Wednesday, March 30, 2011

On taxation

Further to my post on money, I am going to use Warren Mosler's family coupon analogy to explain how our monetary system works. It's very simple and if you reflect on it, it makes very clear what bullshit deficit terror really is.

Let's say I award my children points each week. I give them coupons, each marked with a point, for things that they do. Each week I demand that they pay ten points back to me; otherwise, I will punish them: they will be grounded or will not have treats that they like. So each week they must accumulate the ten points or suffer.

Where can they get the points from? Only from me. No one else can issue my coupons because they are my own invention.

So each week, they might accumulate a surplus of points, and I might allow them something in return for them. Maybe I will drive them to a friend's house for three points, or give them a bag of lollies for five. They may pay each other points for services rendered: Naughtyman might give Zenella five points for tidying his bedroom; Zenita might give Naughtyman a point for allowing her to be player one on the Wii. They may instead keep their surplus to help them pay their future obligation to me.

The coupons are of course worthless outside of this system, unless I agree with their friends' parents to allow them to exchange them with their friends. I might agree to allow their friends to buy services from me with the points, just the same as they can themselves. What rate they can get from each other will depend on the relative value of points within each house. If their friends' parents need ten points for a bag of lollies, then they will likely want two of their coupons for one of mine. This is quite irrelevant. The coupons have whatever value I place on them and no more: if their friends want my lollies, they must pay me five of my coupons. They cannot use their parents' coupons because I will not take them.

In themselves, the coupons are entirely worthless. I need not even issue paper coupons. I can simply keep score on a piece of paper. The coupons themselves are more useful to the children as means of exchanging services than they are to me. When the coupons are paid to me, if they are ragged, I can throw them away (in pieces of course so that the children cannot retrieve them from the bin and reuse them), and if they are not, I can recirculate them. It doesn't matter to me. I can create as many coupons as I wish.

If the children accumulate a lot of coupons, so that there are too many in circulation for my purposes, I can increase the amount they have to pay. I do not need the extra coupons. I am not using them for anything. I simply use them as a way to discipline the children's "economic" behaviour. I can never "run out of coupons" (if I don't have paper even I can just make a note of the points I issue).

I hope this was clear enough: the coupons are dollars; the payment is taxation (note that the payment itself is meaningless: I don't need them to return the coupons so that I can "spend" them because I can simply make more; all I am doing is removing coupons so that they will continue to need them and provide services that I find useful); the exchange with outside children is foreign exchange. I am not going to consider "debt" here because this system is not complex enough to require government borrowing, but you could imagine a system where I allow the children to bank their extra coupons and pay them interest, to encourage them to learn thrift (this is not why governments issue debt, however!).


Blogger Paris Dreamer said...

Why have taxation in the first place, then? And why do governments go into debt? I feel as though there is something missing in all of this, but I don't know what.

March 30, 2011 at 12:20 PM  
Blogger Dr Zen said...

Taxation reduces aggregate demand so that the government has space to pursue its spending. Mosler believes we are overtaxed and should correct our economy by reducing taxes. That's because he's not a fan of bigger government. I'm not particularly, either, so I tend to agree with him.

If you stopped thinking of governments' having debt, and started thinking of them as facilitating saving, you'd find it easier. The method they use to achieve target interest rates is to issue securities, but there are other means that would dispel the "d" word.

March 30, 2011 at 12:25 PM  

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