Tax Human Activity and combat Climate Change

I have been busy for three years on other projects, but sitting here watching a quarter of the State burn prompts further thought.

Automated Payment Transaction Tax

Background - https://en.wikipedia.org/wiki/Automated_Payment_Transaction_tax

USA website - http://www.apttax.com/

a cost to you estimate - https://web.archive.org/web/20140110060700/http://thetransactiontax.org/

and this criticism - https://www.forbes.com/sites/timworstall/2017/03/16/after-indias-demonetisation-next-the-banking-transactions-tax-no-its-a-terrible-idea-dreadful/#5a723454133d

The tax is very simple, easy to implement, a transparent & calculable cost to individuals & business, and generally hated by financial organisations, global companies, and main-stream economists.

The main economic criticism is that any tax restricts the activity it taxes. This is often called the deadweight - the drag a tax makes on activity in the sector it taxes. It is assumed that if you have to pay more ( or get less in your pocket after tax ) then you avoid that activity.

So a Land Value Tax has the lowest deadweight ( we all need land ), then Consumption taxes ( GST VAT etc - we need to eat ), then Income Tax ( why work more if you take home less ), then Capital and Corporate Taxes ( why do business if you make less profit ) And theoretically at the peak, Transactions Taxes ( why do anything if you have less in your pocket! )

And governments adopt this argument, relying on Consumption and Income Tax as the least painful source of revenue.

Climate Change & Human Activity

This is exactly why I think an APT Tax is a good idea. 

We all know we have to do something to reduce the impact of human induced climate change, to stall the changes, and to support communities bearing the brunt of the changes - bushfire ravaged States included.

We also know that climate specific policies, including carbon taxes, water allocations, fossil fuel subsidies, and community support payments are very hard to formulate and implement.

An APT Tax taxes the use of money - it does not consider the activity, the person involved, or the time frame - it basically taxes all forms of human activity. It provides government with a steady stream of income, daily topping up the federal reserves. It captures all forms of activity within a countries banking system - including global companies, prevents transfer pricing and other tax avoidance schemes.

So we all end up paying a tax that fairly matches our personal Footprint on the Earth.

Yes, it will have unexpected impacts on business, on development, and on social services, but that is what we have government for, to allocate the share of tax revenue to meet these needs, and to implement policy to meet community expectations.

We have got ourselves into this mess and it is time we all carried our share of fixing it - our Footprint matches our Use of Money - and a universal transaction tax is a fair way of doing this.

Transaction Tax - USA Model

Found a handy archived link
https://web.archive.org/web/20140110060700/http://thetransactiontax.org/
- try - http://tinyurl.com/zplx8zy
where you can enter your income and expenses and get a taste of the benefits of a transaction tax as proposed in the USA in 2014.

Bear in mind my arguments - Just switching to the tax would be impossible - too much lobbying and scaremongering on the dollar side. But argue for a next to zero starting rate, get the data flow going to government departments ( and through them, to social support bodies, business groups, and even investment banks ) and then debate the rate needed to replace all other taxes, and you have a chance to make this change to a fairer system.

The Piketty Pessimist

Have a read through:
http://blogs.reuters.com/felix-salmon/2014/04/25/the-piketty-pessimist/
Felix Salmon
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Thomas Piketty's book on Capital challenged that assumption that capitalism is a good thing, by showing that even if everybody plays by the rules, inequality is very likely to increase to obscene levels. It’s not the corrupt and venal robber barons who are the problem, it’s rather that unless we make a concerted effort to impede capitalism’s natural tendencies, the entire middle class is likely to get hollowed out.

And Felix Salmon, in his blog, sets out a summary of the views for and against this argument.
But it is the truth of Piketty's data that is most depressing - capitalism can continue to deliver greater and greater wealth inequality, as it supports individual ambitions to gain short term political power. So there is little incentive to find a solution.

".. right now we’re reverting to a state of affairs which is highly unfair but also both sustainable and, in its own way, unsurprising. Piketty has diagnosed a nasty condition. But I don’t think there’s a cure." - Felix Salmon

Here I disagree. I think that a tax on wealth, by taxing the use of money, could be implemented for two broad reasons.

Firstly - mainstream economics, and the banking industry, do understand the underlying problems with the nature of capitalism; of fractional reserve banking; and of the social problems generated by income and wealth inequality. So while many in these camps and industries will resist attempts to widen the tax base, many will also welcome the chance to be part of the solution.

