BOOK TWO
III - NEW SHAPE OF CORNUCOPIA
6. THE TREADMILL APPROACH
Taxes are counterproductive and are not the way of the future. The Income
Tax, for instance, was imposed as a temporary measure to have both ends
meet, at least in the books, when we had to face the expenses of World War
I. Had we had more time to think about it, we probably would have come up
with something more ingenious, because Income Tax is unfair, arbitrary,
rather ineffective, expensive and cumbersome to administrate, incites cheating....
and is highly unpopular! The reason it has survived until to-day is precisely
because, in the minds of some of our social thinkers, Income Tax is "just"
because it is unfair: it takes away some of the "too much" from
the income of people whom social thinkers feel are earning too much.
The unobtrusive shakedown
In fact, from an entrepreneur's point of view, an income tax is uncommonly stupid, since working, and making money to prove that there is a demand for what one does, seems socially constructive. System-wise, it is hoarding that may, or may not be immoral, but is certainly inefficient. If there is a problem of some people being rich and some being poor, it certainly should not be at the moment of earning - which is when incentive is most needed - but later on, when money is hoarded, that the State should attempt redistribution.
This raises the question of a less embarrassing method of getting revenues for the State, in a society that will be fully dedicated to positive reinforcement. Is it less obtrusive to rely even more on Income Tax, or to turn to capital taxation? It depends a lot on who is making the choice, of course, so trust a society of entrepreneurs to feel that, if taxes have to be imposed, it should be on wealth itself, not on income, and that we should hit not at active, but at idle capital. Inflation has been for some time the privileged way to finance the State's redistribution operations; watch for the inflation treadmill to pick up speed again as soon as we outgrow the Reagan Reaction, for the new majority will have State, the Crafty Magician, try to obtain even more revenues from inflation, which is a tax on capital.
Actually, we will rely more on inflation financing. Entrepreneurs will ask for it, and THEY will be the new majority. Inflation helps entrepreneurs, and the future of tax collection lies with the proper handling of the inflation treadmill. This does not mean a social showdown, though, for the situation that prevailed before the Reaction will not come back. The proper scenario is not to confiscate what private capital remains in the land and we will not let capitalists disappear, at least not in the near future.
The problem is not inflation as such, but random inflation: panics occur in times of uncertainty. So let's not crusade for "no inflation" or "low inflation", but rather think in terms of controlled institutionalized inflation, with the treadmill set at the decent pace that the situation suggests...
Used honestly, and as a precise tool for financial policy, inflation
will not bring panic, but will turn out to be salvation for all payers,
payees and bankers involved in the great bum cheque affair. Pure magic.
Before we rely more on inflation financing, though, we will extend a net
below liquid wealth, just like we will have extended a net below shareholders.
The "x" negative yield
The best way to protect money is "indexed deposits". It is to commit the State to be the universal banker, dealing in constant dollars. The State should always be ready to borrow all the money it is offered, and to reimburse on sight the money it has borrowed, adjusted for inflation... minus a premium of x% per annum since the day of deposit. To have such a net below money is a social and economic necessity but the "x" figure itself will be a political decision: "x" is the rate of confiscation, the speed of the treadmill.
Whatever the rate we will decide upon, it will be quite flexible since it is an open contract between State as the borrower and the investors. The "x" negative yield may be considered a "tax" on capital to finance the State's equilibrium-maintaining role. It may also - as it is the maximum loss in real wealth that can now be incurred by the"lazy" investor over the period - be seen as a premium: the price that the capital owner has to pay to keep his idle capital "insured" against wild inflation.
This "minus x%" determines the threshold of dynamism below which wealth becomes fair game. It is also a revenue for the State, and can be set to cover any portion of its redistribution-for-consumption outlays. Take note, however, that once Indexed Deposits protect investors against inflation, it is immaterial to the State's financing whether investors take advantage of it or decide to run their chance on the private investment market... State is the issuer of power chips. Until now, money has been printed on the authority of the Federal Reserve Bank, watchdog of the interests of the Upper Kennel to make sure that we did nothing foolish... like just writing-off the l3-figure bum cheque with inflation. When it is clear that we are not going to do anything of the sort, since capital invested with the State is indexed for inflation, we may give up the rigmarole of periodically issuing Bonds and Bills and simply go on and print the money we need: power chips. Money itself is no more sacred paper than the Bonds, and we will not need the built-in delay for repayment anymore.
Print power chips and produce inflation. Printing more money is not the only factor of inflation; there are others like velocity, expectations, etc... For the sake of simplicity though, let us consider here only this most basic of inflationary factors and see what happens when the volume of credit instruments increase.
