Prospects for fiscal action directed against the excessive concentration of income and assets in view of defending and generating common wealth.
This is an abstract summarizing and enlarging the main theses in the last chapter of Wohlstand und Armut, Metropolis, Septembre 2010 (Wealth and Poverty)
Main topics:
I) Principle of New Fiscalism, that is a strictly consumption-related form of taxation
II) What is new in New Fiscalism?
III) Structure of New Fiscalism, consisting of, first, a producer-consumption tax and, second, a direct and progressive final-consumer tax
IV) Tax evasion
V) Impact of New Fiscalism
VI) Objections to final-consumer tax
VII) Producer-consumption tax
I) Basic principles:
Instead of burdening those who increase general welfare by giving their work, talents etc., government will exclusively tax what is taken from the general public through industrial and individual consumption.
II) What is new in New Fiscalism?
Not, of course, the principle itself. This is so evidently true that it had already been advocated in mid-19th century by nobody less than John Stuart Mill. Quite new, however, is its practical applicability on the basis of technological means which had not been available up to quite recently, indeed they have become so only during the last twenty years. It is true, that consumption may be calculated – although in a very imperfect way – as the difference between income and savings. But doing so we would gain nothing in social justice as the very highest incomes remain stubbornly in the dark.
The technical breakthrough concerns on the one hand electronic reading devices for registering individual consumption and on the other hand a central computer located within the tax administration office. The central computer is not a Deus ex Machina, but simply a synonym for the whole of all automated transactions. For Germany with its population of 80 million people such routine operations assume gigantic dimensions. However, the central computer is but a mindless machine – as mindless as the operations that it replaces. It is therefore crucial, how this machine is planned and programmed in view of just taxation and general welfare.
Let me add that apart from this basic technical innovation the taxing of deferred consumption is a second main pillar of New Fiscalism. All personal savings that is all financial means not used in current consumption, shall be treated as deferred or postponed consumption. These savings are legitimate in so far as they fulfill the needs of later consumption (and investment related to later consumption), but they shall be considered illegitimate in so far as their only purpose is social prestige and power. Last but not least, the fact that taxation and social security may be handled by one and the some authority is tantamount to an extraordinary administrative simplification.
III) Structure of New Fiscalism, that is a producer-consumption tax and a direct final-consumer tax
There are no more than two kinds of taxes in a system of pure consumption taxation (which means that all other taxes: VAT (sales tax), income tax etc. are abolished):
1) a producer-consumption tax to be laid on all products needed and processed by producers. This tax is fully discussed in Wohlstand und Armut. It is chiefly, though not exclusively, aimed at serving ecological purposes, and, second:
2) a direct final-consumer tax on actual as well as on deferred consumption, which constitutes the very essence of New Fiscalism and represents its key innovation. I will confine myself here to the explanation of the final-consumer tax. For the sake of simplicity, I start from an economy where all payments are non-cash transactions (as of today, this is true for only 42% (in value terms) of all German purchases). Domestic payments therefore are made exclusively electronically. Cash money is only needed for payments abroad as foreign countries cannot, of course, be forced to adopt the new system.
Direct final-consumer tax on current consumption
Technical conditions
Each purchase by a final consumer (as mentioned before, I do not refer to purchases by companies since these are covered by the producer-consumption tax) proceeds by means of a debit+tax card similar to today’s debit or credit cards, except that the debited sum is not made known to the bank only but also to the tax authority’s central computer. The same happens if the purchase is carried through by way of bank transfer. The central taxation computer thus notes each individual purchase together with the identity number of the respective consumer. However, the tax authority (that is, the central computer) is normally not interested in or even barred by law from recording the specific nature of items acquired, only amounts paid are being recorded. Thus all particular amounts paid electronically either at home or abroad, are automatically transmitted to the central computer, which then automatically calculates the sum total for a given period of time (let’s say one week or one month). All trading premises like supermarkets etc. are equipped with reading appliances for credit and debit cards. These, however, are now endowed with an additional function since they forward all debited amounts to banks as well as to the central taxation computer.
Calculating the final consumer tax
As for the central tax authority itself, it need not consist of more than the central computer just mentioned (at least in so far as it only deals with levying and calculating the final-consumer tax). Let us now turn to how the computer deals with the incoming information. Supposed that the sum total of all purchases of an individual X within a certain period of time (for instance, a month) lies beneath the minimum living standard for that very period, the computer will not issue a tax bill. If, however, the sum in question amounts to the average consumption, the tax bill sent to the individual in question will then amount to an average tax bill. However, individual consumption beyond this average level will be progressively taxed so that – according to the steepness of progression – somebody who consumes ten times more than the average may well have to pay twenty times more in tax duties. Progression itself should be determined democratically.
