As we have seen, in the last years since the great recession, governments, especially from the USA, the European Union (EU), and Japan have printed trillions of their currencies. The USA is having terrible issues with funding its budget and now they need to increase taxes and also they need to find all tax evaders worldwide and try to collect money from them. Meanwhile, the debt will continue to grow indefinitely.
History has shown that the richest people in the world and the big corporations will always find a way of eluding or evading taxes and also we have the informal economy. It's very difficult for the governments to chase everyone and collect taxes. To do this they need to become like police states where all transactions need to be monitored and they also need to eliminate cash which is not feasible in lots of countries.
In my opinion, the current tax system is broken, it doesn't give enough money to the governments as required by their needs and also tax systems are very complex and require in most cases their citizens to send complex tax filings in which lots of taxpayers can cheat or can have mistakes. Also there thousands of rules, exceptions, laws, jurisprudence, treaties, etc. I think that for the sake of everyone things need to be simplified. Accountants should be focused on reporting the real financial situation of companies that in lots of countries get distorted due to fiscal considerations.
My idea is that taxes should disappear and the money can be provided by the central bank but with a restriction. The supply of money should be a function of the country's gross domestic product and inflation level.
Where:
M=Money supply
p = Gross domestic product
π = Inflation
R = Revenue from money printing that will be taxed through inflation.
t = Rate of indirect taxation
Now to do this it is required to have the same rules all over the world and a single central bank. The rules to make this work are:
1.- A treaty between all the countries agreeing on having the same fiscal policy.
2.- A unique global currency (or maybe regional currencies).
3.- A global independent central bank that will provide currency to each country taking into consideration their rate of indirect taxation and the global treaty.
4.- Governments will monitor inflation and must create policies to help the private sector to expand the production of products and services that are causing inflationary pressures.
5.- Debt will continue to exist until it is paid and new debt can be created only for long-term or special projects. Debt should never be used to fund day to day operations of governments.
6.- The monopoly of currency should be for the global central bank meaning that other currencies (e.g. cryptocurrencies) must be outlawed. The global central bank can create cryptocurrency if required. I think blockchain technology can be very useful to central banks.
Instead of playing with monetary policy, the governments will need to make their economies grow to abate inflation.
A new monetary policy tool will be the rate of indirect taxation which can be used in cases of extreme inflation that needs to be abated with urgency.
In theory, if the supply of money increases more than the production of goods and services that can cause inflation. With this new paradigm what it can be done is that governments should check production levels for each product and their prices and track industries where supply needs to be stimulated to avoid an excessive increase in the prices of those products.
The desired result will be to have low inflation rates by increasing the supply of products and services meanwhile no taxes will be collected from citizens.
Now let's see what has happened in the US in the last 3 years.
Table 1.- Key economic accounts of the USA - 3 years
Without changing the paradigm the USA has increased its debt from 106.6% to 132.5%, its deficit increased from 4.2% to 16% and M2 to GDP increased from 69.8% to 91.5% and the average inflation has been 1.8%. The year 2020 was extreme due to the COVID relief programs and support.
Table 2.- Key economic indicators if the new economic paradigm were used.
Source: Own calculations with data from St. Louis Fed and the Treasury Department.
Note: For simplicity the debt remained unchanged as a fixed amount.
In table 2 it can be seen that if you provide the revenue from the money supply you will not need debt to finance the government expenditures. It is also important to note that the money supply will increase exponentially as it has done most of the time.
After seeing that the US has had low inflation rates with big increases in the money supply we can infer that if the money supply increases it will not necessarily become an inflationary problem. Inflation is also related to the supply of products and services and the demand for them. By eliminating taxation a huge increase in disposable income will stimulate the economy in an unforeseen way and that will cause inflation.
It is well known that governments prefer to continue to tax their citizens to exert control over them and also because taxes can be used as a fiscal policy tool. In my opinion, taxes are so complex and to be realistic it is very difficult to correct deficits. The USA is a clear example of that. I think that the USA will not be able to pay its current debt as it should be paid, instead, I think they will try to use inflation to reduce its value.
In my opinion, it would be interesting to study further this new paradigm and see if it can substitute the current system which requires all the complexities of revenue codes. This idea is not similar to the modern monetary theory (MMT) as in this case the goal is to collect taxes indirectly through artificial inflation and MMT uses taxes as one of its tools.
The benefits are clear:
1.- Countries will have a source of income without having to put into practice complex revenue codes and they will not have to spend a lot of money to collect taxes from tax evaders.
2.- Citizens can focus their time and energy on more productive things like producing products and services that make life better for the community.
3.- With this method, everyone will contribute indirectly and without escape as money will have less value unless it is invested.
4.- The government will focus on helping their economies grow.
5.- The money supply will be a function of GDP and inflation and this will determine the revenue that the government can get taking into consideration an indirect tax rate which is the percentage from the money supply that can be given to the government.
Caveats:
1.- People will try to invest all their money to avoid inflation and it can lead to bubbles in assets. (Something similar to what is happening now)
2.- It is impossible to predict how inflation will work in this paradigm. (Please note that countries will not be able to get all the money they want, it is a function of their production level. This limit aims is to avoid cases like those of Zimbabwe, Weimar Republic, or Venezuela)
3.- It is going to be almost impossible to make all countries adopt a universal currency, agree on the creation of a supranational central bank, and make them happy with strict guidelines and regulations on how much money they can receive which will be based on a formula and not on what politicians want.
4.- This methodology could cause issues in the wealth gap and that need to be addressed.
The key challenges:
1.- Inflation rates need to be low so that people can trust the currency.
2.- The governments will need to monitor prices in real time to take action when needed.
This is a speculative idea, I understand that if this is seen from the traditional economic perspective it would be considered non-sense.
Thanks for reading this article and please comment or ask questions.
Humberto Aguilar
