http://www.slideshare.net/deirdrekent/sustainable-economics-without-fossil-fuels-21
This slideshare show is now updated and made clearer. It is the first time it has been published on this site and represents a lot of feedback from our members. If others have a method of reforming the tax and money system in a way that is politically possible and in a way that doesn’t shock the economy, we would love to know. Meanwhile this is a serious proposal. Feedback is welcomed.
What is your solution?
One of the questions we often get asked is why not do monetary reform first and then do other things later.
Positive Money NZ and its parent in UK have done wonderful work in teaching about the dysfunctional money system. There is no doubting that. They are reaching a wide range of people and describing what is wrong with the money system, how it leads to growing debt, wealth disparity and the growth imperative. We really recommend going to their website and seeing all the wonderful youtube videos and articles and links there. It is a great website.
But when we are in a political party we need to aim to get a thriving economy and that means jobs.
Untaxing labour and sales is like unblocking a currency river
And when we think of where the money flows and why it doesn’t flow into job creation if you fix the money system, we also need to think about the tax system. Our party says it is time to untax labour and sales and to tax land and its resources. When we do this, all sorts of miracles occur.
Imagine having a currency where completely new rules apply. When using this new currency there is no tax on labour, sales or enterprise. No income tax, no GST and no company tax when using this money. Wow! What happens? Well employers realise that workers get 100% of their salary so they have a happy workforce. But that is not the end. When the workers spend their money they won’t have to pay GST. This is that they have more purchasing power. Their wages are higher now in relation to the prices of goods. And that is what unions have been crying out for for ages.
So it is like having the river bed carved out for a new currency. The new money flows in the riverbed unimpeded by taxes. So it flows into productive investment and creates jobs.
We have proposed the slow introduction of a parallel national currency created by a new agency (the Treasury) which adheres to these rules. The slideshow for this is now at http://www.slideshare.net/deirdrekent/sustainable-economics-without-fossil-fuels-21
Of course having argued that it is important to treat the global economic system as a living system and that we need to intervene where the effect is greatest, and having argued that the global economy is what Cantabrians would call ‘mega-munted’ and that you need to start again, people still come back saying Couldn’t we just have monetary reform for a start.
Yes I know a lot of people just want us to do the monetary reform and do the rest later. But what happens? Yes money is spent into existence rather than lent into existence so it doesn’t bear a debt and it has no interest due either. All good. But where does it go? With GST and income tax and company tax, it will of course go into buying up yet more property and naturally occurring assets, putting pressure on the limited resource of land and raising its price. And as before, the wealth concentrates with land owners.
Q. I thought you wanted to close the gap between rich and poor?
A. Oh yes we will do that now, we will impose a land tax.
Q. Well how are you going to do that?
A. Well we will start at 0.5% land tax and lower income tax a little across the board at the same time. That way we won’t shock the economy.
Q. But I am still paying my rates and my mortgage. Why should I pay a third land tax?
A. Oh I don’t know.
And there is stops. If there is another way, please would someone tell us about it! In all the time we have had this initiative up and running, nobody has come out with an alternative solution other than by starting again with a second national currency differently designed.
If you can come up with a suggestion which is better than the dual currency, we would be pleased to hear from you.
So we have just seen the Ikaroa Rawhiti by-election win for Labour with Mana coming in second.
The successful candidate Meka Whaitiri has repeatedly said “Our people are hurting. The issues are poor housing, jobs and poverty” Labour has said people are moving from National to Labour because of the rising cost of living.
With currency reform and tax reform money will flow into activities that maintain and upgrade assets like houses
If the money system widens the gap between the rich and the poor then a party which ignores this or even understand this will do little to reduce wealth disparity. Explaining this: If money is created by banks as interest bearing debt, but the banks don’t also create the interest, then there will never be enough money in the system for everyone to pay back debt. So the losers have to go further into debt. This widens the gap.