While all consumption below a minimum will, thus, not be taxed at all, it becomes progressively more expensive as it exceeds the average. Beyond a certain level luxury consumption entails substantial sacrifices for the public benefit. This is exactly what the new tax wants to achieve.
Current consumption includes goods of daily use such as food, furniture, etc. as well as durable goods like washing machines, cars, etc., and, finally, imperishable goods such as real estate and land. In addition, there must be special arrangements for consumption when individuals are unemployed, in need of medical service or when they are old. Finally, consumers also differ as to their status as single individuals or as members of families. Such particulars do not affect the principle of final-consumer taxation, but they require special treatment (see Details I).
Direct final-consumer tax on deferred consumption (new property tax)
In view of its concept and its content „deferred consumption“ is a mainstay of New Fiscalism. It replaces the concept of saving. In economic science savings rightly occupy a dominant role, as they fulfill a dual function. They serve to protect the citizens and they are, at the same time, the source of public and private investment. What generally tends to be overlooked is the fact that apart from their positive function savings fulfill an additional role and a very negative one indeed: they are the main cause for the self-destruction of property-based (i.e. capitalist) societies (this is a major issue in my book Wealth and Poverty). For only in part do they serve the legitimate purpose of deferred consumption, their superior and dangerous second function is to enrich some individuals beyond all socially acceptable limits. Not consumption but personal prestige resulting in economic and political power is their real function. This power has made sovereign states more and more subservient to the concentrated might of private international creditors. But personal prestige and power have their legitimate field exclusively within the framework of democratic institutions (parliaments, trade unions, companies). They are totally unacceptable outside them and, indeed, neither justified by economic science nor by political theory. In our days they are nevertheless the main reason for an ever-increasing concentration of wealth in a limited number of hands. This accumulation of wealth regularly endangers and eventually destroys the internal balance of capitalist society. If property-based society wants to dispel the specter of self-destruction, it will only tolerate and encourage savings so far as they represent deferred consumption. Taxation must therefore be redesigned in view of preventing savings which merely serve the purpose of personal power.
As a matter of principle, deferred consumption is handled in the same way as its counterpart, current consumption. Citizens deposit parts of their income on a bank account or they acquire stocks or bonds in order to secure their well-being in times of old age, disease or emergencies. Such individual provision is in the public interest and should therefore be encouraged by government. It is the base for investments in the productive sector, as it provides the necessary financial means in the form of loans or equity.
Parts of the population will, however, not be able to make any savings. In this case there is no deferred consumption and consequently no tax. The latter begins at the point where personal savings go beyond a maximum limit for postponed consumption and only serve as a means for economic, political and social power. Cf. (http://www.gerojenner.com/portal/gerojenner.com/Kreativitaet_wird_bestraft.html
What does this mean when it comes to the practical application of the tax on deferred consumption? Let us consider the case of a chief executive who at the same time is the company owner. As long as he manages the company, he fulfills a legitimate function however big the company and its assets. Should he transfer the latter to another managing hand, the tax authority should not intervene as it would only prey on social achievement (creativity). But whenever the director sells his company, there is an immediate and dramatic change in his relationship to the latter and its assets. These do no longer serve the common welfare as they did when they were managed for the purpose of the company and its employees. Their only purpose is now to enrich a specific individual who offers no services in return. He acquires wealth as an illegitimate instrument of personal power. The amount at his personal disposal should be strictly limited to the requirements of postponed consumption as everybody should take provisions for disease, old age, unemployment etc.
The state should be generous when allowing for such provisions. In addition to personally used property (real estate and vehicle) which at a minimum level will not be taxed at all but beyond that level will be subject to progressive taxation, the tax authority could fix the maximum consumption for single persons at 200 000 Euro per year extending over a maximum period of ten years. This would correspond to the average life expectancy of retirees. In other words: Luxurious consumption has by no means been clipped by the state. This only applies to all savings beyond that level, that is savings as a means of illegitimate personal prestige and power. The maximum personal wealth is then limited to about two million Euro.
Progressive tax on deferred consumption is a property tax which prevents the accumulation of personal wealth beyond a socially acceptable maximum. It is the direct outcome of a basic insight: Legitimate and socially valuable savings should serve the purpose of deferred consumption but not the purpose of providing a source of unearned income and thus widening gap between the rich and the poor. The concentration of wealth in the hands of the few – this scourge of property-based society throughout its recorded history – will no longer be possible. However, savings for the purpose of investment will be available in even greater quantity, as savings are now distributed more evenly throughout the population. They will even be subsidized by government for those with very low income.
