Do we need taxes with a fiat currency?

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Riggerjack
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Re: Do we need taxes with a fiat currency?

Post by Riggerjack »

@ JCD

You keep finding ways your theoretical model could be adjusted to compensate for some specific circumstance.

That's not at all what I am talking about.

I am asking you to include a further level of complexity to your simple model. For every adjustment the state makes, individuals will change their behavior.

I don't care WHY Venezuela had the high inflation and whether that is applicable to why you think that inflation would be different in your system. My point is to look at the actions at the individuals reacting to that environment.

An economy is not a set of directives issued from above. An economy is an aggregation of the actions of individuals as seen from above. The map is not the territory.

Money is just a tool. Change the tool, and behavior changes. Change the tool until it becomes impractical to use, people will simply use other tools.

There is an entire history of experimenting that has been done in this arena. This idea was abandoned 130 years ago. Do you think it just wasn't appealing enough to a new state to try? Because we have had quite a few new states in that time, and they have been very experimental in all other aspects of governance.

Or do you think there might be an entire catalog of reasons it fails? Because MMT keeps cropping up in internet forums, and nowhere else, like flat earthers.

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

@Riggerjack
I don't care WHY Venezuela had the high inflation and whether that is applicable to why you think that inflation would be different in your system. My point is to look at the actions at the individuals reacting to that environment.
I attempted to do a deep dive into how the various actors behaved up to the point that I could gather data, but I also looked at the "How they got where they got." I think you will end up concluding I focused too much on the 'why', but I submit to you that this is the limits of the data I could find and I think the why cannot be ignored. Context matters.
"A decline in oil prices of 20 percent or more could be absorbed from official international reserves, which at $25.2 billion are enough to pay off almost all of Venezuela's foreign debt.", 2007 report https://cepr.net/documents/publications ... 007_07.pdf
"However, revenues increased even more, from 17.4 to 30 percent of GDP over the same period, leaving the central government with a balanced budget for 2006. For 2007, the government has once again budgeted very conservatively for oil at $29 per barrel, 52 percent under the average $60.20 dollars per barrel that Venezuelan crude sold for last year. However, what the government generally does as oil revenue far exceeds the budgeted price, is to spend beyond budgeted expenditures. Thus, while a fall in oil prices will not cause a budgetary crisis, it could lead to reduced government spending from current levels. " - 2007 report
"The Chávez government has greatly increased social spending, including spending on health care, subsidized food, and education. The state oil company alone was responsible for $13.3 billion (7.3 percent of GDP) of social spending last year... In 1998 there were 1,628 primary care physicians for a population of 23.4 million. Today, there are 19,571 for a population of 27 million." - 2007 report
 "I found that extraordinary transfers, mostly associated with unprofitable public enterprises, and not central government deficits, account for the increase in financing needs in the recent decades. The inflation tax has been a consistent source of financing needs, especially in the last 10 years, with increases in debt ratios being particularly important in some periods. Interestingly, debt exposure has increased in periods of oil-price booms." - 2018 report (stats go to 2016), https://www.economics.utoronto.ca/diego ... _paper.pdf
"In different degrees, that boom was enjoyed by almost everyone. Poverty had been reduced because a portion of the oil revenue and loans were used to fund a wide variety of social assistance programs. These social programs made the regime more popular and enabled it to advance on its populist agenda." - https://www.csis.org/analysis/venezuela ... -14-charts
"Venezuelans sell gold and silver chains, bracelets, earrings — including pieces that have belonged to their families for decades or generations — so they can walk out the door of the pawnshop with enough money simply to eat, at least for a while.... Some customers even make visits to the pawnshop a regular thing, selling their gold chains in chunks, one small piece at a time, to manage a monthly income for food and basic economic needs, he said." - Late 2018, https://www.miamiherald.com/news/nation ... 99935.html
It seems that there is a good case for that in that GDP fell and inflation grew right around the time of the gov't takeover of the oil pipelines in the 70s.  GDP did grow just as productivity of their nationalized oil production improved in the 00s, showing how tied to oil they are.  This happened right after a general strike in ~2003.  I don't know if those things are related, although I did look a bit for evidence that it was so.

Interestingly it appears it is inefficient socialization of resources that appears to be a smoking gun for hyperinflation and not "typical", consumption debt in this case.  In fact, rising debt really seems to have started in 2007 or 2008, right around our financial crisis, which is also when the government bought out a bunch of private organizations.  The debt to GDP ratio is not insane, never reaching 100%, but being sanctioned by the US also hurt.  Basically, it appears that the administration decided to pull people out of poverty, particularly by importing goods rather than diversifying industries. At the same time lots of "transfers" occurred, where the government was giving money to non-government, but gov't owned entities (at least that is as best I can tell, I only spent a few days looking at this).  Several happiness surveys in 2005, 2012 and 2014 put Venezuela near or in first place.  I have had a hard time finding the underlying data around that, so I have no methodology or underlying data, my citations are only from wiki and nationmaster. Another point worth considering is that the first big jump in protests, which from the data I could find started in 2009, when oil went down in value. While this implies the 2014 happiness survey might be junk, it also implies that loss of gov't confidence and income are linked, not inflation. If your income goes up 20% and inflation goes up 20%, no problems (except for savers) but if your income goes up 0% and inflation goes up 20% there a problem. Since 2009, the price they were getting for oil stabilized, but the amount of oil being sold has gone to nearly nothing.

