04 November 2008

The End of Taxation

With the election cycle coming to a close here in the USA, there's lots of the usual talk about tax reform. During the campaign, Ron Paul, Mike Huckabee, and John McCain endorsed a "fair tax" - basically a flat national sales tax intended to replace the income tax; Sam Brownback and Rudy Guiliani wanted a "flat tax" - a single-rate income tax. Various candidates wanted to whittle around the edges of the tax code by repealing (or not) the estate tax, raising (or lowering) the capital gains tax, taxing (or not) carried interest, taxing (or not) carbon emissions, raising (or lowering) cigarette and gasoline taxes, and so on. And of course, Barack Obama wants to cut your taxes if you make under $200,000 - a number Joe Biden can't seem to remember. The shared consensus underlying all these proposals is that the existing tax code is neither fair nor simple - and this consensus is correct.

But none of the existing proposals will fix this problem. They'll just reward the constituency of the winner of tonight's election. We'll continue to tinker unsuccessfully with the tax code until we come to grips with a fundamental issue: taxation itself is obsolete.

Wikipedia says taxes originated 5,000 years ago in Egypt. This might be right, or it might not - we probably don't actually know when taxation was invented. But we do know why it was invented. It was invented because Pharaoh was a senior executive: instead of doing work, he supervised it.

Although Pharaoh didn't cultivate a garden, he still had to eat: he had to rely on the fruits of others' labor in order to set his table. Laborers being laborers, many of those growing the fruits doubted that Pharaoh was earning his supper, so they sent rotten produce, or they sent their regrets.

And (Pharaoh being Pharaoh) when the laborers sent their regrets, Pharaoh sent his army, and his army took everything they thought Pharaoh might need to impress his dinner guests (plus a little bonus for the Captain, as I'm sure you'll understand).

In order to minimize conflict (and to keep the Captain poorer than Pharaoh!) this system of royal confiscation was eventually systematized and scheduled, so that the laborers would grow accustomed to the seizures and plan their productivity accordingly (rather than, say, getting all surpirsed and in a huff, and marching on Thebes with sharp farm implements). The result was a tax.

Pharaoh really had no alternative to taxation; he needed grain for his bread and papyrus for his scrolls and tallow for his candles, and the only way to get these things was to go to the people who had them and claim a portion.

Now flash forward 1500 years and swim the Mediterranean to Rome. The Republic, and later the Empire, found it inconvenient to scour the landscape for cattle and grain and tallow and wine every time the legions needed to be paid; the logistics were too daunting, and it was tough to remember that Severus wanted 200 candles but Quintus wanted a cow. So the Romans innovated and came up with a standard medium of exchange - salt. Salt was great stuff. It was infinitely divisible, it was small in proportion to its value, it was imperishable, and it was in lots of demand because you could use it for many useful purposes, including curing meat and hides and flavoring food. So the legions were paid a "salary" (salt ration). Quintus could use his valuable salt to make his camp rations taste better, or he could trade it to the local farmer for that cow he had his eye on.

Commodity media of exchange make taxation much easier. You don't have to see if the cow Quintus sends to the emperor is scrawny or has foot-in-mouth; all you have to do is weight the salt. So the laborers began to bring a portion of their salary to the seat of government and turn it in. They had to do this, of course, because the Republican (and later the Imperial) tax authorities couldn't just make salt - they had to collect it.

Salt is, unfortunately, somewhat tough to test for purity. And, laborers being laborers, they tended to mix the Emperor's salt with sugar, or quartz crystals, or flour, or cocaine, or any number of other things. This made it hard for the Emperor's tax collector to know when he was being cheated. The Emperor hated to be cheated, so he encouraged his tax collectors to innovate. They did so by switching from salt to metal coinage. Soft metals can be tested for purity using a touchstone. Some soft metals are also nice and rare, and they can be turned into pretty jewelry, so they have intrinsic value. And they have another property which is just irresistable to a megalomaniacal Emperor - you can stamp pictures (of, oh, let's see - the Emperor?) onto them, and those pictures are fairly hard to copy exactly and fairly hard to deface.

Putting his face on metal coinage gives the coins a property very dear to the heart of the all-powerful Emperor: he can control its supply. The laborer can't use just any old pure silver as a coin - he can only use a piece of silver with the Emerpor's very own personal face (and other symbols of authority and value) stamped on it. And the Emperor can strictly control who gets to do the stamping. Now pesky foreign potentates can't get richer than the Emperor, at least on the Emperor's own turf, because only the Emperor can create valuable currency.