A further advantage should not be overlooked. The two progressions on actual and on deferred consumption can be adjusted separately so as to stimulate or inhibit the propensity to save rather than to consume. In this way, the total amount of saving can be fine-tuned by the government so as to match overall investment needs.
Let me add, that deferred consumption is technically as easily controlled by the central computer as when people actually consume. Provided that all domestic payments be made electronically, deposits to bank accounts or the purchase of shares, etc. will be recorded without exception.
Taxing deferred consumption is the prelude to a most welcome change. The economy receives a boost, as all productive forces are now free from taxation apart from those on limited resources. At the same time we use the best medicine against unemployment ever invented. As for the state, the new tax on actual and postponed consumption gives it a Chance to substantially reduce his debt. Don’t forget that – to mention but one example – German debt (sovereign as well as entrepreneurial) amounts to six trillion Euro or three times the German GDP. Approximately half of the credit side of this debt (3 trillion Euro) is held by the upper 10% of Germans and German sovereign debt alone adds up to 80% of GDP, that is about 2 trillion Euro. It should be remembered that overall debt can only be reduced by diminishing overall credit. Compare: Eigentum – ein Irrtum im deutschen Grundgesetz? (http://www.gerojenner.com/portal/gerojenner.com/Eigentum.html).
For more specific rules pertaining to deferred consumption see Details II and Details III.
The central tax office and the welfare bureau become one and the same
In the old tax system, the state is perfectly informed about the financial situation of most of its citizens as the income of all employed persons are known to him up to the last penny. Only the top ten percent enjoy the privilege of disguising or even completely concealing income and assets. The new system could well put an end to this injustice by letting government be informed about all deposits as well as other property. Although the tax office would gain no insight into the source of income, that is where and how these were acquired, there would then be no hidden accounts. To a large degree this state of affairs is already true nowadays. To prevent money laundering, accounts are no longer tolerated if their owners cannot be determined.
Granting the central computer insight into all accounts would represent a very simple solution but by no means a necessary one. Alternatively, the same effect may be achieved if only commercial banks exercise their legitimate access to personal accounts, that is, if the present state of things remains unchanged. A disclosure of all private accounts to the tax authority and thus to the government would hardly be politically feasible and not even desirable. In the following, I shall, however, present the simple solution, because it is easier to describe and to understand. I will, for instance, say that the central computer will cause a welfare payment to some person because it knows that his or her current account has fallen below a certain critical level. In actual fact the commercial bank would inform the tax authority about that fact so that the tax authority can take the appropriate steps (see Details III).
Government may then provide effective assistance during unemployment, need and in emergency situations. Indeed, a basic administrative simplification will be possible for taxation and social support are now managed by a single authority. In principle, they may be performed by a single computer and – this is what really counts – in a much fairer and more comprehensive way than today.
Unemployment, indigence, emergency situations – basic welfare provisions are now part of the system is installed
Let’s see how this is achieved in a relatively simple way. The very moment when a consumer can no longer consume because his account is empty (a fact immediately known to the central computer both as a result of failing consumption and of an empty current account), the debit+tax card will automatically be unlocked by the central computer so that the person in question may make his purchases up to the standard level. At the same time the central computer transfers the necessary public money on his account.
However, this state of affairs will not be maintained indefinitely. It lasts for a certain time, that is as long as the person in question is in need of help or at most up to a year or two, in order to compensate for unemployment or any other sudden loss of income. Equivalent to the amount that government thus provides to persons in need, it charges long-term savings. If such savings are not available, future tax on average consumption will be raised so that the means forwarded by the public will be refunded within a certain number of years. No one is, therefore, induced to rely on help by the general public except in cases of genuine need. It is no longer possible that someone holds bank accounts or stock packages, but still resorts to the help of the public.
In the new system no clear-cut difference will be made between support in case of unemployment and basic welfare payments. Both conform to the average consumption level. But things are different if the central computer notes that the person in question never made any provisions for old age. In this case it may be reasonably suspected that this person speculated from the beginning on help. This would give him an undue advantage with regard to all those who do care for themselves by regular savings. A socially minded government of any rich society would, of course, even in this case provide the living minimum but only the living minimum. Standard consumption would be reduced to this level after one or two years. But there should be further provisions in order to discourage socially parasitic behavior. These provisions may, for instance, consist in the following steps. The central computer switches the debit+tax card in such a way that it allows free purchases only for specific outlets like public kitchens and shops for used and cheap goods, as they exist today in almost every city.
