation. I do not need to remove tokens because I need to re-spend them as I am able to create as many tokens as I wish. The tokens have no value to me. I am the government and I can create as many tokens as I wish. They gained value when I spent them into society. Much of their value is because they are desired to pay the taxes that I impose. Citizens need the tokens to buy stuff but the value is dependent on the need to pay tax. So, the act of removing tokens from society by taxation benefits the society by preventing the volume of money tokens exceeding available goods and services and maintaining the value of the tokens. If I do not tax, the money becomes excessive in volume and subsequently worthless. If the taxes have to be paid in my money tokens, there is a heavy demand for money tokens and people will work very hard to earn money tokens to pay my taxes. If they don’t pay my taxes I get nasty. 'Nasty', depends on which country you live in. Please be clear, I do not need to tax my people to obtain money tokens for my government to spend. You may think that I am labouring the point and this may now seem obvious to you, but it is not obvious to mainstream economists advising governments that they need to balance their budget. Why on earth would a government balance its budget when it has the sole authority to create the money tokens of the nation. This is The Third Flaw of Economics and The Fifth Flaw of Economics.

The Third Flaw of Economics

   Money has no value to the creator. The creator of money can create money tokens in any volume at effectively no cost. Money has no intrinsic value.

The Fifth Flaw of Economics

   Taxation is not Revenue.

The government has the sole authority to create new money. Thus, the government does not need to collect tax to obtain money to spend. It only does so because, currently, all money is created as bank-credit at the time of making loans. Our entire money supply is created as a loan from banks. The banks took over the role of creating the money in the world as people moved away from cash to virtual bank balances. So taxation has morphed from the method of removing tokens to prevent oversupply to the method of harvesting bank-credit to pay for government expenditure. Oversupply of tokens in the modern era is managed by the collection of interest by banks. Governments have been degraded to the level of street beggars desperate to get scraps to operate their expenditure programs. The volume of money is completely in the hands of banks and their lending policies and a farce is conducted to pretend that the money supply can be controlled by adjusting the interest rate at the central bank. The interest is now a private tax on the use of bank-issued credit, but it is taxing at the worst place possible. It is taxing those that need money and giving a free ride to those above the waterline. If those with 'more money than they can spend', pay a holding tax on money, the demand for money will be reduced and the need to hang debts, on all and sundry, will be reduced.

Taxation is collected to ensure that there is not an oversupply of money tokens in the society and to ensure that there is a demand for money tokens. The demand for tokens makes people work hard to obtain tokens to pay their tax with the result that money tokens maintain value. However, the need to pay interest to banks makes up most of the demand in the modern era. When the bank collects more money in repayments than it issues in new bank loans, the money supply shrinks and the converse: if the banks lend more than they collect in repayments, the money supply increases.

The Second Flaw of Economics

   Balanced budgets are a nonsense.

It is nonsense to suggest that governments tax the people to obtain money tokens for the government to spend. The balance issue arises because governments use Bank Credit rather than the notes and coins that they create.

In a sovereign money system, with he government creating the money, the tax office could be disconnected from the Treasury and the tax office need not tell the Treasury how much money it had collected. The tax office could actually burn or destroy any money that it collected and the Treasury could create new money to spend into society. The task of the tax office is to remove excess money tokens from society to prevent oversupply, not to provide revenue. Now back to the example.

Current logic would suggest that I tax $1000 out of circulation, but a better practice is to only tax $900. Our economy has expanded and become more vibrant and the factories are producing more and the small businesses are capable of giving more services. There is a benefit in increasing the volume of money tokens to match the volume of goods and services available to be purchased in the nation. If there are insufficient tokens, then there is insufficient purchasing power. There needs to be enough tokens to soak up all goods and services available, but no more. So the exact increase is necessarily a smart guess rather than a computed value. These tokens need to be available evenly around a nation otherwise, you will see flash motor cars and inflated real estate in the capital cities and you will notice the young migrating to the national or state capitals. They will move to the big cities to exchange their labour for the only available tokens. Money needs to be spent evenly around the nation in proportion to the population density. If you do not do this you will create an internal migration and great demand for housing in the already overpopulated capital cities. Each state needs its own taxation and spending powers and the ability to create local money if deemed appropriate. Local is better at looking after local needs.

