Ralph Musgrave, who did a good summary of Modern Monetary Theory, emailed me a link to a splendid article titled How to exit the Euro which is ostensibly about Quebecois independence, on which the author has no strong views one way or another, but also builds in the following:
i. What Modern Modern Theory is, i.e. fiscal and monetary policy boiled down to a single variable.
ii. Why there's no need for deficit spending
iii. How to introduce a parallel currency
iv. Why taxes on land values are far better than taxes on income, output and profits
v. Introducing a Citizen's Income by the back door.
There's no point me cutting and pasting bits, as you have to read the whole article, which might take you ten or fifteen minutes to understand, but we can use this model as a non-confrontational way of introducing a Georgist system where taxes on land values are used to pay a Citizen's Income, as follows:
1. The government issues every UK citizen with one thousand special tokens (whether physical or electronic does not matter), maybe 500 for kids and 2,000 for pensioners.
2. So it has issued (say) 75 billion of these tokens.
3. It then values each house and each building and each plot of land and demands the payment of exactly 75 billion of these tokens from the owners of all UK land and buildings, proportional to the value of the land and buildings.
4. So some households end up with a surplus, and some end up with a deficit. Let's say a mum dad two kids family gets three thousand tokens and the payment demanded for an average home is three thousand tokens (75 billion tokens divided by 25 million homes).
5. How surpluses and deficits (and hence net redistribution) are distributed is illustrated by the Georgist Flag (click to enlarge):
6. All the surplus tokens are put up for auction, and because the surplus which some have is exactly equal to the shortfall which other people have, they will somehow end up with a market price in £-s-d for each token, that might be 1p, it might be £10, I do not know and do not particularly care.
7. The auction would be run in the same way as stockbrokers match bid and ask prices, i.e. every seller sets the minimum price at which he will sell; and each purchaser sets the price which he is willing to pay, with the bolt-on that all tokens are then redeemed/sold at this price (to prevent unwilling sellers holding out for an unreasonable price). Having established a market price, let's say it comes out at £2 per token.
8. The next step is to somehow replace the existing tax system; if we remember the lessons of Modern Monetary Theory, it's actually quite simple: you just reduce other taxes in absolute terms and other cash (non-token funded) spending in real terms. So in Year Two, we scrap VAT or Employer's NIC (or whichever your most hated tax is). The dynamic revenue shortfall is usually only half the static shortfall, so cash tax receipts go down by (say) £50 billion and people end up better off by (say) £75 billion because they get not just the cash value of the tax cut, but the benefit of lower dead weight costs.
9. Most of that extra £75 billion flows through into higher house prices or rents, so next year, when the government repeats the exercise with 75 billion tokens, the market value is miraculously bid up to £3 per token (instead of £2).
10. Then you just keep cutting other taxes and allowing the market to sort out how much should be redistributed from land owners to citizens. The two groups overlap to a large extent so the net redistribution is only a sixth of the total value of all tokens, i.e. assuming they change hands for £3 each, total revenues/spending is not 75 billion x £3 = £225 billion, it's more like £40 billion (i.e. the area on the flag between the vertical axis, the blue line and the red line).
11. No doubt the Homeys and Faux Libs will cry foul, but hey. At least we can find out in practice what people really think of Georgism. If a majority of people (who end up with a surplus of tokens) really think nothing of it and are happy for people on whom society bestows the most benefits to continue to enjoy them tax free, then they are free to set a price for their surplus tokens of nil, or 1p each (thus cutting off their noses to spite their faces as they are giving away money), or to hand them over to charities collecting tokens for the Poor Widows In Mansions Benevolent Fund and nothing actually changes either.
Saturday, 21 May 2011
Four or five economic thought experiments rolled into one
Subscribe to:
Post Comments (Atom)
10 comments:
As ever, MW, an interesting post. I have to say that economics is not my forte, but if you say it would work, then fine by me.
Apart from the fact that the State hasn't got a clue how many people live in the UK, or how many illegals there are, and the fact that the population is changing by the month anyway due to immigration and emigration, I think the author of this idea has a touching faith in the ability of the population to manage such a complicated system. A good 20% of the public live such chaotic lives that official paperwork and documents mean nothing to them, nor often would not reach them anyway, or be stolen en route.
Unless of course the plan requires us all to be electronically tagged of course..................
At least MWs LVT plans have the benefit of being relatively simple to implement - as he often observes, property doesn't move and the ownership is well documented.
WFW, ta, of course it would work.
S: "the State hasn't got a clue how many people live in the UK"
That's true, but that doesn't matter - as long as it hands out 75 billion and demands 75 billion tokens, the fact that non-British citzens living here don't get any is a minor issue.
"I think the author of this idea has a touching faith in the ability of the population to manage such a complicated system."
Nope, it's like a bank account (or a self-assessment tax account). Head of household is sent a statement showing credits (the free tokens) and debits (the tokens demanded in tax) and there is then a single net figure. If he wants £-s-d for the surplus, he enters the price he likes on the pre-franked postcard and sends it off; if he has a shortfall, he enters the price he is willing to pay on the pre-franked postcard and sends it off.