I am well aware that all restrictions concerning the poorest in our society elicit most negative emotional resistance from the part of philanthropists. If you want to be popular you better take the side of Götz Werner who preaches a guaranteed minimum income for all and everybody regardless of needs. But then you have to accept the consequences. Millionaires who opt for these gifts will leave the expenses to others (mainly to the middle class). For their part they will not only remain unscathed but even benefit as income tax will be removed. This is a way to help millionaires not the poor.
On the other hand, it must be acknowledged that parasitism – life at the expense of others – is found both on the top and the bottom of society. If we want to prevent further concentration of wealth on the top, we must be prepared to prevent parasitic behavior on the bottom as well. In view of the real stigma of involuntary poverty in the countries of the South, the solution proposed here as a remedy against social misuse is of a rather harmless type.
IV) Tax evasion
Given the technical conditions in the new system, tax evasion by simply buying abroad is no longer an attractive alternative. For all payments abroad either proceed by way of the aforementioned debit+tax cards and then conform to the same rules as mentioned before, or they are made in cash because foreign countries cannot be forced to accept electronic payment. Now, since all domestic payments are made electronically, cash must be obtained at the frontier or in any domestic bank. There the required amounts are handed to the recipient with a request to state the approximate number of days for which he needs the money. This information is forwarded to the central computer together with the customers identity number (as obtained from the debit+tax card). The central computer then calculates the consumption tax to be paid for that time and automatically subtracts it from the person’s bank account. If the latter does not hold the required sum, the required cash amount will not be delivered. This is a rather simple device meant to prevent capital flight.
It should further be noted that purchases made abroad will hardly offer any advantage. Since taxes on labor (income tax) and mixed taxes like VAT have been abolished, domestic products will be much cheaper than those of other countries – at least until these themselves introduce the new system. Consumption of domestic goods is thereby significantly promoted (but only insofar as it does not get into conflict with ecological objectives as pursued by the producer-consumption tax).
Special rules do, of course, apply to cash as needed for the purpose of industrial investment in foreign countries. This is a topic to be dealt with under “producer-consumption”.
V) The impact of New Fiscalism
1) Once capitalist societies have exhausted their potential of initial growth, they tend to get into a state of saturation, after which social justice and political stability are increasingly threatened. In Armut und Reichtum (Wealth and Poverty) I tried to show why such a development regularly tarnished the image of capitalist (property-based) societies throughout their long history. While in their initial stages they tend to establish a state of relative social justice, in later development they are regularly transformed into societies where the divide between rich and poor gets constantly deeper until political stability itself is at risk. The real purpose of New Fiscalism is, therefore, to identify and establish an alternative to this pre-programmed decline. The point is to ensure social justice and political stability within a system that still maintains the dynamics of property-based society (as I prefer to call capitalism).
2) The goal of social justice cannot be reached without a guaranteed basic income. But that must be properly designed or else it produces more harm than benefits. The basic income as here proposed and described, is based on the principle of social justice. All members of society contribute in accordance with their financial strength. However, basic income can take quite different shapes.
The Roman Empire still serves as an example of how things should not be done. An immensely rich layer at the top of society, consisting of only a few economically and politically dominant families, distributed alms (panes and circenses) among the jobless masses in order to buy itself out of any further obligations. The concentration of wealth – the real cause for the regular occurrence of self-destruction in otherwise successful capitalism – could proceed unhampered as it went hand in hand with deliberate appeasement. As we know, this finally led to the dissolution of the Empire in the fifth century. Indeed, the Roman masses got their guaranteed basic income but this was surely not a democratic gift but a poison administered by a plutocracy of overwhelming economic as well as political power.
This brings us back to the special version of basic income advocated by Mr. Götz Werner. Considering the fact that employees of his companies would be paid only the difference between their regular income and the guaranteed basic income – allowing Mr. Werner to substantially reduce his costs -, considering furthermore that he gets free of the progressive income tax – a substantial burden for men in his income bracket – you are certainly not very far off the mark if you suspect him of simply designing a stratagem for the protection of wealthy capitalists. For when Mr. Werner advocates consumption tax as a means for paying for his generous gifts, he wrongly identifies the latter with the current VAT (Value-added-tax). This, however, is by no means a true tax on consumption (since it takes the volume of sales or entrepreneurial achievement as its measuring rod). Furthermore, VAT is a socially very unjust instrument as it treats rich and poor in the same manner. The poor will become even poorer, the rich get still richer. Putting Mr. Werner’s proposals into actual practice, would indeed free the top five percent actually in possession of 40% of national wealth in the German Federal Republic from all obligations. They would make no contribution at all to the guaranteed basic income. Instead, they would get rid of what still remains of their progressive income taxation. The burden would be shouldered by others, most of all by the middle class.