There are other reasons to increase the number of money tokens in society each year. Some people will hoard tokens which takes the tokens out of the circulation for future use. Unfortunately, this Hoarded Money is hyperinflation fuel like the snow on the hillside. The tokens in society are vital to enable daily trade and wealth creation. A lack of tokens has a dreadful effect on local economies by destroying the number of transactions taking place. A citizen that hoards tokens effectively destroys the ability of money to create transactions for the period that the money is hoarded. Hoarding also reduces the volume of tokens available for payment of tax. If hoarding is taking place, there is a need to issue an equivalent volume of new tokens to compensate. Hoarding occurs when money passes into the hands of people with 'more money than they can spend'. Hoarding is usually called 'saving'. Money which is given to poor people generally gets spent faster which is better for the economy. If people wish to hoard, they should save silver or gold or add value to their house or plant trees or invest in local business. Investing locally enhances the local area and creates employment. A good welfare and pension scheme are very appropriate, as spent welfare and pensions passes immediately into creating transactions. Irrespective of the origin of the money used to spend on pensions, the goods and services, used by welfare and pension recipients comes from current production produced by current workers. Another reason to increase the volume of money tokens each year is to cover the interest charged by banks. When banks charge interest, the volume of debt increases but the volume of money remains the same. There is More Debt than Money and the debts are unpayable. Hoarding can be reduced by appropriate taxation but also by reducing the need to hoard.

Now we move onto the next year. My National Development Bank will loan money into society. My Treasury working through the National Public Development Bank will lend $1000 of my freshly created money tokens into society for companies to build factories, farmers to buy equipment and people to build houses. The interest rate is 10%, so this group of borrowers will owe me $1100 at the end of the year. The big question is, "is the $1100 principal plus interest payable or unpayable?" "Has usury occurred?"

Remember my definition of usury:

Usury is the practice of lending money and expecting a greater amount in return such that unpayable debts occur.

Usury occurs when the interest is unpayable, forming an Impossible Contract. This can usually be detected by checking if there is More Debt than Money. This is the point that I cannot find in any book or from any source. This $100 interest does not have the characteristics of an Impossible Contract or an Unpayable Debt, because I am spending money into society and taxing money back out of society at a different rate, it is easy to adjust the spending and taxation mildly so there are adequate tokens that can be repaid to the National Public Bank. Furthermore, any profit created by the bank is repatriated to the government for spending back into society. Of interest, is that a National Public Bank lending into society on items that benefit the economy of the society will result in a greater tax take for the government. Using business logic, a government will operate more effectively by lending sensibly into a society on items that create a healthy economy. The minor amount of interest collected is negligible compared to the tax take from the business created by sensible lending into the economy. It is therefore quite feasible that the National Public Bank could operate on a non-profit basis, which I believe to be about 1% (1% being the amount needed to recover operating costs). A National Public Bank could lend at zero percent or negative interest and still win from the increased tax collected from a stronger economy. I shall say this again in another way. You must remember that money has no value to the creator. The National Public Bank could operate at 0% interest as its operating costs would be covered by the increased tax collected by the government.

Taxation Australia.

Taxation collected by source for the USA by Andrew Chalkley.

You might see, in the above graph, the inappropriate way that tax is collected. The first four taxes are an impediment to ability of money to perform transactions. These four need to be progressively reduced and other taxes introduced and increased. Currently, we tax very heavily on transactions that involve goods or labour but charge no tax on transactions that involve speculation or hoarding. We need to bias our taxes towards the hoarding, speculation and the use of resources including land and minerals. Remember that mining depletes a resource, quality farming without pesticides, chemicals and land degradation does not deplete the land.

Land Taxes, Local Government Rates, fuel taxes, resource taxes generally, taxes on things that are harmful to the economy, taxes on items that are harmful to health, taxes on Hoarded Money, all need to take a far greater share. A minor transaction tax needs to be introduced to capture all those hoarding and speculation transactions and replace the harmful sales tax. A generous government retirement plan would help reduce the need to hoard. Death and inheritance taxes are needed but not in a manner to damage family farms and businesses. Before you shout at me, consider if, for most people, the tax on income reduces by $10 000 and tax on sales is reduced by $3000 but tax on land and rates is increased by $7000. Besides an overall decrease in tax, the rate of transactions will increase dramatically enabling all to have greater prosperity.