Zero Tax Economic System

Over the years I have come up with some crazy ideas and schemes. Every time I do, however, I discover that someone has been there first. I came up with the idea of a Democratic system of government that selects politicians randomly and without the need for political parties and elections, but then discovered that someone else had come up with it first. I invented the Zero Unemployment Economic System but then found out that I had simply come up with a Socialist version of Milton Friedman's Negative Income Tax theory. As yet I have yet to find anyone advocating my idea for Absolute Price Stability before I did.

Now I've come up with something else - the Zero Tax Economic System. It's been running around in my mind for about 5-6 years now, but the reason why I never published anything about it was simply because I had no faith that it would work. To be honest with you, I'm still not certain that it would work, so if you do find holes in it I won't get too embarrassed.

The reason I'm publishing it now is due to some conversations I've had with a friend over the nature of the Monetary system and recent stuff I have read about SIMPOL and their ideas of monetary reform. As a result of my thinking through this, I have come to understand a bit more about Fractional-reserve Banking, as well as the Reserve requirement that has sometimes been used as part of a central bank's Open market operations.

In a nutshell, here is my idea:

1. All taxes are removed - income tax, sales tax, company tax... everything.
2. The government creates the money it needs via seigniorage (printing money).
3. The Central bank then controls inflation by increasing the Reserve requirement of bank deposits (on M2 and maybe M3).
   

Simple isn't it? In years gone by it was my understanding that when a central bank intervened in the marketplace it either issued bonds or paid them back. I wasn't really aware of the Reserve requirement - the percentage of deposits that banks must hold at the central bank - or any other tools of monetary policy.

Of course the idea of a government simply printing the money it needs without worrying about tax intake is hardly new. Everyone with a smidgeon of economic understanding knows that this sort of activity leads to the "H" word - Hyperinflation. Suddenly everyone then becomes an expert in the history of Weimar Germany (although Zimbabwe is another good place to start these days).

What I'm suggesting, though, won't result in hyperinflation. This is because I still have faith in the ability of Monetary policy and Central banks to recognise inflation and to act accordingly (except, most saliently, the current US Federal Reserve Bank board, who obviously need Paul Volcker to be chairman again). The complete removal of all forms of taxation, followed by wholesale money creation, would inject massive amounts of money into the economy. But for every dollar, or pound or Euro or Yuan that is created, the central bank can remove by increasing the Reserve requirement for bank deposits. This balancing act will remove the hyperinflationary effect.

I can see three benefits of this system.

The first benefit is efficiency. Without the need to collect tax, entire government departments can be eliminated, removing the need for a massive bureaucracy to maintain the government's tax revenue. Instead, the government simply gets the money created by the central bank. This efficiency would also be felt in the private sector, with no tax accountants and lawyers required by companies and corporations. Obviously some level of unemployment would occur as accountants and lawyers and bean counters look for work, but that would be easily solved over time. With less time spent on adhering to tax laws and finding loopholes, the economy will benefit.

The second benefit is that government revenue is indirectly raised from the broadest possible base. This proposed system does not really create money from nothing - the raising of the Reserve requirement of bank deposits balances out the seigniorage. This means, in effect, that the tax burden is still there - it's just that it has transferred into the marketplace in the form of higher market interest rates, which affects the entire economy.

The third benefit of this system is that it accommodates those who wish for "small" government as well as those who want the government to have a larger role in the economy. Obviously the amount of money the government spends will determine how high the reserve requirement of bank deposits becomes - the smaller the government, the lower the reserve requirement will be and the larger the place the free market has; the larger the government, the higher the reserve requirement will be and the free market will have a smaller place in the overall economy. Put simply, this zero-tax economic system can work for both conservative and progressive sides of politics. In the end, the argument between these two political sides will no longer be about government revenue and taxation, but government spending and market interest rates.

Since I've had other economic ideas, how would this idea fit in with my other models - the Zero Unemployment Economic System (ZUES) and Absolute Price Stability?

With ZUES, all that would happen is that each employed person would continue to receive two incomes - one income from his/her employer (which has no minimum wage requirements) and the universal income from the government that all people would receive equally (which is a form of negative income tax). But rather than this universal income being sourced from higher levels of tax revenue, the income is merely created by seigniorage, with the amount determined by formula. The central bank then modifies the Reserve requirement to control inflation.

With Absolute Price Stability, the Central bank would set the Reserve requirement at such a level as to keep inflation at zero. Moreover, I would argue that banks should not get any interest paid at all on these reserves by the central bank which, in a zero-inflation environment, means that banks would neither directly gain nor directly lose from having to keep money under the central bank bed.

Update 22 January 2007:
I have just discovered that a lengthy discussion of this article occurred at Megan McArdle's page at The Atlantic.com.