Just like in imperial Rome this would not lead to a democratic but to a plutocratic basic income with the psychological goal of appeasing the otherwise revolting masses. Let us be realistic, the fact that a German party, widely known as serving the interests of the better-off, is gradually warming up to Werner’s ideas, may serve as a warning that these men understand their true intent and consequences much better than some blue-eyed enthusiasts from the Left.
3) In an epoch of dwindling resources and impending wars fought for them, ecological control by means of taxation becomes an imperative. Such control is primarily achieved by producer-consumption tax which directly concerns the consumption of ecologically important goods. But additionally it is brought about by final-consumer tax as well since excessive individual consumption of ecologically sensitive goods is discouraged by progressive taxation.
4) Up to now government chiefly charged those who by their knowledge and skills not only attend to their private interests but contribute to the general welfare. This is unreasonable and can only be justified on historical terms. However, it is immediately evident that government acts in a reasonable way when it taxes what people take from the available sum of goods and services, that is when the government taxes consumption. Consumption tax rewards knowledge, skills and work, but through progressive taxation it erects protective barriers against an excessive demand that would unduly diminish the legitimate claims of all other members of society.
5) On the basis of the new tax system here advocated, fiscal intervention by government becomes extremely simple thus offering a striking contrast to the current system, which lacks total transparency even to the professional eye. In addition to income, corporation and value added tax Germany relies on about thirty other kinds of taxes, not to speak of hundreds of exemptions and special provisions. Furthermore, the current taxation system is socially so unfair as to risk popular revolt unless government invents hundreds of transfer payments or other means in order to compensate for the many distortions produced by unjust taxation. These remedial actions in turn contribute to the overall complexity of the system.
A great advantage of the new taxation system is that government may totally abstain from prying into the income of private individuals. The calculation of final-consumer tax and the issue of assessments by the central computer is of such simplicity as to be carried out in a fully automatized manner. Thus, the government’s tax department gets rid of a huge and costly apparatus. Financial officers will only be required for the calculation of producer-consumption tax, but in relatively modest numbers. Tax consultants whose primary task is to reduce the tax charges of the privileged, will hardly be needed.
6) Enterprises now pay no other taxes than the producer-consumption tax (mainly on environmentally scarce or dangerous goods) while all other taxes in current use like payroll tax, corporate tax, VAT, etc. are completely abolished. In other words, personal achievement as expressed in income and work is free from all taxation. This means that production becomes substantially cheaper. And this advantage is by no means totally compensated by the tax burden now transferred to consumption. The two systems are by no means equivalent because it is now the majority which mainly profits from cheaper production. We may, indeed, expect the level of average consumption to be conspicuously raised. We may confidently say that the introduction of pure consumption taxes operates in the same way as a very efficient economic stimulus package.
7) On the one hand, demand is now substantially increased, so companies feel encouraged to create and offer lots of new jobs, on the other hand, all those administrative obstacles which up to that moment blocked such action, are now removed. The calculation of payroll, corporate and other taxes which swallowed up so much time and caused so much cost within each company, has no more place under the new regime.
8) The reduction of costs within each company makes labor and its products so much cheaper that this gives domestic export a large winning margin in foreign markets. However, this is only true so long as foreign countries do not switch to the same system. If they do, this too can only be beneficial as it is through the new system that further concentration of wealth can be prevented on an international scale.
9) Government now is in control of current as well as of deferred consumption which it may stimulate or dampen by adjusting tax progression. And it may do so separately for each of the two, which means that the volume of savings and the volume of investment may now be fine-tuned according to economic situations and needs. If, for example, a higher burden is placed on current consumption while, at the same time, the tax on deferred consumption is diminished, the result will be a higher saving rate so that there is more money available for investment. As there can now be no drifting of money into the financial sector – we have seen that all such movements are recorded under the title of deferred consumption – we need not worry about evasion.
10) Another substantial advantage of New Fiscalism concerns the scrapping of what is called the shadow economy. Undeclared work can no longer be offered at a better price. As work is no longer taxed, there is no advantage in working outside companies. Of course, there need be no law prohibiting that any individual offer his or her work to any other person. This is quite legitimate so long as he or she does so under adequate insurance so as to protect potential customers from poor or dangerous performance. But insurance will, of course, be more expensive for single providers than for regular employees as a company vouches for the quality of its workers. Under the new system working outside companies makes no sense to the individuals concerned.
