16. Periodic taxation of accumulated capital
One or another way of growth, either through debt or monetary expansion will sooner or later require corrective actions in the form of painful austerity or inflation or even total monetary reform.
These corrective actions are particularly harmful for further economy development as they are causing chaos and suffering of millions of people and all just because of collectors having the need to exercise their passion or it is just a natural need to safeguard against bad times.
To be able to avert such drastic measures, we need a new form of tax, which will be gradually diminishing the very capital (profit, savings) directly at the bank accounts.
This diagram is explaining the existing problem. At present the state is financing its transfers and dotations through debt, financed from profits and savings of the people.
Standard taxes (VAT, sales tax, income tax, corporate tax, capital tax) will never be able to provide enough resources for it as they would have to be at the level of 100% and this is not possible nor suitable. But without these transfers the economy would be missing the buying power for sustainable profit creation. When we get to the position when we need to start repaying this debt or it reaches an abnormal size, where nobody is willing to finance it any more, there comes the financial bust. The solution is cutting off the branch that is contributing to spiral of debt and instead introduce new one, which is directly taxing excessive savings and profits at the bank accounts.
Understanding that accumulated profits and savings are only illusionary and they represent only one side of the coin whose second side is written by debt and inflation is very difficult and sudden awakening would surely cause strong social shock. Therefore, instead of this shock we need some new corrective mechanism which would take care about our need to constantly supplement missing currency through unsustainable systems of debt or monetary easing.
Such corrective mechanism should be new periodic tax directly on bank deposits, according their size.
Of course, it would not be at the level of 100% from saved amounts. That would not be realizable mainly from psychological reasons and it would not be correct, too. It is OK and useful if individuals and companies have certain reserves. The only problem is if such reserve is rising beyond healthy levels. Therefore we need to set up certain threshold for companies and individuals alike and after it is breached the excess should be taxed.
Without this threshold the savings will build indefinitely and cause, based on method of financing, building of astronomical debt( left branch, which we aim at closing) or through monetary financing lead to new monetary easing over and over with potential of ever growing inflation.
The calibrating of it will be always politically extraordinarily difficult, but in democratic system achieved consensus will yield enormous benefits of stability of financial system for generations. The key is to set up such levels of these thresholds which would be high enough so as the individuals and companies would see is as something minimalistic, which is not hindering their freedom to use their hard earned money as they wish. It is important that consumers would have certain stock of currency which stimulates their trust to spend and invest without fear of future without safety reserves.
This is clearly evident at the recessions where consumers start to save to protect themselves against the uncertain times, unemployment and as the result the recession actually worsens. Also, even long after the currently unemployed people find the job, it will take a significant amount of time till they resume their usual consumer habits exactly for the reason that they are repairing their damaged bank balances. And because of their recent experience, they rightly feel they have the need to do it. So the end of recession is prolonged by the time, till these reserves will not reach the expected psychological levels.
The other counterpoint is such level of savings, where consumers, employees see themselves such rich that they are stopping working and expect to spend the rest of their life in wealth financed from their wonderful bank balance. But this is the great mistake. Money will not guarantee any wealth at the macroeconomic level. It is obvious that few individuals can exist from such personal monetary fortune but if all members of society would by some miracle won millions (each), instead of expected wealth and happiness ever after what would follow would more likely resemble an end of the world. Waitress at the restaurant would wait till she would be served now by somebody else. Her colleagues would be thinking the very same way and expecting service at empty tables in vain. The cook would cease cooking, thinking somebody else should be doing it now. But he wouldn´t made it to his former workplace at all as all taxi drivers would be waiting at taxis driven by somebody else(who did not win) and oil pump manager would close the store as pumping the petrol as a newly millionaire would be definitely under his dignity.
Therefore, however terrible it may sound it is necessary to keep population in such poverty as the majority would have to continue working. There are no cakes without work and our society is functioning only because people are working. Money are nothing, they will never produce anything and serve nobody. It is just a means of exchange and tool for motivating the people.
So the final threshold must be significantly lower than desired by majority of the people and exactly for the simple reason as after it’s exceeding the society would collapse for lack of available labor.
That does not mean that supplementing of buying power through transfers and subvences is not beneficial even if part of the used resources will directly end as savings.
By faster supplementing the savings to desired psychological level we can strengthen the consumer confidence and increase the volume of realized buying power. It will save the time needed to overcome the recession and the society will be functioning at the “higher gear”.
One of the possible forms could be to make the permanent savings about the volume of certain multiple of taxed profits, say 3 times yearly income. After that, the individual saving additional amount (from income, profit…) of excess of this threshold could spend it within 1 year. If he/she didn´t manage to spend it, it would be taxed periodically (quarterly, annually) in full, so the remaining savings would remain again at 3 times of yearly income.
It sounds as a radical method, but with reasonably and adequately set thresholds it would provide an alternative to unsustainable growth of debt or inflation.
At the same time the very existence of such tax would lead to true understanding of financial system by all its participants. They would realize how profit is created, what conditions are necessary for its annual creation and what the dark side of such profit driven system is.
It is much better to tax still and unmoving capital then to start squeezing the whole economy or to devalue savings of all the people without regard of their size. Inflation is causing impoverishment of all, notwithstanding their consumer behavior. Those who spent and so helped to turn the wheels of economy will be hit the same way as those who did not. The same applies to recession caused by austerity. Companies that paid their employees generous salaries and invested their profits to research and development will suffer the same way as those who were only hoarding cash. Even more, such mean companies will most likely survive at the short term and so spread such pattern of behavior to the future. The world will be becoming meaner and less investing in new technologies. Without existence of such tax we cannot prevent economical cycles and inflation.
Necessary precondition of its introduction is existence of fully digitalized and closed circle economy.
Money in its paper form would lead to the situation where people with excessive capital would try to avoid such taxation by withdrawing cash and hiding it which would lead to bank runs with all consequences. The same way it must be ensured only internal circulation (within border of the state) of such currency. Otherwise next tax evasion would be transfers abroad.
Only fully digital currency with internal circulation is suitable for such financial system.
But the benefits are enormous: possibility to exist without state debt, without inflation.