If in addition the tax system causes wealth to concentrate with property owners and stops money going into investment in the productive sector then a party which ignores this will surely make little progress in alleviating poverty or bringing jobs for the rangatahi of Ikaroa Rawhiti electorate. Explaining this: If we tax labour, sales and enterprise with income taxes, GST and company tax, then the purchasing power of everyone declines. The cost of living rises relative to income. At the same time investment money goes into housing, because there is no tax on land and everyone is betting on rising land prices. A notable example was of an Auckland house which was recently sold by New Zealand Transport Agency for $220,000 above Rateable Value. The housing bubble in Auckland is a serious threat as the Reserve Bank constantly reminds us.
Because our party has looked to the root of the issues, and have proposed a well designed domestic-only currency linked to a completely new tax and welfare system, (see https://neweconomics.net.nz/index.php/2013/06/how-to-build-a-life-supporting-economic-system/), only our party can offer serious solutions to the growing wealth disparity and bring real jobs to the Ikaroa Rawhiti electorate.
In May 2013 the Government announced it had approved $1.5 billion over ten years on an upgrade of the computer system for our Inland Revenue Department (IRD). Apparently IRD’s 20-year-old computer system is stretched and is struggling with a patchwork of programmes like Working for Families and KiwiSaver so Cabinet has agreed to the money.
I was curious about this, as it seemed an enormous figure. So I looked up the Budget. Well, Government spending for 2012 was $82 billion. This makes the figure for this computer upgrade nearly 1.8% of one year’s total government spending.
A tax system unsuited to encourage work and trade will always be expensive to run
Economist Keith Rankin, a long time advocate of Universal Basic Income, summed up the situation in an article for NZ Herald May 20, 2013. He described the gradual growth of the IRD as it was required to deal with more Government schemes. He called the proposal an “IT behemoth”.
National Superannuation was introduced in 1976 and continues as a partial Universal Basic Income to all those over 65 because it is not means tested.
He says Family Support was introduced in 1986 (a means tested family support programme) Child Support in 1992, Student Loans in 1992. The Department of Social Welfare had a name change to Work and Income New Zealand (WINZ).
Rankin says “Child Support became an administratively complex compliance scheme for the IRD, in which levies were deducted from liable parents and payments made either to custodial parents or, as benefit recovery, to WINZ.
Student loan repayments became unnecessarily complex, despite the IRD’s role being quite straightforward, managing repayments as an additional income tax.”
Then in 2004 we had Working for Families. This is a package designed to help make it easier to work and raise a family. It pays extra money to many thousands of New Zealand families. Greater financial support is available for:
Working for Families Tax Credits are made up of four types of payments:
You may qualify for one or more , depending on your personal situation.
The Accommodation Supplement is available to more working families and many people without children. They can also get childcare assistance. It is an incredibly complex scheme.
Simplify the tax system by taxing land and resources and use of the commons. Don’t tax work or trade
Ever since that legislation it has become apparent that if parents are on benefits their children are penalised, as their parents don’t qualify for Working for Families. In 2012 the Children’s Commissioner’s Expert Advisory Group on Solutions to Child Poverty released a report showing that 270,000 children in New Zealand were living below the poverty line, and it all came to a head when the John Key National Government had to introduce a scheme to feed hungry children in schools in May 2013 after an series of television programmes highlighting the need.
The scale of the IRD upgrade shows just how impossibly complex our tax and welfare system has become.
The Inland Revenue has to deal now with income tax, company tax, GST, child support, student loans, Kiwisaver, Working for Families and Paid Parental Leave.
Our proposals (see https://neweconomics.net.nz/index.php/2013/06/how-to-build-a-life-supporting-economic-system/) to create a second national currency linked to a completely new tax system would avoid all this. There would be no income tax, GST or company tax on trades in the new currency. Because it is also linked to the distribution of a Citizens Dividend to all citizens including children and other dependents, there would be absolutely no need for extra means tested payouts like Child Support and Working for Families. And because work is untaxed it favours job rich investment. If the Worgl experiment of 1933 is anything to go on, unemployment drops dramatically fast.
For the new currency, IRD would only have to deal with ensuring that the full ground rent was paid and that resource taxes and sin taxes were paid at source. As jobs were created and Citizens Dividends were distributed, the need for social welfare would quickly decline. The need for Social Welfare would soon decline as people’s basic needs were being taken care of by the other currency.