11) New Fiscalism substantially increases the total tax volume of government though at first glance it may seem that the new and the old system are strictly symmetrical. Leaving VAT for the time being apart, we get a progressive taxation of consumption while previously we had a progressive taxation of work (income). As a result the income of workers and entrepreneurs will immediately shoot up or – with incomes being unchanged – product prices will be much lower because they are now free from the burden of income tax and social security deductions.
Let us now consider VAT as part of the picture. In the new system it will no longer be added to product prices. Together with the previous reduction the total rebate on prices will, therefore, amount to approximately one-third. By the same amount we must, of course, now tax consumption, that is producer plus final-consumer consumption, for only then will public revenue remain the same as before.
The impression of equivalence is, however, misleading. What we actually do is much more than just shifting a burden that was previously placed on work (income), to the opposite end of consumption. For we must not forget that companies as well as government now incur substantially lower costs. While individual companies remain untroubled by an expensive calculation of taxes (together with tax avoidance), government can do without all those thousands of tax offices which it presently has to maintain even in distant provincial towns. The new system does away with all these expenditures. Tax collection is automatic and virtually free.
However, government and society do not only save a lot of money, government for its part even adds substantially more tax money to its purse than before. In the old system it had suffered substantial tax evasion from the wealthiest as well as the lower segments of population. The former successfully managed to escape from its obligations to the community, while the latter had created a second or informal economy for just the same purpose. In both cases, the loss in public revenue amounted to billions of dollars. In the new system both leaks are closed. It is socially even-handed with regard to both the lower and the upper spheres of society.
12) New Fiscalism directly acts against speculation. The acquisition of gold or other commodities (including basic food products such as wheat, rice, soybeans, etc.) is treated like final consumption and therefore taxed progressively. Of course, this only applies to commodities bought by final-consumers. Companies when using these products, only pay the producer-consumption tax. In this way, economically harmful speculation (as opposed to its economically useful counterpart which consists in the storage of goods for emergencies, etc.) should gradually become a thing of the past.
13) The new system efficiently prevents further concentration of wealth in a few hands. After its introduction, the final consumer tax on deferred consumption makes all excessive accumulation of money or interest-bearing property like shares, bank accounts, rental houses, etc. all but impossible.
Income can only be used in three alternative ways: it either serves the purpose of current or of deferred consumption, or it may be parked on a checking account. Above a certain limit of actual consumption – a limit to be democratically defined – progressive taxation becomes so expensive as to become an efficient deterrent against waste. Someone consuming about a hundred times more than the standard level finds himself burdened with a tax that will exceed the amount of consumption itself. Excessive consumption is just compressed just so far as we want to compress it without thereby jeopardizing the psychological drive for achievement.
As for deferred consumption, all products offered by banks or stock markets to the end consumer are treated in exactly the same manner as other products, i.e. the central computer of the Tax Authority is automatically informed about the amount of each purchase, together with the buyer’s identity number. In the case of deferred consumption the payable tax amount can, of course, only reach the upper limit of 100%. All further incremental growth of savings (or assets) is then channeled from the individual to the community. This happens when such savings or assets reach a certain multiple of what is considered the tax-free standard level of savings. For in this case savings do not longer contribute to the socially relevant purpose of serving the needs of retirement, disease, emergencies and unemployment. The more they exceed the standard, the less they serve their legitimate goal. Instead they are meant to procure personal income without personal achievement.
In other words, the central computer raises no taxes on such savings as roughly correspond to the current amount of compulsory social security, health and unemployment provision. He rather compensates with negative tax those whose incomes are too small to provide for such savings. However, he progressively charges all savings beyond the tax-free average and even raises taxes to 100% as soon as they attain a certain multiple of average savings.
For the third alternative of parking one’s money on a checking account see Details II. Because of appropriate „parking fees“ parking (or hoarding) in order to evade progressive taxation, represents no viable option.
14) New fiscalism is a socially acceptable and relatively harmless way out of debt. In fact, it is nothing less than a recipe for overcoming the debt crisis. This aspect results from the handling of existing savings. Up to now I only dealt with actions relating to income and wealth after the introduction of pure consumption tax. They effectively prevent a further concentration of wealth, but they do not change unequal distribution in so far as it already exists. How do we deal with the latter?
The answer is evident for all wealth transformed into actual consumption. It then becomes subject to progressive taxation, which is all the steeper the more consumption is removed from the standard. In so far, however, as existing assets remain savings, they will at some time be transformed into more profitable or simply different types of assets. At that very moment the central Tax Authority will be automatically informed. Those savings which largely exceed a certain maximum multiple of standard savings, will be substantially reduced. That is the excess will be channeled from the individual to the community.