Taxation was still necessary with metal coinage, because, while the Emperor could make coins, he couldn't make silver - so he had to have the laborers hand in some of their coins so he could turn around and give them to the people who mined his silver and brought it back to the mint.

Now flash forward another thousand years or so. People were getting pretty flush in Europe, and carrying around big bags of metal coins was starting to be a drag. The bags were heavy, and bandits tended to notice them. Keeping the bags under your pillow at home was no solution, as it attracted unwanted visitors. Storage and transport of money, in short, was starting to cause problems. Enterprising merchants, being enterprising merchants, came up with a solution. German merchants began accepting cash deposits and issuing receipts; these receipts (which were much lighter and less conspicuous than bags of cash) could be used to reclaim the deposited amount of metal coinage - either from the merchant who issued the receipt, or from another cooperating merchant. These merchants quickly started charging for their services; they became bankers, and their receipts became a form of paper currency.

As paper currency established itself, people used it to pay their taxes. It was still necessary for the government to collect actual currency from its citizens, since the currency was tied directly to the commodities the government needed to use to build its roads, feed and equip its armies, and write and enforce its laws.

Things worked pretty much this way for a long time; until, in fact, 1975 - at which time the US Government declared that the value of the dollar would no longer be tied to the price of gold. The dollar thus became a fiat currency, which meant, essentially, that the dollar became valuable "because we say it is" rather than "because you can trade it in for a specific amount of some valuable commodity".

This is where our hero - J.S.G. Boggs - comes in. Recall that we first met Boggs way back when we were talking about Similarity vs. Identity. The question Boggs repeatedly forces us to try to answer is "what is money, and why is it valuable?" Here's Boggs on Boggs, as told to Lawrence Weschler:

"Some of the early American paper bills included engravings on the back depicting the metal coins for which the paper bills could at any moment be redeemed. On the back of the five-dollar silver certificate, put out in 1886, there was a picture of five silver dollars. If you wanted to know what a five-dollar bill represented in those days, all you had to do was look at the picture on the back. But anyway, when they started withdrawing the dollar's metal backing - when you couldn't redeem your dollars for gold and in fact were no longer even allowed to posses gold on your own except as jewelry - that's when they started putting that phrase ("In God We Trust") on the currency. When you could no longer trust in gold, they invited you to trust in God. It was like a Freudian slip." "It's all an act of faith. Nobody knows what a dollar is, what the word means, what holds the thing up, what it stands for. And that's also what my work is about. Look at these things, I try to say. They're beautiful. But what the hell are they? What do they do? How do they do it?"
In a fiat-currency system, value is "Boggsian"; there doesn't have to be any particular amount of fiat currency, because there's no absolute standard of value, because it's all fundamentally an act of faith. The basic idea (the "act of faith") behind the value of fiat currency is that the "total wealth" of a society is in some sense equal to the "total value" of all the currency the society has in circulation. If society's total wealth stays the same but the government prints enough currency to double the money supply, the value of each individual bill is cut in half. And, conversely, if society's total wealth stays the same but the banks all get together and throw a party at which they burn half of the bills in existence (a depressingly plausible scenario given recent events), the value of each of the remaining bills doubles.

Let's look at one sentence of the previous paragraph again: If society's total wealth stays the same but the government prints enough currency to double the money supply, the value of each individual bill is cut in half. Think about that carefully; what it means is that every time the government prints a dollar, it is effectively taking that dollar away from "everyone". A government which can do this doesn't need to collect taxes; it can just print the money it needs, and the appropriate amount of value is subtracted from the money you and I still have - automagically! Aristotle would hate this; it's action at a distance.

It's that simple. Taxation is no longer necessary. It's an artifact of an older time when money was made out of stuff instead of made out of ideas. As soon as enough of us realize this, we can simply close the IRS and H&R Block and the Tax Courts.

Each year, the congress can simply instruct the Bureau of Engraving and Printing to fire up the presses and fund the federal budget. This will do the same thing as collecting taxes, but it will do it in a different way: by driving up inflation. It will be, to coin a phrase, a "Boggs Tax".