Economist Susan St John says in a 64 page 2009 paper
Working for Families reduced child poverty among many of the employed poor, but entrenched the position of beneficiary families and introduced more complexity and discrimination into family assistance.
There is no clear way out of the welfare mess in the foreseeable future; only more complexity, less adequacy, increased child poverty and less ability to cope with recessionary influences in the labour market. (http://www.cpag.org.nz/assets/Backgrounders/Escaping%20the%20Welfare%20Mess.pdf)
If it takes 64 pages to explain and summarise the history of our complex welfare system, there is something really wrong. I don’t pretend to understand it all. What I do understand is that we need a tax and welfare system suitable for the 21st century. This must include a Universal Basic Income whose forerunner must be a series of Citizens Dividends and a tax system favourable to job creation rather than land speculation.
In an economy where everyone has sufficient and there are jobs for all there will be virtually no need for government support programmes. The Social Welfare budget for 2013 was $22.4 billion out of a total government spending of $82 billion. So Social Welfare was more than a quarter of government spending!
The patchwork solutions are now requiring $1.5 billion upgrade of the IRD computer systems and that must surely ring alarm bells.
How To Build A Life-Supporting Economic System
Earth is a Living System
Earth is a living ecosystem and necessarily the model for the human economic system. The words ecology and economy have the same Greek root ‘ekos’, meaning ‘home’ or ‘earth’, so our economy is a subset of our ecology. All life-based systems are unique home economies – Earth, nations, states, cities, towns, communities, families, and each living being. Each economy can only survive in balance within natural limits.
Every global crisis derives from an unbalanced economy:
We have a Deadly Economy
In an interest-bearing debt system of money creation:
A tax system which taxes labour, sales or enterprise discourages work discourages trade and discourages enterprise. It also greatly reduces people’s purchasing power (though there are cases for reducing this e.g. tobacco, alcohol, fossil fuel etc.). A tax system like this encourages property speculation, reduces productivity and concentrates wealth with landowners.
When we tax these three but fail to tax land, we invite taxpayers to use tax havens and do under-the-counter trades, resulting in lost government revenue. Land cannot be hidden offshore.
However, though it has been recommended for centuries, a land tax in the 21st century is a politician’s nightmare. Successive tax review by Inland Revenue, Treasury and universities have recommended land tax, but no government has implemented them. In fact there is actually a law prohibiting land tax in New Zealand, probably enacted to please the banks.
People already pay on their property two payments – rates and mortgage – so the possibility of government imposing a third burden is zero. In fact it is political suicide for any politician to recommend land tax, no matter how small. Yes, the banks have claimed land for themselves, as it is their best security on their loans. They vehemently oppose land tax and so governments have to be content with taxing a less secure asset – income taxes. Banks love lending on property because as the price of land rises, so does the size of their loan portfolio.
A means tested welfare system with an intrusive state and a ‘benefit trap’ is trapping our unemployed and dampening enthusiasm for working. It is also complicated and expensive to run and requires billions being spent on IT systems. The benefit system with its various income support schemes which favour the children of employed over the children of the unemployed like Working for Families is basically unfair. A Universal Basic Income has been recommended for centuries, starting when someone saw thieves hanging in the street and said it would be better to pay them a living wage. However there has been no progress.
All of the above – monetary reform, a Georgist tax reform and a Citizens Dividend – would if introduced suddenly shock the economy. All of the above have attracted loyal movements that have made virtually no progress over the centuries. It is important to reflect on the reasons for inaction. Each major reform would shock the economy.
We Need a Living Economy
A living economy will feature:
Transition To A Healthy Public Money System and to a Reformed Tax and Welfare system
First we need to explain why we are applying a broad-brush approach to reform, not doing it piece by piece.