Secondly - gaining short term political power and ascendancy, quickly pales when it translates into little social good. And much of western democratic government is aware that vested interests and lobby groups currently supply the majority of the data that is used in policy formulation.

So introducing a tax on the use of money is a "saleable" option if the debate focusses on three key points  -  Fair - Efficient - Wise

Fairness is easy to explain, and would be politically a huge bonus in the promise of a tiny tax for low wage earners.

Efficiency appeals to small and medium business, as it makes calculating and paying their tax burden both easy and nearly painless. It also appeals to the banking industry as it adds next to no cost to their IT systems, yet entrenches their interests as a key service supplier to the government.

Wisdom stems from the data that governments can access on the economic activity of their nation.
An insignificant tax on the use of money would be worth implementing for this data alone, any actual tax revenue being a bonus. To be able to drill down to regional and industry data, with next to live feeds, would vastly improve policy making and planning.

On the Greek Crisis

A quick note - if the Greek Government introduced a Tax on The Use of Money, many of the current problems might be solved.

The tax would solve the problem of unpaid and uncollected tax revenue, at little extra cost.
The flow of financial information would alleviate the concerns of the lending banks.
The transparency of tax revenue would help plot the long term loan repayment schedules.

It is more than likely that the EU banks would view Greece as a much more secure investment and extend the loans.

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.

The Inventions of Depressions

Finance had always been a bit risky. Funds invested in agriculture, trade, and mining were often lost due to bad weather, drought, physical hardship and ill-health, war and banditry.

But the invention of banking and the creation of State sanctioned central banks, with the ability to issue bank notes only vaguely related to actual gold reserves, created the conditions for booms and busts on whole community, whole region, and entire State based scale.

Mercantile based booms and busts started to appear in the 1600's as banking services made it possible to get credit and funds in exchange for debt, and notes against trade and goods. The first major boom was the Netherlands 1630's speculation in tulip bulbs. Money poured into Holland, and initial speculators made enormous profits, triggering ruinous investment by later speculators. The availability of bank notes made it possible for working class people, and minor merchants, to invest, so the crash affected whole communities and ruined land holders and nobles alike.

In 1717 a Scottish financier John Law, persuaded the French Government to establish the Banque Royale, which issued bank notes underpinned by his speculative Mississippi Company. He paid navvies to march through Paris supposedly on their way to dig up gold in South America, and managed to create a long run on the shares. It created such a bubble that he was able to take on the entire French national debt, and turn it into paper notes, which he issued to the french population.
In 1720 the bubble burst.

At the same time 1711, the South Sea Company was created as a public–private partnership to consolidate and reduce the cost of UK national debt. The company was granted a monopoly to trade with Spain controlled South America. There was no realistic prospect that trade would take place and the company never realised any significant profit from its monopoly. Company stock rose to ten times its orginal value as it expanded its operations dealing in government debt, peaking in 1720 before collapsing, ruining many who had taken on debt, via bank notes to buy share.

In the 1840's there was similar speculative booms and busts in railway shares in England, the US and Europe. In each case there is belief in some technological or economic breakthrough that will permanently change the market - but it is the ready expansion of bank notes to meet the speculative urge that created the boom.

In 1929 the new US Federal Reserve was widely believed to be the perfect financial safety net, controlling interest rates and money supply by buying and selling government bonds.

A new investment house opened every day of 1929 issuing $2.5 billion of securities, financing both businesses and the purchase of shares. Shares "bought" using the bank notes issued, were used as security for further loans. Until in October 1929 when a number of minor shocks triggered the collapse of confidence and the rush to sell triggered wholesale collapse.

The fragility of such a boom is highlighted by some of these minor shocks - the arrest of a London based stock broker over fraud; the tabling of a bill to introduce tariffs on imported goods; and the discovery by public investors that the ticker tape method of reporting on share trading and share values was running hours later than the actual trades.

Junk Bonds
Junk Bonds took speculative investment, supported by banks issuing notes and demand debt, to a new level.  The credit risk of a bond issued by a company ( an agreement to pay a specific sum on a specific date in return for a loan ), refers to the probability and probable loss upon a credit event (eg: default on scheduled payments, bankruptcy, or bond restructure) or a credit quality change issued by a rating agency.  A high risk bond offers high interest or returns to the holder making them attractive where a loss can be borne, and these were called junk bonds.