Suppose, as a limit hypothesis, that investors should deposit so many funds with the State, that the "minus x%" of these funds, as will have been determined, would be sufficient to cover all the State's expenditures. The State, then, would have no extra money to print and, in theory, would produce no inflation; the investor who withdrew his deposit would receive his investment minus the x% as determined, in money that would have kept the same value. But this is pure theory. Chances are nil that enough money be deposited with the State to make inflation unnecessary. A "minus 6%" rate would have required that $14 trillion be deposited with the State, in its capacity as guarantor of Indexed Deposits, to produce the $850 billion that was needed for the budget of 1984...! Conversely, we would have needed that same year a totally ridiculous "minus 40%" confiscation rate to cover our expenses out of the mere 2 trillion presently floating around.
The realistic hypothesis is that investors will deposit with the State much less than it needs, and will go on investing on the market as entrepreneurs. Short of cash, the State will activate its printing press to cover its expenses, and thus will create "inflation". Thanks to indexing, though, those who will have deposited their money with the State would not be harmed by this inflation except for the agreed and pre-arranged "minus x%": the risk of inflation would be supported entirely by the investors on the open market, the entrepreneurs looking for high yield.
Should most of these investors get this high yield, it would be a sign
that the economy is booming, and who will complain? Save that, in constant-dollars,
inflation would reduce these high yields to reflect what real economic progress
has been achieved. Should investors not get these high yield, some of them
will come back to the security of a "minus x%" deposit with the
State, reducing inflation... and making it easier for the others to succeed.
Suburbia and the Disappearing Act
Indexed Deposits are only part of the solution, though. To protect capitalists as an endangered species, we must not only spread a net below capital as liquid wealth; we must also make sure that all partners of "have" status, and not only the "rich", will contribute to the "redistribution for equilibrium" policy. To achieve proper inflation financing, we need controlled inflation, a well-tempered treadmill, but we need to go also after the illusory, inflation-induced "paper profit" of the property owners. We must use that purely symbolic wealth increase as security for the equally symbolic transfers which regularize, in the books, the Santa Claus operation that distributes the surplus production of the industrial system free to the Have-nots.
How do we do that? Let's see how we would have financed the same 1984 budget, for example. Suppose, for the sake of argument, that there is presently on the market $5 trillion worth of real estate, the price of which increases with inflation, and $7 trillion worth of credit instruments whose value decreases with inflation. Let's say we set the treadmill speed at "minus 6%" for "U.S. Government Indexed Deposits" and offer holders of Government securities to swap them immediately for Indexed Deposits. It is an offer they are not likely to refuse, since holding securities that bear a fixed interest when the declared intention of the State is to promote inflation is not a comfortable position. With this swapping, plus the money of those who will feel a little nervous, we should end up with a reasonable $2 trillion in deposits. This, at "minus 6%", brings in $120 billion in revenues for a starter.
As a second step, with the target a 6% inflation for that year, print another $420 billion in credit instruments, equivalent to 6% of the $7 trillion outstanding, bringing the kitty up to $540 billion. Then, let's go after the windfall in real estate, in Suburbia and everywhere, and budget to tax property owners the equivalent of the inflation-induced capital gains they shall have made by year's end on their $5 trillion assets.
This will bring in another $300 billion, if the 6% inflation rate materializes, and we will have a total of $840 billion, comparable to the $852 billion spent in 1984. If it does not materialize, of course, it proves the market is more resilient than we thought... and we just print more power chips. On the other hand, should inflation soar more, the extra money obtained from the tax on real estate more than covers up for the Indexed Deposits, and the State may either print less money, reduce the negative yield, or do both, all of which will tend to reduce inflation
But, naturally, if we really wanted a lot of dynamism and were ready to run the risk, we could also make it a 7% negative yield, 7% inflation and rake in $980 billion. Or we could keep the negative yield at 6%, but print money to increase inflation to 7%, giving a modest break to the quiet investor and an incentive to deposit with the State... Or the other way around, producing the opposite result. It's flexible.
What about the horrified reaction from the effective majority of homeowners? It will simply not happen. The average homeowner, if he so wishes, will merely mortgage to any institution - or to the State itself - at rates that will reflect the negative yield on capital - the inflation-induced growing equity on his home. This will be the equivalent of an inverted Indexed Deposit; the mortgage will grow cumulatively, its value will be indexed to inflation and the chosen "x" negative yield will apply.
The homeowner will live happily as ever, in a house which will not offer less comfort merely because the State or an institutional lender might hold in it a growing equity. An equity that will not prove an obstacle to normal real estate transactions, since it will be transferable without fuss to future owners and most often then not will never be paid back. It will be a paper debt cancelling the paper gain of inflation, and the effect will be exactly the same as if people were offered to pay their Income Tax with an I.O.U. rather than money: it will create the liquidity we need to sponsor private entrepreneurship and enough Indexed Deposits to cover a significant part of the State's new obligations.