When family therapists are presented with the problem of a difficult adolescent, it is important to treat the family as a whole system, rather than just look at the presenting problem, the adolescent. Tweak just one part of the system and the whole becomes healthier. You seem to solve all sorts of problems. But if you just try and fix one problem at a time, it won’t work. The original problem tends to persist. That is because the issues don’t exist in isolation and the relationships continue. You can’t divide up a system because you break the links and destroy the patterns. It is the same for any living system. The challenge is to intervene at the points where it is going to effect the greatest change. This is in the areas of goals of an economy and the fundamental paradigms which are taken as gospel. Those paradigms are the basic beliefs and ‘givens’ of a system.
In our case, we have an economic system showing a range of Big Problems. First we have the property bubbles in Auckland and Christchurch while the economy in the regions stagnates. Second we need to sort out the welfare mess by introducing a universal payment, the UBI. Third we need to get a tax system that taxes what we hold or take, not what we do or make. (Taxing labour and enterprise is counterproductive, while it is quite fair to tax those who take or use more than their share of the commons.) Fourthly we need to move from privately created interest-bearing money to publicly created interest-free money.
These big issues are all connected through banks, land and taxes. If there is quite a simple solution where, if you tweak one or two parts of the system and the other problems solve themselves naturally, then we should use it. This is the systems approach. You don’t tackle the intractable problems issue by issue; you look at the whole integrated system and choose your point of intervention that gives the greatest leverage. In that way the fundamental relationship between the elements of an economic system will remain intact.
You will notice we are suggesting the point of intervention that has the most leverage – the currency, tax and land. We have paid attention to what is important. Changing the paradigm from a currency monoculture to a currency ecosystem is going to bring big change. Changing the tax and welfare systems will also have a major effect.
Second we set up a small new system parallel to but very different from the old system.
This proposal will put in place the small beginnings of a new and healthier system to coexist with the earlier deadly system as the old system dies away.
So we are going to start a new currency with new rules. This will be the beginning of the new healthy economy. The old economy will die and a new one will be born. It’s a transformational change. In order to transform the tax system from taxing labour, sale and enterprise to only taxing land and the use of the commons, you need to link that new tax system to a completely new currency.
It can’t be done effectively otherwise. New life is full of health and vitality. Just as new growth in a forest after a fire appears slowly, so will this process be gradual.
Note that by setting up a fledgling parallel system we have not just fiddled round the edges. We have changed the whole paradigm. So we would expect major change.
Government issues a new currency called Tradeable Tax Credits. These are acceptable by Treasury for tax on a certain date. (The Reserve Bank is left out)
Using Tradeable Tax Credits, Treasury gradually buys up the land of homeowners who opt into the system voluntarily. Government doesn’t want to use New Zealand dollars – first because it hasn’t got enough of it and second because Government wants to link the vouchers to a new tax regime. The dated Tax Credits are to ensure that Treasury issues just the right amount so as not to cause inflation. The date by which it must be redeemed also serves as a circulation incentive.
Then Government makes the rules for these tradeable tax credits. They say trades in Tax Credits will not incur income tax, GST or company tax. IRD is not involved with them except insofar as it imposes “land rates” and resource taxes.
Full land rates would be set if possible by tender or auction and the lessee will pay it in perpetuity to Government, the revenue to be shared in some proportion between central and Local Government.
A Land Rates Index would be established for each general area and rates adjusted annually or biennially according to the rates index. Note the rates are not indexed to inflation. Rates vary very little unless there is an earthquake, subsidence or new infrastructure or a significant business arrives in the area or departs from it.
There would be no impediment preventing the Tradeable Tax Credits from being freely traded with NZ Dollars. Employers will want the Tax Credits and importers will want the New Zealand Dollars. The Tax Credits would be issued at par and redeemed at par. What happens in between will depend on the sentiment of the market.
From time to time Government will issue all men, women and children with a small Citizens Dividend in Tradeable Tax Credits to share some of the revenue with its citizens. This dividend would gradually grow as the area of land in the scheme grew.
Resource taxes are imposed on anyone with a monopoly on any part of the commons e.g. Oil, Coal, minerals, water, fisheries etc.
The homeowner who has opted into the scheme receives Tradeable Tax Credits to the value of their land and either puts it in the bank or uses it to pay labour for home improvements or for productive investment and always to pay taxes.