In the 1980's bank and finance deregulation allowed traders to create junk bonds in one company, based on the promise to buy another company and fund the bond from the cash reserves, or sale of assets of the second company. Again this novel "innovation" started speculation, but it was the banks compliance in issuing notes and debt that spurred the boom.

A second innovation in the 2000's was the creation of Collateralised Debt Obligations (CDO) where bonds, mortgages, and other debt agreements are bundled so that the nett risk rating meets the minimum levels of institutional, and conservative investors. In some cases the bundles are rebundled, so that accurate audit and risk assessment becomes difficult. Again a boom was created by banks being prepared to create debt and issue notes to support the speculation, and in fact further bank deregulation had made it possible to be both an investment advisor and the debt creator.

Derivatives
If you find the idea of CDO's and Junk Bonds a worry, you will love derivatives.
This is a contract that gets its value from the performance ( not the value ) of an underlying entity. This can be an asset, index, or interest rate. Derivatives can be used to insure against price movements (hedging), but more often pure speculation on price movements for speculation - eg: forwards & futures (the right to buy in the future at a set price), options, swaps, synthetic collateralized debt obligations and credit default swaps (the risk that someone won't be paid by someone else).

Again, the preparedness of banks to support investment in derivatives, and the banks ability to create the debt out of thin air - fractional reserve banking - drove speculation in this new innovation. In 2001 it was estimated that $44,000 billion was invested in derivatives in Wall Street, and to put this into perspective, the world wide losses on stock market adjusts over 2000-2003 was $7,000 billion

The size of the derivatives market is obscured because much of the activity take place within hedge funds. In 2010-12 the majority of countries cooperated to create and legislate bodies to make derivative trading more transparent and subject to regulation. This was driven in part by the reported $39.5 billion in derivative trade losses due to fraud and market collapse in the decade 2000-2010.

The Invention of Banking

First - Ancient History
The history of banking ( http://en.wikipedia.org/wiki/History_of_banking ) starts with record keeping of promises and transactions around goods, services and trade.

Probably the earliest forms were the holding and transport of animals, edible grains, and pelts and skins on behalf of others.

Inscribed records date from 4000 BC, and used mnemonics or symbols as short hand for the transaction and promissory details and contracts.

As precious gems, gold, silver, and bronze tools and artefacts became the currency of exchange, safe storage facilities were built - initially in the style of the granaries they were replacing, and gradually as treasuries to reflect the wealth and power of the rulers who controlled them.

Around 1000 BC in Egypt and Mesopotamia there are accounts of entrepreneurship similar to today's deposit banking - the lending of funds, and the holding of funds for a percentage payment.

In later ancient Egypt and Greece, the treasuries became better organised in record keeping, and codes of conduct raised them above the local rulers and politicians. So that deposits from private individuals and traders from outside the banks region were being made.

Rome refined the idea of deposit banking, and the concept of private capitalism. Bankers were appointed to collect taxes, or licensed to operate private treasuries or banks. Bankers also exchanged foreign coin and goods for Roman minted coin - the only legal tender in the empire.

The idea of charging interest (usury) on loans ebbed and flowed. Most societies realised that it placed a burden on the borrower, some set the upper limits, some banned it ( but allowed fees for creating the loan ), some only allowed interest to be charged against "outsiders".

By Medieval times deposit banking had evolved into private merchant families acting as banks, and also the financing of agriculture - a crop loan at the beginning of the growing season. Underwriting in the form of a crop, or commodity, insurance to guarantee the delivery of the crop to the buyer, and making arrangements to supply the buyer of the crop through alternative sources in the event of crop failure.

The size of medieval kingdoms, the growth of papal rule, and the increasing literacy of the public, allowed the expansion of promissory notes, letters of credit, and other documents of exchange.

Innovations evolved like the charging of an insurance "fee" in place of interest to avoid usury, or of selling and "interest" in the trade event that the loan made possible.

Now - The Invention of Banking
Up until the 1600's banking was mainly using actual deposits and treasuries. There was some use of confidence in the lender to underpin loans and insurance, and in the value of notes and letters of credit.

Goldsmiths and wealthy merchant families were storing gold, and other valuables, in their vaults.
They were charging a fee for this service, and issued receipts certifying the quantity and purity of the metal they held as a bailee; these receipts could not be assigned, only the original depositor could collect the stored goods - so far nothing too different from the past.