I didn't come across data that suggests individuals investors were investing in things like gold, in fact the only item of note is that industrial production was on a very slow decline and retails sales were mostly up sans US recessions and their current hyperinflation crisis.  So people were working in retail, kind of like the US with the service economy.  This appears fine but the ability to import was based upon the value of the oil reserves and when that went away, so did the money.  Given that the US also has hollowed out its production capacity, I hesitate to generically "blame" inflation for this, since it appears many things can cause folks to abandon manufacturing.  You might blame inflation in that no other sector could outperform oil in returns and so oil-based inflation/growth caused other sectors to not be worth investing in.

However, even without evidence of investing, I think I can point at the lack of evidence as evidence they didn't invest.  One reason I think that is a safe claim is the massive effort to flee Venezuela right now.  If the population had lots of hard currency, the investors and importers would be trading with the populace directly. Instead, they had a few gold rings or chains, which kept them going in hyperinflation long enough for them to decide this was not going away before they decided to leave. I just don't see massive changes in behavior due to the 15+ years of high inflation (not the hyperinflation period), except perhaps by those external actors.  The external investors want to see a "hard" asset to back their investments and refused to give loans to a failing state.  Instead I see corruption, stupidity, resource curse and a lack of planning for oil being down for 5+ years as the "why" aspect of the hyperinflation. The lack of the populaces having large personal safety nets and their lack of ability to rebel in a meaningful way, to enact change, is why they are leaving. The hyperinflation is clearly part of it, but the elections are basically rigged makes it hard to judge what a free populace would do or for that matter what a free populace would do with high inflation in general (if those who protest go to jail for 10-20 years, meaningful reform ain't gonna happen).

So I guess to summarize, the gov't made many assets public, buying them up, expanded debt and spent everything they had.  Oil prices are cyclical but they didn't defend themselves against the down side, particularly post 2008.  The people didn't or couldn't defend themselves from these risks either.  With no industry, low oil values, debt and scarcity increasing, it eventually created hyperinflation.  I simply don't see how this compares to my description and application of 0% taxes to stable countries, like the US. Using the behaviors of Venezuelans for predicting a US-like country's population responses seems less than useful unless we assume removing taxes in a fiat currency behaves the same in all conditions (i.e. poverty stricken dictatorships has no impact on this form of economy). I do agree it might be one nice example case, it certainly shows that high inflation with overspending, sanctions to prevent debt restructuring, no real growth and declining revenue can certainly be a deadly combination, regardless of taxes. That high inflation by itself is not a doom and it might be relatively stable.

Perhaps your point is the government was tempted to print money and just let inflation happen, long term consequences be damned.  That somehow high taxes would halt a government from doing that?  I don't see the linkage or force that would cause that (and they did have taxes as I noted previously).  I do admit a conservative government (in the fiscal sense) would have preference for a "balanced budget" and that might keep spending down.  However, as quoted above, it appears in 2006 they had a balanced budget.  I do admit that there is less clear "sensors" of cost of government via an inflation model.  Like how a war using foreign bought or mercenary soldiers on long term debt might make a populace less unhappy than a war using "local boys" and locally funded bonds, inflation might be sneakier and less clear than taxes.  That might be a big issue , but it seems people get use to higher inflation, with no big impact some measures of happiness for the little people during the good times. Maybe that is the point you are trying to make, it might make us inattentive to government spending. Then again, debt clocks have been running for decades without serious impact.  Perhaps your argument is that inflation causes the smart people to leave and those who happily stayed did so because times were good, thus the economy was run by fools and eventually they collectively paid.  I think that narrative could just possibly be valid, but it is hard to prove, much less casually and I'd need a heck of a lot more evidence before I reached such a conclusion.

If you have a different narrative or a more mature model of Venezuela than I have presented, I'm all ears. Days of research did not make me an expert, I just found it interesting and happened to have the time to spend on it. Inflation is fascinating to me. I know I have gathered a lot of qualitative and quantitative data, so feel free to take your time and examine it. If you have other sources with different conclusions, I'm not tied to this narrative I wrote out.