However, such reduction of accumulated assets should proceed in a socially acceptable way so as not to provoke a revolt of the rich and the super-rich. Explosive social unrest will, of course, harm them in a much more substantial way. Therefore, they will be ready to make sacrifices. But these should be distributed over a number of years. As a general rule, the procedure should be as follows. The greater the multiple of maximum savings (after which all increments are taxed 100%), the higher the property tax should be in the first year. It could, for instance, amount to 25% of all saving assets (production assets in actual use by their proprietor do, of course, not pertain to this category!) if these savings exceed the multiple a thousand times. In the following year the tax on the remaining sum would reduced to 20%, in the third to 15%, etc. until this process finally ends with the upper limit after which all increases are taxed 100%. In this way personal enrichment for the sole purpose of accumulating economic and political power is made impossible.
Social revolt and revolution is more dangerous to the established order and to its elites than such a gradual reduction of savings. Once it becomes common knowledge that personal savings exceeding the upper limit for deferred luxury consumption, represent a frightening social evil, the elites themselves will agree to such action.
The new system should, however, be introduced with caution so as not reduce existing assets too quickly. This can be done in such a way that taxation instead of reducing assets from one year to the next, proceeds in larger five-year-steps during a transitional period of 20 to 30 years. Such an approach is preferable because it can not be in the interest of the general public to victimize the wealthy and thus to take the risk of their refusing all cooperation. Certainly nobody can be blamed for his wealth as long as the latter has not been acquired illegally. It only testifies for its owner’s ability to make an optimal use of opportunities offered under the present system. By no rationale would wanton expropriation be justified. A progressive tax on deferred consumption owes its justification exclusively to our knowledge that all property-based societies tend to self-destruction if they do not succeed in peacefully averting a more and more dangerous concentration of wealth.
However we may proceed, we will get a very important result. The mass of savings exceeding the maximum multiple is enormous. Within two decades national debt all over Europe could be almost entirely eradicated. For savings in the hands of the upper ten percent are equal to the debt burden of the lower 90 percent. Indeed, they are nothing else than its logical counterpart. The alternative to this painless method of reducing government debt – painless because nobody suffers any serious harm when he is deprived of assets which represent a multiple of the highest luxury consumption – is nothing else than inflation. And this is really dangerous. It always pulls a whole community into the abyss – not only the poorest, but also the elites themselves.
Nevertheless, I expect this proposal to be the most controversial of the whole reform. But no alternative is at hand. In order to drag the countries of Europe out of the quagmire of their debts, creditors must be willing to make substantial sacrifices. Whoever wants to reduce debt, must be willing to do away with oversized savings for these correspond exactly to private plus public indebtedness.
15) The advantage of a gradual change from the old to the new system should not be treated light-handed. Both, the producer and the final consumption taxes, can be introduced smoothly while, at the same time, current taxes are reduced in the same step by step way. Thus abrupt transitions can be avoided and the impact of the new system at each stage carefully monitored.
At a first step, the final element of current VAT chain – in Germany it raises consumer prices by about 20% – could be replaced by progressive final-consumer tax in such a way that total government revenues remain unchanged. In a second step deferred consumption would be subjected to progressive taxation. Subsequently, the previous stages of VAT chain would be replaced by the producer-consumption tax, again in such a way as to maintain government revenues at exactly the same level. Only then income taxes will be gradually reduced while consumption taxes (that is, producer-consumption tax as well as final-consumer tax) are increased accordingly.
16) Up to now all social reforms in response to an excessive concentration of wealth have led to large-scale expropriations which were called proscriptions in ancient Rome, while we speak of revolutions in modern times. Sometimes wars or economic crises like the one in 1929 had an identical effect. The tax reform here proposed encourages and even stimulates cooperation by the elite. This advantage is by no means negligible. For present-day elites have again all reason to fear popular unrest or even revolt against their privileges. New Fiscalism does not directly endanger acquired property and assets, in the short run it only prevents further concentration of wealth. Only in the long run does it gradually diminish acquired wealth for the simple reason that, at some point of time, it inevitably gives rise to consumption. The owners of great property or other assets thus do not lose face – and they should not – as most of them are not guilty of any crime but only used the rules and opportunities of the present system better than others did. This offers the perspective of a peaceful transition from the old to the new system which I consider to be a point of particular importance since up to now property-based society never found other solutions to the age-old problem of excessive wealth accumulation than civil and other wars together with a lot more calamities (further material on this topic in my book Wohlstand und Armut).