But gradually the goldsmiths began to lend the money out on behalf of the depositor issuing promissory notes backed by the gold deposited with the goldsmith.



This was a new kind of "money" - goldsmiths' debt to the depositor rather than actual silver or gold coin, issued and regulated by the monarchy.

This development required the acceptance in trade of the goldsmiths' promissory notes, payable on demand; a general belief that coin would be available; and required that the holders of debt be able legally to enforce an unconditional right to payment; it required that the notes be negotiable instruments.

This was in competition to the monarchy, so this new kind of money swung in and out of popularity until in the 1700's an acts of Parliament locked in the "customs of merchants", and the notes became fully negotiable.

Modern Banking was invented.

The new Bank of England started issuing promissory notes that looked like today's bank notes in stepped denominations in 1695. These were standardised by the 1750's and fully printed bank notes by 1850's. Cheques were invented to enable banking house to banking house payments, and this lead to central clearing houses.

William Paterson had proposed a private banking structure in 1691 of a loan of £1.2M to the government (which needed cash to rebuild the army and navy) in return the subscribers would be incorporated as The Governor and Company of the Bank of England with long-term banking privileges including the issue of notes. This was granted in 1694 through the passage of an Act of Parliament (The Tonnage Act) establishing the now Bank of England. The act also described the notes as legal tender - everyone was compelled to accept them in payment of a money debt.

Two years later 1696, with the Bank of England bankrupt - notes issues equaled UKP 760,000 and cash and gold reserves equal to UKP 36,000 - Parliament ( most of whom were shareholders in the Bank ) allowed the Bank of England to suspend paying out in gold in exchange for printed bank notes. And in 1697 Parliament also passed a law prohibiting the establishment of any new corporate banks, making the shareholder owned Bank of England the "Reserve Bank".

Although the Bank was originally a private institution, by the end of the 18th century it was increasingly being regarded as a public authority with civic responsibility toward the upkeep of a healthy financial system.

Henry Thornton wrote in 1802 An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, in which he argued that the increase in paper credit did not cause a banking confidence crisis, and he outlined ways a central bank might influence and control the monetary system and the value of the currency.

The Bank Charter Act of 1844 gave the Bank of England an effective monopoly on the printing of new notes since authorisation to issue new banknotes was restricted to the Bank of England. It also assumed the role of "bank of last resort" to the regional and smaller banks.

A similar pattern evolved in the USA - 1781 Congress established the Bank of North America with the task of funding mercantile expansion and to build the navy. Gold lent to the USA by the French was appropriated by Robert Morris as reserves for the new bank, and notes were then issued to finance the war contracts held by his business associates, governors and senators.

1791 Hamilton pushed through legislation establishing the First Bank of the United States with their notes being legal tender and able to be used to pay taxes. Millions was issued and 18 new banks established to funnel the money to mercantile and property investment businesses.

The War of 1812 saw many millions in new notes to pay for military goods and services. Between 1811 and 1815, gold reserves fell from 15 million to 13 million, but notes issued rose from 42 million to 79 million. In 1814 Congress ruled that new banks did not have to make payment in gold against a note based demand.

By 1818 there were 338 separate banks in the US - up 40% in 2 years - and $95 million had been issued in new bank notes.

Important Banking Precedents

In 1811 the English Courts ruled that money deposited into a bank, other than into a specific security box or bag, was a loan to the bank and not bailment ( or warehousing your money for you ). In 1848 this was reinforced by a second ruling that said that money paid into a bank becomes the property of the bank, though with an obligation to pay a similar amount to the depositor on demand.

So a bank is under no obligation to keep it safe, and can engage in speculative activities. The bank is also absolved of meeting the obligation to pay, if they are legitimately insolvent - a true form of "bankrupt".

Later Developments

Despite a regular history of boom and bust, of inflation and bank failure, the model of a central bank with the monopoly to issue legal tender, and as the "lender of last resort" to junior banks had huge political credibility and value. The US Federal Reserve was created by the U.S. Congress through the passing of The Federal Reserve Act in 1913;  Australia in 1920;  Colombia 1923;  Mexico and Chile 1925;  Canada and New Zealand 1934.

REF:  Mystery of Banking - Murray Rothbard
and download the free pdf or epub edition for more history and detail