The bank lends out the new Tradeable Tax Credits to businesses to pay a portion of their labour and New Zealand materials. New jobs are created. As there will be no need to move to Auckland, labour intensive industries will attract young people back to regions, back to New Zealand. Organic farming and manufacturing will want them. At first some workers are paid only a small proportion of their wages in the new credits.
No rates will be payable on any property where the land is Government owned and full land rates are paid.
The land to be changed to publicly owned leasehold land would include: –
The circulation incentive
Dated Tradeable Tax Credits will circulate relatively fast. They will not pool for long in anyone’s bank account. People don’t want to find themselves in possession of them when the date arrives, so they trade with it, put it in the bank for the bank to lend out or else pay their land rates early. When a tax credit circulates smoothly without pooling anywhere, it nourishes everything in its path. A trade mutually benefits the buyer and the seller. Even if the Tax Credit goes out of the country there is an incentive for the holder to get it back to New Zealand before its maturity date.
The NZ Dollar and the Tradeable Tax Credit
These can be exchanged. A market will develop naturally. There are two opposite forces acting. The NZ dollar will be used for importing goods and for those who are travelling overseas. The Tax Credits will be particularly attractive to those who plan to use it to pay for labour because this currency is completely delinked from all disincentives to show initiative. The labour they buy will not be taxed, their employers business will not be taxed and the goods and services produced will not be taxed. The Tax Credits will always be worth one NZ Dollar when it is paid for taxes before the expiry date. It is rather like the NZ Postage stamps they sold us when the 70c stamp replaced the 40c stamp. One stamp will take the letter anywhere in the country.
The Tradeable Tax Credits would be digital only
Kiwibank has a “Loaded” card. It is a debit card with embedded chips for each currency. It is issued when a customer travels overseas. Perhaps the Tax Credit could be issued this way, with EFTPOS machines dealing with both types of currency. It is possible each new voucher could have a unique identity so that their circulation speed could be tracked.
Results
Transformational reform when carefully and gradually introduced has an exciting range of effects. This policy gives us low cost housing while gradually but fundamentally changing the tax structure. According to the Productivity Commission, the value of land is on average half of the total value of an urban property, but for Auckland it is 60%. Secondly it makes an important but gradual change in the money creation process. Thirdly it starts on an overdue reform of the welfare mess. Fourthly it gradually changes the way we fund local authorities.
While it releases much needed liquidity for new businesses it has to be implemented along with adequate controls on resource use through resource taxes e.g. carbon tax.
Wouldn’t people cheat the system?
History tells us that wherever money is involved people will try and find a way to cheat the system. Some suggest that people will exchange their Tax Credits for NZ dollars and go and buy another property and do it again. But these people haven’t planned to pay their ground rent and this is a large ongoing obligation. In fact wise people will not opt in unless they have a plan to use the new credits productively to create sufficient revenue flow to pay the rent. Most will pay their land rates in advance. Remember the Tax Credits are issued at par and redeemed at par. The sorts of things that happen in between will soon settle down as people learn the rules. The new law will have meaningful penalties for those who default on their obligations to pay land rates.
How much land rates?
A full ground rent or land rates for an urban or suburban property is ideally set by auction. However, rule of thumb indicates it is around five percent per annum or more depending on the zoning and other restrictions on the land. Location is important. The further away the property is from government services, the lower the rate. Certain land is however, already overvalued e.g. Auckland land and dairy land, so allowances for that would then have to be made. Other restrictions would include land with a QE2 covenant or land under historic buildings or land otherwise used for the public purpose.
The Citizens Dividend
Although this starts out being small, the first payout will attract a great deal of attention. When people realise these Tax Credits will pay for food and other essentials, they will begin to trust them. Their value relative to the standard currency will rise. As time goes by this dividend will be repeated and will increase, perhaps allowing, say working couples to opt to care for their own children rather than drive to jobs they don’t like. It might also enable inventors to spend more time inventing. Because the dividend of a dependent will go to the nominated carer, it will redress the economic balance of power between those who care for dependents and those who don’t. This raises the status of carers – usually women, raises the standard of care for children and reduces the social service burden on the state. Many carers will opt to spend their dividends on further education. There is also a long known fact that as the education of women rises so does the control over fertility.
