Introducing the Taxing of the Use of Money

On the weekend I was asked about how a government could introduce a tax on the use of money.
The view was that it would be politically impossible, and a bureaucratic nightmare.

If you think of it only as a revenue source - yes.

But think of the information flow back to the government. The tax is based on all transactions.
So once in place, no matter how small the revenue, it is possible to extrapolate back to the streams of money flows in various regions and industries.

So the first step is to legislate the tax at a very very tiny percentage - just sufficient to get the data flowing and for the banks to implement the collection and transfer to the government tax accounts.

Then once the tax is in place, Treasury can start to calculate the revenue flows from incremental percentage increases. And public education programs can be started to explain which taxes are being abandoned in exchange for what percentage increase, until the point where all other taxes and imposts have been removed.

The time scale and rate of change is a matter of bi-partisan and public support. But the increase in timely financial and economic information should make it attractive to all parties.

Structural Change in the Australian Economy

This employment graph is typically used to illustrate the change in the Australian economy over time.  But the services industries are very labour intensive, and there have been significant changes in the mix of services included in the data. The graph below shows the long term change in percentage contribution to GDP.  ( Note: Service and Distribution are grouped as Services in employment data )

The large growth in Services ( excluding Distribution ) reflects three trends.
Firstly - the growth of two income families has created demand for services that previously were conducted in the home - child care, pre-schooling, home maintenance and servicing, aged care, and cooking - and hence not previously included in the GDP data;
Secondly - there has been an increased demand for health, educational, recreational and financial services with increased incomes, and pressure for employment;
Thirdly - many activities that used to be run in-house in manufacturing, agriculture, mining, construction, and distribution, are now outsourced and re-classified as services.

So from a structural change view, the growth in services is not as dramatic as it first seems, but from a taxation or government finance point of view, it is a significant change with long term consequences.

Around 1900 - it made sense to tax goods as this collected the bulk of the financial activity in a format that made assessment easy and collection efficient.

Around 1950 ( and later ) - the growth in combined services encouraged the additional of a VAT or GST to both goods and services, as a practical way to tap into the increasing share of financial activity that was service based.

Around 2000 - it seemed appropriate to increase the VAT/GST rate, and/or extend it to include previously exempt services and goods - typically education, fresh food, and some health services.

However, Finance and Insurance currently contributes about 10% of GDP ( and is growing at around 3% ) and a VAT/GST typically fails to collect tax revenue from this activity. Part of the reason is the strong political lobbying from the industry in general, and the small number of powerful and wealthy individuals who benefit from the trading in finance. Part is also the difficulty in defining the service that should be taxed.

This problem has encouraged proposals for an alternative tax on the use of money - a tax that would replace all current taxes - VAT/GST, sales taxes, and levies - and be based entirely on the interface of money exchange. ie: levied at the point of deposit and withdrawal at financial institutions.

The argument is that this captures the true overall economic activity as based for taxation ( as revenue for government ) and is capable of responding to any future structural change in the economy.

There are also moral and environmental arguments for such a tax on the use of money, and these will be discussed in later posts.

Facing Up to Frugalnomics

If you have been following the business press lately you will have been seeing articles talking about the capitalist bubble. Guy Rundle and David Hirst in The Age recently wrote good articles.

In summary, they point to the fact that developed economies really surged in productivity post WW2 with most of our current infrastructure like roads, bridges and train lines; pipelines, sewage, telecommunication and electricity services; and government departments and social services all coming into place.

Capitalism is argued to be a system where a large number of people can be persuaded to work for an income sufficient for daily needs plus a small amount of luxuries. This creates wealth because this individual human labour converts true energy. It is a pretty good source of productive capacity, but there are two limits. The first is the physical resources, the embodied energy, which can be exhausted ( mining, oil, etc.) or degraded ( agriculture ), and the second is that individual labour is a limit in itself.

Post WW2, Capitalism was modified. A spirit of consumption was encouraged. People were persuaded to shape their identities around consumption and luxury goods. This was designed to overcome the limit of individual human labour, and ignored the limit in physical resources.

It was also the first sign of a secondary economy designed to feed off the real economy, an economy of speculation that needed constant and expanding growth to camouflage its activity - a permanent bubble economy.

One outcome was an acceleration of energy conversion into social wealth, the infrastructure described above, but the other was a rapid depletion of natural sources of energy and this productive capacity and output stalled in the late 70's.

But by then we had a secondary economy of such size and political power that it demanded increased consumption to maintain its wealth. The problem though is that bubble economies are just that - bubbles with no real economy core. The consumption it required did two things.

It asked for the transfer of the conversion process to areas of lower wages - manufacture and processing of resources moved off shore to less developed countries - as this boosted apparent cash profits and savings. And it encouraged the transfer of these savings into speculation, shares and purchase of luxuries where it could be appropriated by this secondary economy.

And this is where we are now.

The bail-out programs of our governments are driven by the needs of the secondary economy and only marginally designed to support the real economy. And unless much more attention is given to sources of renewable energy and the rebalancing of our economies back to the conversion of natural energy as a source of wealth, the results will be marginal too.