Taxing The Use of Money

Summary: Modern developed economies now consist of three sectors - manufacture, service, and finance. Current tax regimes primarily collect from the first two sectors, leading to an impoverishment of both those sectors, and the government that uses that revenue. The proposed tax on the use of money would effectively and efficiently tax all three sectors. Such a tax is feasible due to the high level of computerisation of the banking system, and the decline in the use of cash in day to day transactions.

Background:
* Manufacture includes all the ways things are processed and transformed;
* Service includes activities that support manufacture and society itself;  and
Finance includes all the ways money is used as a commodity and a source of profit, rather than money being the lubricant to facilitate manufacture and service processes.
The tax system evolved along two principles - identify the processes that generate wealth, and find a way to efficiently collect a part of that wealth. This revenue was then used to finance processes that support the population as a whole ( according to the dominant social model for that time ).

Early taxation identified manufacture as the dominant source of wealth creation, and the goods created, excavated, or grown could be measured, valued and a tax collected on their transfer as property.

As society evolved, services grew, first as a part of manufacture - bookkeeping, goods handling and freight, machine servicing, labour support, etc. And these services were efficiently taxed by taxing the goods that they supported.

As ex-manufacture services grew - health, education, personal services - and as the previously internal services became outsourced, the concept of a GST developed to capture these less concrete sources of wealth. These taxes still relied on the practicality of taxing the transfer of goods, but the concept of an invoice enabled a form of virtual taxation that was equally effective and economical to collect.

Now it is estimated that Finance transactions are approximated 10% of the GDP ( and growing at around 3% pa ) and that these predominantly use money as the commodity of wealth generation - trade in money, debt, and securities being used to earn money.

This source of wealth is very poorly taxed - only declared profits being measured. Yet the impact on society ( and the environment ) of this use of money is a profound as strip mining or irrigation on the natural environment, or industrialisation on human society and towns.

This might sound an extreme analogy, but the use of money to generate money means that only those chosen to participate by the managers of those financial institutions, get any benefit, for the wealth generated by money debt today, comes by bringing future concrete wealth into the present, impoverishing those who did not gain ownership of that concrete wealth.

Proposal: Tax the Use of Money
Almost all financial and business transactions now involve a digital exchange. Most involve the deposit and withdrawal of a money amount in a legally defined and regulated financial organisation.
It would be relatively inexpensive to require all these financial organisations to modify their computer systems so that a percentage of these transactions are passed to a government account(s).

This source of revenue could replace all current taxes and levies, simplifying both the tax payment and the tax monitoring systems.

It would not have to be an exclusive tax - in fact, a gradual introduction, with concurrent reductions in other forms of taxation would ensure a smooth transition, and opportunities for industries and social organisations to monitor and adjust to the change.

The advantages of taxing the use of money would be:
government budgets would be easier to formulate from the smaller number of data inputs from financial organisations - much available in real time.
short term budget needs could be met with tiny increases and decreases in the transfer percentage.
the payment of tax would be daily or hourly ( or less ) in tiny amounts, so much easier to match to cash flow for business and individuals.
low-incomes could be supported by similar tiny frequent deposits from the government account(s)
over-seas purchases and transfers would be taxed as withdrawals in the local regime.
currency speculation and micro-trades would be taxed, and discouraged unless truly of value, leading to reduced volatility in the markets.

The disadvantages would include the taxing of investments, cash used to establish a business or venture, and research and development costs. But these could be treated as special investments in the common good, and supported by government grants.

The primary advantage would be that the tax burden would be more fairly shared across all three sectors of the economy, and the tax revenue would strengthen the sovereign government, and reduce the negative impacts of globalisation on society and the environment.

Retirement Savings, Superannuation and Bank Deposits

The Australian Federal Government has set up the Murry enquiry to look at bank deposits, insurance, retirement savings and home loans, and the key issue seems to be the role of deposits versus other sources of funding.

Bank deposits have risen from around 40% in 2008 to 60% in light of the crash and slow thaw in wholesale money markets. Superannuation savings have grown to more than A$1.7 trillion and half of that has been invested in shares in the absence of a pathway into tax effective interest bearing deposits.

So curiously, we are at a stage where the banks themselves may lobby for a much larger real deposit backed lending process, drawing on the superannuation funds, and a move away from creating loans backed by the borrower's future access to wealth (- see the earlier blogs).

This would be a very good thing. In the short term the interest rate paid on deposits would fall or flat line due to the increase in funds available, but long term the depositors would start to demand better returns, and while this would raise the cost of borrowing, it would also raise the level of consumer demand for goods and services.

But more importantly, it would base investment on already generated wealth of the lender instead of mortgaging the future generation of wealth of the borrower.  And it would free to borrower from living up to the model of the future envisaged by the lending institution.

This may sound a little odd, but that is one problem with the current ability of banks to lend more than they hold in real deposits. That phantom money becomes real when you agree to borrow it because you are agreeing to give the bank your ability in the future to generate wealth, but the future you are signing up to is that that suits the bank - a future that they think will be favourable for them to make more money. This is why housing, property and development get such favourable rates, and ethical and sustainable projects struggle. The banks may not be especially mean over this, it is just that they can not model a green future, so they can not accept such an unknown future.