If no postcard is sent back, then it is assumed that those people are prepared to pay/accept any price, so once people have decided the price, they are then sent a cheque or demand for the balance.
Obviously, tying this in with the PAYE or welfare system will be a bit fiddly, which is why it is better to leave the welfare system as a separate system and just cut taxes generally, but that way people will hotly deny that they are better off.
Since writing this post, I've had a rethink on the transitional arrangements, but for posterity, para's 8 onwards originally read thusly:
"8. It can then deduct the face value of the tokens it hands out from people's welfare payments or pensions; and it can deduct the face value of tokens it demands from people's existing tax bills.
9. So not only do the value of tokens demanded for the privilege of land ownership not discourage economic activity in the first place, they cost the more productive members of society absolutely nothing. Maybe you currently have to pay £15,000 in income tax, National Insurance and VAT (estimated at 7% of gross income), if it turns out that your house costs net 3,000 tokens (after deducting your free tokens), that's a bill of £6,000, but it doesn't matter to you, because your PAYE code is adjusted so that you pay £500 a month less PAYE. So not much changes, really.
10. On the other side, if every adult gets a thousand tokens (now worth £2,000), welfare payments can be reduced by £2,000 and pensions reduced by £4,000 a year, and so on."
"A good 20% of the public live such chaotic lives that official paperwork and documents mean nothing to them, nor often would not reach them anyway, or be stolen en route."
Yes, but the vast majority of these 20% are the ones that will be in credit under such a system. All they need to do is bank the cheque when it arrives. If they are on the dole, then they will be used to doing this, or having money placed directly into their bank accounts.
Good post. And it's got me thinking. Sorry if this is too long.
The tokens can be used to think about why some attempts at stimulus are more successful than others. And also how you can get stimulus and a balanced budget at the same time.
Consider the scenario that MW has outlined above. It stimulates the economy and yet the budget is perfectly balanced in that the government takes back everything it gave out in the first place. It also is pretty effective as a stimulus because those who lack tokens have something to exchange for them.
Consider a second scenario. In this one the government gives everyone 1000 tokens at the beginning of the year and requires everyone to return 1000 tokens at the end of the year. The budget will still be perfectly balanced but this time there will be almost no stimulus since nearly everyone will just put the tokens in a safe place and wait for the end of the year. The only exceptions might be emigrants who would be able to give them to immigrants in exchange for cash, goods or services. But that is a very small percentage of the population so the stimulus will be small too.
Consider a third scenario. In this case landowners receive the 75 billion tokens proportional to the value of the land and at the end of the year each citizen has to pay 500/1000/2000 tokens according to age. So the reverse of the original scenario. In this case the budget will still be balanced and there will still be a stimulus effect, but not such a large one as would be produced by the original scenario. This is because in the original scenario it was always possible for those who lacked tokens to swap resources for them. whereas in this scenario many of the people who lack tokens also lack resources and so cannot make an exchange. And the fewer the exchanges, the less the stimulus.
Finally consider a fourth scenario. This is the same as the original scenario except that the government only wants half the tokens back. Again this will have a stimulating effect but not so great as the original because the tokens will be easier to get hold of and thus not worth so much. If the "tax" was lowered even further, the stimulus would be even less. In the extreme, if no tokens had to be returned there would be no stimulus effect.
Other scenarios can also be imagined in order to work out what makes for an effective stimulus and what makes for an ineffective one.
But from what I can see, the token budget needs to be balanced so as to avoid inflation/deflation; tokens need to be issued to as many people as possible; the people who have to return the tokens should overlap as little as possible with the people who receive the tokens in order to encourage the maximum number of economic transactions;
And since the Pound Sterling itself is basically a government issued token, these thought experiments should apply when the government issues pounds rather than arbitrary tokens.
D, excellent work, all those outcomes would appear to follow naturally.
I'd just add to scenario three that what little stimulus there is would become less and less every year, because those who can't earn any money trade down and down, and those who have done well and traded up in the early years, or who were just lucky in the land ownership stakes, have less and less incentive to work (why would they?) so the entire economy ends up being carried by the 'squeezed middle'.
Of course the interesting scenarios which I have not touched upon are ones where income-based token payments are used instead of land-value-based ones, since that is the current tax situation and might give us some insight into the results of current government action. Still thinking about those though.
D, doing it with income tokens is a real challenge.
Doing the Citizen's Income side is easy enough, but then the problem is making higher income people pay for the tokens. Unless you expect complete honesty and ask people to declare their income (as defined) and then tot up all these incomes (= the tax base) and then divide the number of tokens distributed by the tax base (= the tax rate) and then ask people to buy tokens to 'frank' their income?
Hmmm, see what you mean. That's even more difficult than I thought it was. No wonder people find it so difficult to work out the consequences of fiscal policy.
Post a Comment