Shouldn’t relief of mortgages be a first priority?
Yes. However in practicality those who opt in at the start will probably be those who are mortgage free because those with mortgages don’t want the hassle of going to their banks and having the bank refuse the Tax Credits. It would be easier in the case of New Zealand owned banks like Kiwibank, the Cooperative Bank, TSB and the SBS. However over 90% of New Zealanders’ mortgages are with the Australian owned banks and the banks might take the case to the World Trade Organisation or other authority to challenge it. So it is better to do the easy things first until the public is onside.
Is there a precedent for Step One?
Yes. These Tradeable Tax Credits are the same as the Treasury Notes that have been used before in history e.g. China 1912 when there was an uprising. Abraham Lincoln used the US Treasury to issue Greenbacks in 1865 and The UK Chancellor of the Exchequer Lloyd George, on the advice of John Maynard Keynes, issued Emergency Bradbury Treasury Notes in 1914 to pay for World War I. Lord Bradbury was the Secretary of the Treasury.
Bernard Lietaer and Stephen Belgin in their book New Money for a New World describe three periods of history in which there were dual currencies. First, Dynastic Egypt, where there was gold for long distance trade and also pottery chards that were receipts for corn taken to a store. The built-in circulation incentive was that when, after a year, farmers came back with ten chards, they were only given nine bags of corn. These pottery pieces circulated for sixteen centuries in a period of relative prosperity.
Secondly in the Central Middle Ages in Europe people used gold for long distance trade but silver coins for local trade. The local Lord or Duke, who owned the land and issued the coins, reminted the silver coins at irregular and unpredictable intervals. Though the periods between reminting varied from area to area, a lord might give out, for example, four coins for every five that were brought in. Reminting happened when the Lord died. This practice coincided with a massive period of cathedral building and the authors say the enthusiasm cannot only be explained in terms of religious devotion but in the currency system. Maintenance of water wheels, mills and wine presses was excellent. Ordinary people wore silver buckles. Nutrition was so good that the average height of a woman in London at that time was 1 cm higher than today.
Thirdly in Wørgl Austria in 1933 during the depth of the Depression, ‘work certificates’ were paid to council workers who could in turn have them accepted by the butcher, baker, etc because they were redeemable for tax. But each month the bearer of the note had to place a stamp on the note to validate it. During the 18 month period these work certificates circulated, unemployment declined dramatically, bridges were built, people paid their local tax early and visitors came from far and wide to witness the ‘Miracle of Worgl’.
Lietaer and Belgin claim that in each period there was prosperity across all classes and a huge building programme. They attribute this favourable economic outcome to the dual currency, and in each case the domestic currency had a built-in circulation incentive. The authors did not describe the tax system of each society, but to my knowledge there was no income tax, sales tax or company tax during this period. In the central Middle Ages tax was more likely to be a regular tithe to the lord or duke, possibly paid in produce. This is basically a land tax.
There is also a precedent in New Zealand history for Step Six, a Citizens Dividend. In 1951, after a particularly high wool cheque, the government gave out a five pounds dividend to all families.
Why can we see so many bad symptoms start to reverse?
If we observe the results of these small actions being set in place, it is truly astonishing. It is almost as though a fallen domino set has begun to rise, piece by piece. Some are totally disbelieving, because we are so used to thinking that only one result is possible.
This is quite a list of achievements.
Summary
The policy is powerful, elegant and simple. It creates jobs, provides cheaper housing and transforms interest-bearing money to government interest free money all simultaneously. And it does the whole thing gradually without shock to the economy.
More discussion needed
Among the issues to be fleshed out are: –
Deirdre Kent deirdre.kent@gmail.com 06 364 7779
021 728 852
New Economics Party
With acknowledgement to the late Dr Adrian Wrigley of Cambridge UK
Who would have thought New Zealand children go hungry?
With child poverty a major political embarrassment it is time to examine causes and propose solutions. Not only are there 146,000 people out of work in New Zealand but the working poor are really feeling the pinch. Many part-time workers want full time work.