VI) Objections
1) Germans are not prepared to give up cash, the transition to a system of exclusively non-cash payments is, therefore, an unrealistic option.
I consider this objection to be unfounded. In actual practice, the choice between cash and cashless payments is determined only by utilitarian considerations. If electronic payments turn out to be more convenient or even more profitable for consumers and companies, they will easily and without hesitation convert to such a system. As for government, it may offer incentives as to stimulate or prevent the transition. If it reduces consumption taxes by a certain amount provided they are paid electronically, the transition will be immediate.
All cash payments above the level of a few Euros will anyway proceed in the previously described manner, that is, the customer pays by means of his debit+tax card. Paying cash now becomes more costly for all parties concerned as the consumer has no right to a rebate by the tax authority while the recipient (for instance the cashier in a super-market) must enter the amount in question manually into the keyboard of the card reader. For the customer himself this makes no sense because every citizen must anyway produce his debit+tax card containing his identity number.
Once payment is 90 to 95 percent electronic, government will make electronic payment obligatory for all domestic money transactions. This is a necessary step because there is all reason to fear that the remaining 5 to 10 percent cash transactions predominantly serve the purpose of tax evasion.
2) This point leads to the further objection that the new system too will not be immune to tax evasion. Certainly. Whoever ventures a claim to the contrary, would grossly underestimate human intelligence. In the second edition of Wohlstand und Armut I will deal with some of these opportunities and how to fight them successfully. But the main point is of a different kind. It concerns the question whether the new system is apt to achieve greater social justice and whether tax evasion will be made more difficult. On both questions our answer is quite unambiguous.
3) New Fiscalism, so it was argued, transforms citizens into what amounts to the like of transparent consumers. If this were true, we would have to fight against quite a formidable and, for that matter, quite legitimate objection as democratic man fears nothing so much as intrusions into his or her private life. Every single shopping now reported to the central computer. Is this not tantamount to total surveillance?
I hold this objection to be irrelevant for several reasons. First of all because real and indeed highly dangerous snooping is at present a fact of everyday life. Private buying behavior of almost every consumer is spied out ruthlessly for private purposes. This is done primarily via the Internet, but also by supermarkets and companies using discount cards so that the nature of all things bought can be easily ascertained together with the identity of the customer. This information is not only used for private advertising purposes. In all developed countries, the collected knowledge of the transparent consumer is being sold to other institutions for whatever purposes it may serve.
By contrast, the central computer calculating the tax amount according to the final consumption of a specific consumer, does so on the basis of information that in 95 percent of all daily purchases consists of mere numbers, namely the numerical amount of each purchase or sums of such. Thus, in most cases, only the extent of consumption is known to the central computer not its material nature. Indeed, the tax authority acquires no more knowledge of its citizens than it already possesses at present. Nowadays most of the population is wholly transparent as to its income.
4) A strictly consumption-related tax system will have the undesirable effect of letting the final consumer tax go skyrocketing to unbearable heights. This criticism was invoked against me by the German tax expert Lorenz Jarass. „Did you figure out the tax rates for your model? Would be interesting. Thank you.“ Although the objection was already referred to under V) Impact of New Fiscalism, item 10, I want to add a further remark.
Let’s compare a system A characterized by progressive taxation of work (income) plus taxation of property (mineral oil and other commodities) with an alternative system B characterized by progressive final consumer tax and equal taxation of property. It should be evident that both can be made totally equivalent in terms of total tax revenue. So in this respect there is no advantage or shortcoming on either side.
On the other hand, it is certainly true that you get rather elevated taxes for the final consumer unless the focus of taxation be shifted on the taxation of property, that is on commodities. In the new system a substantial part of public duties should, therefore, be placed on raw materials and material assets processed by producers. This requirement dovetails with the demand of all those who voice their protest against the environmental impact of the current tax system. We must get away from taxation of work (income) to that of scarce goods!
We should, however, be aware of confusing the final-consumer tax with current VAT. This is a hybrid tax, charging both the end consumer (but in a socially harmful way, because it specifically hurts the lowest income strata) and companies, which it treats in a uniform way regardless of their efficiency. Furthermore, VAT is bereft of any ecological value. This tax as most of other current taxes owes its origin purely to expediency, namely the fact that prior to the emergence of electronic payment governments found it near to impossible to tax single consumers in a socially acceptable way, while it was quite easy to turn to companies for that purpose.
VII) Producer consumption tax
On this tax see my remarks in Wohlstand und Armut.