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.

The Mystery of Banking and Capital in the 21st Century

18 months between posts might seem excessive, but I have been reading books by some impressive economists - Murray Rothbard - The Mystery of Banking, and Thomas Piketty - Capital in the Twenty-First Century. Both authors come from Europe - Rothbard from Austria and Switzerland, and Piketty from France, and their european perspectives are enlightening.

Rothbard's focus is on how money and money supply works, and how the demand for loans led to the concept of Central Banking, and how this has become organisations ( Reserve Bank, Federal Reserve, etc. ) with their own commercial and political agendas that run counter to the aims and needs of the wider community and societies that they supposedly serve.

Piketty has collated and analyzed the records on property ownership, tax payments, deaths duties, and company shareholdings, from 20 countries, the oldest data from the 1700s in France and England, to build a model of how capital builds over time, and how it is used and distributed.

Piketty's key finding is that capital always tends to create returns in excess of the rate of economic growth, and that only in the immediate post WW2 period, did technology allow wage earners to match the earnings of capital ( itself temporarily reduced by the costs and damages of WW2 ).

Piketty expands his argument to include financial inequality ( income and wealth ) as a key factor in social unrest, and rebellion.  Critics have been quick to point to capitalism as the source of equality of opportunity, and of improved health, education and social equality, especially in developing countries.

However, Piketty has already pointed out that we are just leaving the "abnormal" post WW2 period, and that he is warning about returning to the long term trend line, where capital creates capital ( or wealth ), faster than wages can create capital.  And he notes that there is no clear correlation between increased capital and increased social equality, except in situations where improvement of the skills and health of the workforce generate productivity increases and so raises the return on the capital.

The key point that I take from these two books is the realisation that the actions of the expanded central banking system has both increased the growth in returns from capital, and through fractional reserve banking, decreased the ability for wage earners ( and governments that rely on them for tax revenue ) to build up capital.

This might not be a serious problem if the form of capital, and the uses made of it to generate returns, where similar that of the 1700-1900s.

Over this period, labour was a key component in the sources of returns on capital invested.
In the cases of using capital to invest in colonial trade and industries, the labour component was small, slavery was often part of the "capital" owned, and wages were tiny. But in most developed economies the return relied on skilled labour, whether in agricultural, industry, or mineral or timber extractions. So wages were a necessary "cost" and proportional to the nett return.

However, the last 60 years have seen a shift towards money being a commodity in its on right, rather than just the mechanism of exchange, or temporary store of value - the "oil in the cogs of the economy", or the "catalyst in the process of production".

The percentage that financial services contribute to the economy is also growing at around 5% per year - from a current 9% ( 2013/14 ABS ) - and half our overseas "trade" is transfers of money to related companies ( globalisation ).

The nett effect is that money is increasingly a form of capital ( rather than a measure of capital ), and one that can generate a return on itself with very little labour required.

Combine this with fractional reserve banking, and you have a system that shifts wealth to the more wealthy by diluting the existing wealth of the less wealthy, and reducing the capital creation ability of wage earners - an efficient source of the inequality that Thomas Piketty is concerned by.

How Much Money Should We be Making?

Frugalnomics says that real wealth comes from the transformation of energy, and at the most basic levels - agriculture and crafts, it is fairly easy to work out what wealth is possible. But how do you judge the validity of wealth at levels removed directly from energy transformation?

Firstly, be sure that the wealth has a true energy transformation basis. Look hard at what source of energy or energies underpin the process, map the pathway of this energy up to the stage where your wealth is generated and consider the validity of that process. Don't forget your energy as part of the process - humans are pretty efficient transformers of solar energy through the foods we eat. That sort of covers the moral side of the equation.

Now consider the dollar value - how much money should we be making?

Part of the current financial crisis is due to expectations for excessive returns on investments. Financial packages were developed with promises of now, ridiculously large returns.

So what sort of returns should we expect? Australian Superannuation Funds as a group, have set a annual benchmark return of CPI plus 3% - or roughly 4% due to inflation and 3% for astute investment.

Similar pooled expectations from academic economists consider Inflation plus 4% reasonable.

So anything that offers returns of more than 7-8% per annum must be counting on smoke and mirrors ( or put another way - the cheating of less informed investors ) to generate these returns.

Where does the 3-4% come from? I think it is the sort of return that is derived from human effort - or the natural wealth increase from the transformation of energy by people. ie: this is the sort of return an individual can generate by their own sweat, and it puts executive salaries in a poor light.

Frankly, any management or executive position that is paid more than 4% greater than the staff being managed is being overpaid, as there is no way individual effort, as a manager, can generate more than a 4% increase in wealth.