So it isn’t any surprise that even the National Government has realised that it is important to make some effort to feed hungry school children. Schools are the perfect indicator of the state of household wellbeing in this country.
No measure proposed so far will get at the root cause. Nurses in schools won’t give families sufficient purchasing power to feed and clothe their children. Raising tax rates of those on high incomes won’t do it either. Nor will legislating for a minimum income.
The problem is there is not enough money to buy essentials
So let’s look at the family budget spelt out in the Dominion Post Sat 1 June.
The family was a real Porirua family with three school aged children. The income was two benefits plus accommodation supplement plus family tax credit, which brought in a total of $685.29. The itemised expenditure tallied $752.69, leaving a weekly shortfall of $67.40. There was no tobacco, alcohol or gambling listed in their expenses.
Expenditure was $180 for food, $300 for rent. There was also a weekly payment of $80 for a car loan, and presumably this was for both capital and interest repayment.
GST, income tax are reducing purchasing power.
Now let’s analyse the family’s expenditure in terms of taxes and interest. For decades we have lived with income tax and assumed it is fair and normal to tax income. Since Roger Douglas introduced it we have also taxed spending in the form of GST, now at 15%. I don’t know how long we have taxed enterprise but our company tax is projected to bring in $10 billion in the 2014 year. So income tax, GST and company tax now comprise over 79% of our Government revenue.
Yet we completely fail to tax the use of the commons for private purposes – “the commons” being defined as that which is given to us by Nature. Such resource rentals should include all private land and all commercial operations requiring the use of part of a natural resource e.g. aquifers, forests, fisheries. It includes minerals, oil, coal, gas, waveband spectrums and of course the 49% of Mighty River Power which is now in private hands and the proportion of any port or airport which has been sold off. The potential for gathering resource rent is significant.
This means taxing us for the use of residential land, valued by various reports at approximately $300 billion. Numerous tax reviews have recommended taxing land, but no government has adopted their recommendations, largely because the banks have sewn up all possible security on land. Since land will always be there (give or take an earthquake and a subsidence or two), banks want it as their security on their loans. And so government has to have the second best security – the labour of the people. Banks oppose any proposal to tax land.
98% of our money supply is created when banks issue loans. With most of the population blithely unaware, we allow private banks to create our money as interest bearing debt. When a farmer or a manufacturer has to borrow from a bank at interest, that interest is inevitably built into the cost of every item they sell.
Secondly when a bank creates a loan, it creates the principal but not the interest. So everyone has to compete to earn enough interest to pay the bank. Because there is never enough money in the system to pay back all the loans with interest at the same time, someone has to go back for further loans. The Porirua family is a case in point. If their budget remains the same, they will have to borrow $67 every week to keep afloat, and pay interest on that. Unless WINZ issues them with another loan, the loans sharks with their exhorbitant interest rates will be circling.
So where is this all coming through in prices? Well the landlord is paying interest on his or her mortgage and paying tax on income derived from rent, as well as GST on all landlord related expenses. If he or she buys a heat pump, carpet or curtains, GST is in the price. When the landlord employs a painter the wages have to be large enough to allow for income tax.
The Porirua family’s meagre food bill includes 15% GST. The electricity, petrol, vehicle maintenance, vehicle registration and clothing bills all contain GST. Each of these items also contain a labour input. The mechanic had to pay income tax so calculates the charge-out rate to allow for this. Each of the items listed also contains an interest input. For example, the clothing factory may have borrowed from a bank for capital and the selling price of clothes allows for the interest the firm has to pay the bank.
We are talking here about purchasing power. My granddaughter says she can easily live on $90 a week in Mexico because prices are low. It is wages relative to prices that is important for purchasing power. According to Matt McCarten (on Q&A 2 June), real wages in the last 20 years have gone down 30%. It doesn’t matter how cheap an item is if you have only a few cents to use as payment. Purchasing power is a better indicator of wellbeing than inflation
What this means is that until we change our tax system and return the money-creating privilege back to the people where it belongs we will continue to scratch our heads about hungry children and the growing number of people who can’t make ends meet no matter how hard they try. As you can see, both reforms will have to go together, because no government is going to tax land while the banks have this monopoly on land. While we live with the private creation of money, we won’t be able to tax land rather than labour, sales and enterprise.