If the owner insists on paying the bill annually, so be it; there will be no law against hoarding in real estate, and capital gains may still be made by homeowners, although they will tend to depend on the condition and relative value of the house itself rather than be an automatic phenomenon. But, just like "Book-of-the-Month" members are inclined to accept rather than refuse the proposed selections, so may we expect homeowners to take the offered State's mortgage covering the tax on inflation-related added value, and either to play their money safe on Indexed Deposits... or go for real risk taking.
Yet, in this option, the homeowner is still losing the automatic profit
he now takes for granted and that he will not be making anymore. Crisis?
Rest assured that the homeowner will live more happily than ever, indeed,
in his State-mortgaged house, when he is informed by State the Magician
of the Great Disappearing Act. With this type of inflation financing, we
do not need the Income Tax anymore, nor will the Federal Government
need any other sources of income whatsoever. Except for what local levies
may be kept to care for local needs, taxes may simply disappear.
Eldorado
What is the difference between a "no income tax + face-value negative yield on investments + inflation tax on property owners" policy on the one hand and, on the other hand, the present situation of "interest + inflation + income tax" ? Both approaches hit just the same at the "lazy money" that carries no initiative and give a free ride to the middle-class, but there are four major differences.
First, Indexed Deposits with the State will force the indexing of other loans throughout the system. These will bring a higher yield than the deposits with the State, but it will still be negative yields, except for extremely high risk ventures, since the gap between the interest on private loans and Indexed Deposits will remain the same as the present gap between these private loans and the Government security of similar terms. Investors and financial planners will know where they are going, at last. Without the cost of uncertainty due to inflation, we can expect rates lower even than what mathematics would suggest for mortgages, corporate and personal loans since we will have removed from the system one major element of "iffiness".
Second, no Income Tax means no penalty on profits and initiative, no progressive taxation factor to penalize success and hinder motivation. This is an advantage for entrepreneurial investors in the high-income brackets, comparable to what G.I.A will mean, in terms of extra protection, for the entrepreneurial people with lower income.
Third, there is flexibility. We can plan a 6% negative yield from the start on Indexed Deposits, but this is a day-to-day contract. From 6% you can move to 5.5% or 6.5% as need be, or to any figure you choose, since the investor is always free to collect his money if he is not satisfied. Then, the printing activity - and inflation rate - can be adjusted also to meet reality. It is the real inflation rate that will determine the tax on property owners, not the initial forecast.
Fourth, the corollary to this policy is that ends should meet. If a discrepancy appears, it should be corrected immediately rather than spread over the next generations for random inflation to correct. Inflation financing - we may call it the "treadmill alternative" - imposes a continuous reexamination of the State's budget, an approach which is better adapted to the state of flux of modern economic conditions than the present once-a-year exercise in wishful thinking.
How harsh a bargain would a negative yield be on investors? Will not money just flee from the U.S. and go to finance the development of those foreign countries where Government Bonds will still bring a positive yield? Maybe it would... if such a country still existed on the face of the Earth... As things stand at present, the real yield is negative for top-dogs in all WINs, unpredictable at best in the third world. Ironically enough, it is socialist, planned-economy countries which might come in to compete for capital! We can safely trust, though, that the reaction will not be an exodus of capital but rather the other way around. Where else would the investor find an Eldorado where he could enjoy an insurance against inflation, the social climate of guaranteed income for all, a dynamic society of universal entrepreneurship... and no income tax!
What does the treadmill approach mean for Johnny Worker, you and me? What would the worker, the small investor, the average businessman and the homeowner in Suburbia win and lose? There is an easy way to find out for yourself. Suppose we take the 6% inflation, 6% negative yield hypothesis. Pick-up a piece of paper... and write, in two columns.
On the left, write (1) your net income after tax this year, from all sources, including transfer payments and (2) if you own properties, an amount equivalent to 6% of their value, to account for capital gain;
On the right, write (1) your income (except interest received) before tax or, if unemployed, the normal income before tax of someone who has your professional qualifications and (2) all interest received, minus 6 percentage points (if rate was 6% interest, make return nil; if it was 12 % bring it down to 6%... etc.);
Doing better on the left or on the right? A crude estimate, but if you profit from the right hand alternative, chances are you would be better off with a tax on wealth than with an income tax... like most entrepreneurs and workers. If you want a simpler rule of thumb, consider that the capital-taxation approach, at the 6% inflation and 6% negative yield level, is advantageous to all the taxpayers whose interest bearing capital is smaller than 16 times the amount they pay in income tax.
Enough people would profit from this approach to make it a distinct possibility that the Crafty Magician will bow to the new entrepreneurial majority soon, and will proceed with the Great Disappearing Act, both to make our new plans possible and to control the public debt with a minimum of pain, slowly, and keeping in mind that wealth must remain productive.