Inflation as a Form of Tax
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In previous two posts we discussed digitalising money. As discussed, digitalised money can be used to directly collect value added tax from each transaction. There are other methods to also fund public services using digital money. Here is one, described in the context of informal settlements.
In informal settlements, transactions are cash based. Property is not unofficially owned – it is so called extralegal property discussed in “Importance of Property”. Economy operates in the grey zone, de facto acknowledged by utilities and police as part of the city, but in the eyes of public records, it does not exist. Since assets do not exists formally, collecting fees legally poses practical problems.
Unofficial cash transactions make collecting traditional income-based taxes next to impossible. At the same time public services like healthcare, schools and police need funds to pay personnel salaries. Dependence on external aid is not a long-term solution. The taxation issue needs to be re-thought.
Central bank digital currencies are being planned and could offer a solution with a small modification. On public blockchains, the validators are paid so called mining rewards (for an explanation see Decentralised Organisations and esp. the primer in chains). The CBDC is a trusted environment but could copy the mining reward concept by creating new money at constant rate. Instead of handing it over to some external party, the newly created money could be given to the public side for organising common services.
Issuing new money constantly leads to an inflation and can be thought of as a form of taxation.
This would be a move to an asset-based taxation, where the asset is the money supply and taxation is implemented by inflation. Every year government gets a reward that is say 5% of total amount of currency assets. The generated currency amount can then be moved to the budget of the government to fund its activities like schools, health centres, build roads and electricity transmission networks, pay salaries for police and run digital public services.
This has number of benefits
The mechanism is extremely simple
It prevents deflation that is deemed very detrimental for economies
It is impossible to subvert (like income-based methods)
It may be possible to abandon or never introduce income-based taxation at all
Persons who have lots of cash or liquid money face a reality where their assets diminish every year unless they invest it wisely. “Lazy money” is forced into work.
It does not prevent other forms of taxation like VAT from existing if deemed appropriate
This type of digital currencies generates new money every day and the rate is known in advance. This allows to re-distribute it to various public agencies on daily basis. Overspending becomes impossible and long-term planning a necessity.
When building self-standing local communities, the same concept of constant inflation velocity for the community digital currency can be applied, no need to be nationwide.
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