I am not suggesting the sum of resource rentals should raise all government revenue required. We would still need excise taxes and a Financial Transaction Tax. It’s just that once we face the money issue we can then face the tax issue and liberate purchasing power of the nation so that all may have enough to feed their children while labour is encouraged and enterprise is unleashed.
I think it would be forty years ago that I first advocated strengthening the local economy and about twenty years ago I began to believe that a local currency and a local bank were necessary for this to happen. To help mainstreet we need local money
If you are like me and fraternise with people in the complementary currency and peak oil movements you will have been told the line: “When there is a crisis, whether it is financial or a civil defence crisis, you will need local currencies to help you survive.” You are exhorted to help build an alternative economy where you trade with each other, start your own savings circle so you can lend to each other without interest, use a locally owned bank or credit union and so on. So far, so good.
The theory is fine. Ignore the mainstream economy, get to know your neighbours and abracadabra you will be safe. Banks can collapse and they can have as many financial crises as they like but you will survive.
Some very good people have handed out this line of advice, and still do. I believed it and advocated it myself for years too. It is just that it is not enough and it’s not a really accurate story.
But if our economic system grinds to a halt, time banks and LETS systems won’t get us very far. They won’t buy us houses and they won’t provide investment capital for new sunrise businesses needed to produce jobs. They won’t clear up a welfare mess or stop wealth accumulating with landowners. They won’t stop investment banks from beguiling investors into buying fraudulent products. They won’t rebuild a hospital or even perhaps fix a washed-out road.
These actions are for national politicians.
Yes I do know that there are a wide variety of local currencies and national complementary currencies that can match unmet needs with excess resources. I wrote a book on the subject. At the time, I researched and described as many of these economic tools for self-sufficiency in the book as I could, and there are even more nowadays.
But it is critical to go further in this quest, because no matter how many local initiatives that can be taken, there is still the necessity for initiatives at national level.
So we need to scale up complementary currencies. At first I believed that if a local authority issued a local currency and accepted it for payment of rates, that would be as far as we could expect. It would do the job nicely. But others persuaded me New Zealand is a very small country those who have lived in Europe say our national really resembles a local currency. Besides, now that you are thinking about national politics you have to address the tax system. And what about the growing power of the banks? Where would you keep your money that was safe?
About two years ago, after I had worked assiduously for years to start a local Transition Town and start a local timebank, I had a Skype call from an Australian environmental economist that I once shared a platform with after my book came out. He told me he was extremely concerned about the global situation. I said I was happy with my Transition Town work and my timebank work. He then reminded me that even if we in our town had reached a remarkable degree of self-sustainability, even if we could feed ourselves and clothe ourselves and provide energy for our transport and warmth, what would happen if hungry people from the neighbouring town invaded us?
Oh, that made me think. So it wasn’t long before I had left the Transition Town and timebank colleagues to soldier on without me and had turned my attention to national politics, that I finally addressed some of the national issues.
OK so what if we scaled up complementary currencies and designed a second national currency differently from the one we have now? Yes, that is what I have been working on now for a couple of years and one of those efforts is on this site somewhere.
And I have also been working on the idea of linking that new national currency to a radical new tax and welfare system. Those long years in the local currency movement have completely convinced me of the idiocy of income tax and I already knew that sales tax like GST hurt the poor more than the rich. When you see the administrators of tiny LETS systems struggling to persuade Inland Revenue that their trades should be free of tax, but this is only allowed if a plumber in normal life doesn’t do plumbing for his LETS trading. That is ridiculous. Then I saw the unfair rulings of IRD when barter companies pleaded with them to show mercy. Their good small businesses just had to go under.
Basically the new system would grow in the undergrowth of the older unbalanced economic system producing all the misery of climate change, poverty, instability etc.
That is what I am working on now with other people who can see the vision. It won’t be long now before we come up with a clear proposal. It is a systems approach.