Switching to a Boggs Tax would have a lot of good effects:

  1. A Boggs Tax taxes wealth. It does not tax income, or economic activity, or personal behavior - which is good because taxing any of these always discriminates against some groups and in favor of others. Because it can't be sheltered against (see below), it taxes the very wealthy much more heavily than the current system does.
  2. It requires no expense to collect. The government simply prints the money it needs. There is no tax return preparation, no Internal Revenue Service, no audit, and no court proceeding.
  3. There is no way to shelter against a Boggs Tax - every dollar in existence is automatically taxed. Whether a dollar sits in the Cayman Islands, or in the bank, or in a municipal bond, or in a corporate stock certificate, or in a mattress, the tax is applied to that dollar as if by magic. A Boggs Tax taxes dollars held overseas just as effectively as those held at home, it taxes dollars held secretly by criminals just as effectively as those held by honest taxpaying citizens, it taxes the "underground" (cash) economy just as effectively as the official economy, and, as a special bonus, it even taxes counterfeit North Korean $100 superbills just as effectively as red-white-and blue US Bureau of Engraving and Printing honest-to-goodness real $100 bills.
  4. There is only one public-policy argument where before there were two. Today we have to talk about who we will take money from and who we will give it to. Under a Boggs tax, we only have to decide who to give it to - since it's taken from every dollar automatically.

There are a couple of arguments against a Boggs tax; it seems to me that the three most important are these:

  1. While a Boggs Tax is radically more progressive than today's tax code at the top end of the wealth scale, it's much more regressive at the bottom end - it taxes the meagre wealth of the poor at the same rate as it taxes the rich. But there's no real problem here; simple annual subsidies to the poor can relieve their burden, and as a bonus, all government's activities are focused on distributing money (which makes people happy) rather than confiscating it (which makes them angry), so the quality of the average citizen's interactions with government improves.
  2. There is evidence to suggest that high inflation makes economies unstable, so a system which operates by increasing inflation might have bad economic effects. I'm not an economist, and I have no desire to play one on TV, so I'll leave this one, for the most part, to the professionals. But I will observe that we already pay an economic cost for our current tax system; operating the IRS and the tax courts, and requiring every citizen to burn a day (or a week) of productive time or pay an accountant to prepare tax returns is a real cost to the economy. Paying this cost produces nothing of value; it's pure economic friction. My guess is that the inflation incurred by a Boggs Tax would be smaller than the total of tax receipts plus collection friction, so the Boggs Tax would have a net positive effect on productivity.
  3. The third objection is the biggie: using inflation to collect taxes guarantees that the value of a dollar held as an investment decreases over time. This means that the dollar's value as a reserve currency is diminished, and it also means that dollar-denominated investments operate at a disadvantage compared to investments in currencies which do not inflate. Again the details of how this would affect the real economy have to be left to economists, but again there's a counter-argument: if a Boggs Tax makes the economy as a whole more efficient (and I hypothesize that it should), inflation due to causes other than taxation might decline - and the overall rate of inflation might not be extreme compared to other economies. Calculating how much inflation the Boggs Tax would create seems tricky. The CIA World Factbook gives a figure of $2.73 Trillion for the US Federal budget. This is the numerator in the inflation calculation, but the denominator is slipperier. It's not GDP (which according to the same source was $13.84 Trillion dollars in 2007) - because GDP only measures newly created wealth for a year. The denominator also doesn't seem to be M2 (the total money supply of the nation, which according to Wikipedia was about $7 Trillion in 2005). The correct denominator is something like "total dollar-denominated wealth in the world"; I can't find a statistical source for this, but it's evidently quite big; according to Wikipedia again, the total wealth of US households and nonprofit organizations (which doesn't count corporate wealth or dollar-denominated assets held overseas) was about $60 Trillion in 2007. If we're very conservative and simply double the US personal wealth number to $120 Trillion, this gives us a figure of about 4% annual inflation for using a Boggs Tax to fund the current US Federal budget - not trivial, but not crippling either.
I don't imagine the administration we elect today will switch the US to a Boggs Tax, at least not in its first term. But I do think a Boggs Tax is coming; traditional taxation is just too twentieth-century to survive in an information economy.


Blogger Lydia Fiedler said...

Supremely fascinating.


I would like to cast a vote for moving to barter, as the supremely wise GRB suggested we have been moving towards.

Short of that, if it already looks like a Boggs, and walks like a Boggs and talks like a Boggs, by God - why the hell not?

November 04, 2008 7:21 PM  
Blogger John said...

A Boggs tax if adopted would fail in time as it relies on the dollar hegemony which will end as countries begin refusing to accept dollars as payment for goods and services. The dollar hegemony depends on our military might and foreigners being willing finance our excessive consumption. This approach may work for many more years but is not sustainable.It is fatally flawed in that it relies on our trading partners acceptance of a continually declining dollar as if it had real value and thereby violates the economic law of honest exchange. Add this to the rise of the Euro as a global currency alternative and the dollar's days as king will come to an end. Eventually we will need to back the dollar with things of real value and that means we must begin creating more goods others want to buy and curtail our own spending.

November 07, 2008 11:14 AM  
Blogger Bob said...

The Boggs tax does not depend in any way on "dollar hegemony"; even if there were no foreign exchange whatsoever, and even if no one other than American citizens held dollars, the Boggs tax would still be a more efficient way to collect domestic federal taxes than the current income tax.

Regarding trading partners, it should be noted that no major trading partner of the United States has a currency which is backed by any valuable commodity (the Euro, the Pound, and the Yen are also fiat currencies), and it should also be noted that the dollar is not now and has not since it became a fiat currency been "continually declining" - both the Euro and the Pound have recently been losing value against the dollar, for example.

As a society the US needs to continue (not "begin") producing goods and services people want, and this is true completely independently of whether our currency is commodity-backed or fiat.

Whether the dollar is "king" has nothing to do, however, with the fact that taxation is obsolete in a fiat currency regime.

November 07, 2008 11:48 AM  
Blogger Chris Quenelle said...

Clever idea, but I'm not sure it makes sense to me. I'm not sure what you mean by a "dollar denominated asset". Say we're living in this new system, and there's a shop on the corner that buys and sells gold by the ounce. The price per ounce will rise with inflation. If the fed publishes the amount of money they print, the prices of such things will rise very specific amounts at specific times. So if I hold gold, I'm not losing money. Eventually, the financial world will learn to adapt to this inflation and adjust all dollar-denominated *markets* accordingly in real time. I think the result is that you will only be taxing people who hold currency, or money stored in "dollar" bank accounts. Anyone who isn't a moron will sign up for a bank account that stores your money in gold (or whatever) and only converts it to cash when you want to take cash out of your ATM. Of course, the ATMs will cost a zillion dollars to run because they hold huge bundles of cash which is constantly devaluing. I suppose that means people will move to direct debit cards to replace as many cash transactions as possible, where the debit card converts to dollars as late as possible. So the only people suffering will be people with green paper in their pockets. It seems like a game of hot-potato. With everyone trying not to hold actual dollars, won't the value of the dollar go down even below the inflation rate?

January 23, 2009 11:02 PM  
Blogger frog said...

A simple test for the purity of salt is to dissolve a sample in water. Quartz won't dissolve, flour will clump, and sugar in Roman times was imported from India and was far more expensive than salt. Cocaine did not exist until the 1800's and came from tree leaves that the Romans had never seen.

December 19, 2009 8:14 PM  
Blogger theRonosphere said...

Simply brilliant, Bob - delightful as a tongue firmly planted in cheek.

Of course the accounting lobbies will be up in arms. Tax accounting as you point out is not a small enterprise on the planet. And economic 'friction' is too nice a term.

Economic history is replete with examples of the Boggsian tax. Wikipedia provides a nice synopsis of hypernflation here: http://en.wikipedia.org/wiki/Hyperinflation

You put forward a rational argument for what might be described as utilitarian inflation. The cynical however might be tempted to cite our current federal budget and suggest that while settling on one method of governmental revenue might yield a more transparent process, there remains a plethora of interests for whom such transparency is anathema. The last 3 years under 2 divergent administrations have treated us, albeit as a side effect, to a significant amount of Boggsian tax. The fact that this doesn't appear in official government statistics (or those of the bankers that support it) is unsurprising. These policies have been in acted in addition to the new and creative means being discussed by the administration and congress to maintain the existing [sic] system.

Thanx for demonstrating yet again the supreme value of a classical education - and for your trademark elucidation of history and its relevance to our modern context.


August 24, 2011 11:11 AM  

Post a Comment

<< Home