Here are some additional additional citations that I found useful, although I read more than just this:

https://www.nationmaster.com/country-in ... Very-happy
https://en.wikipedia.org/wiki/World_Hap ... #Criticism
https://tradingeconomics.com/venezuela/ ... production
https://www.youtube.com/watch?v=KPdvYW4iwjc
https://www.youtube.com/watch?v=mL8d91vdR9g
https://en.wikipedia.org/wiki/Venezuela ... of_2002–03
https://www.theguardian.com/world/2018/ ... havez-rise
https://en.wikipedia.org/wiki/Economic_ ... alizations
https://en.wikipedia.org/wiki/2018_Vene ... l_election
https://en.wikipedia.org/wiki/Venezuela ... 4–present)
https://www.e-ir.info/2014/05/12/oil-an ... venezuela/

Riggerjack
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Re: Do we need taxes with a fiat currency?

Post by Riggerjack »

Read the investment threads. At low inflation, savers are loathe to not be invested in something, as they know at an intuitive level cash has a negative return.

But at a low inflation rate, many in the Gen pop are fine holding cash, usually as a bit of balance for their load of debt, but cash is not the asset of fools in the eyes of the public.

How does this change with a high inflation rate?

How does that change play out?

What are the ripple effects?

I choose Venezuela, because news stories used to be about common people's reactions to an unstable currency and economy. People buying multiple big screen TV's, because the TV's would devalue less than the cash in the time frame they had to work with. Barter was more efficient than saving and spending later.

How does that fit in your model? How is that an improvement in any way?

I am taxed at federal, state and local levels. Do they all get printing rights, or do my local and state taxes go up at the rate of federal spending?

There's nothing wrong with MMT as a thought experiment. But it's completely unworkable. It's a monetary perpetual motion machine.

nomadscientist
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Re: Do we need taxes with a fiat currency?

Post by nomadscientist »

JCD wrote:
Thu Feb 20, 2020 2:33 pm
That is to say, I want to explore this topic purely from a money theory basis and not an economic or political basis.  For example, I get those with the most dollars today have the most to lose from a switch in systems.  But from a monetary perspective, why wouldn't this system work? I want to know if the idea is sound, not viable.
It would work, and I think there is no particular reason why it is not done purely from a money theory perspective.

Inflation has side effects, it isn't a pure transfer, but the same is true of other taxes.

Probably the main reason this is not done is to preserve the belief that we have independent individual/household units that trade with the state, rather than a state-owned economy in which the state chooses to delegate some management duties to individuals/households. Which is a political basis.

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

neidagafan wrote:
Fri May 07, 2021 3:40 pm
I think it depends on of the total amount.
How would it matter? If you inflate by 1%, 20%, 40% or 60%, how is it different than if you tax by 1%, 20%, 40% of 60%? As noted before, it isn't exactly 1-to-1 due to inflation devaluing not just the existing currency but the new currency as well, but conceptually your argument seems to be purely political rather than economic. In the political sphere I agree these two methods are different and probably vary on the amount. However, that was purposefully excluded from the question and thus not relevant in my mind.

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Jean
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Re: Do we need taxes with a fiat currency?

Post by Jean »

You'de have to ban every other currency, but people would still use them instead of dollar. This would put the inflation much higher than thé aimed 20%

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

Jean wrote:
Sun May 09, 2021 2:14 am
You'de have to ban every other currency, but people would still use them instead of dollar. This would put the inflation much higher than thé aimed 20%
That is an interesting point, that folks would try to bypass the currency to use another. What that makes me wonder is, why not do that now? Why not use some non-local currency to bypass, say, sales taxes or income taxes? I'm not paid in USD, I'm paid in "barter buxs" a standard that grants me x time of other workers effort, thus it doesn't convert back into USD either. Yes, I know barter is taxable... but we'll just say barter buxs can be converted to 1 cent per hour or some other lawyer based hog wash. Or I'm paid in company store coins with no USD basis. There have been and still are certain ways around the current system, but most people don't bother. The problem with both these methods is once they get popular enough, the gov't will regulate it just like it regulates bitcoin after it became bigger. Even if you can lawyer around it, the gov't will just change the law to stop it. I submit the same thing is true with your currency bypass idea.

The obvious fix is to just require a massive sales tax if you buy or sell anything in any other currency besides our inflation-based money. Also tax any change in currency to keep people from avoiding inflation that way. Maybe have a 'wealth tax' on long term holding of non-productive assets over x amount. This will mean a hand full of people a year will deal with currency taxes and they mostly will work like sales taxes, unless you ask for more than y amount of currency. Saying "non-productive assets" also points out the alpha strategy, but that is just like storing wealth in copper rather than EUR. I'm sure on the margins it is done today, but most people are not going to pay for massive storage to protect their assets unless they are extremely wealthy. For this problem, I think it falls under the category of "ethical manipulation" I suggested in my first post. This is where some small amount of tax law may need to exist to pressure the players to play the game "right." You might tax unproductive wealth over x amount. Think of a law like "Companies and individuals may not stock more than 5 years of supplies for instance lest they see a 90% tax on all 5 years of supplies." Sure 5 years is a lot, but for a billionaire, 5 years is a drop in the bucket. That sort of thing would keep hording to a relative limit. A law that simple, with enforcement, judged by a jury of your peers would probably be enough to stop that sort of fraud.

I realize this does imply there is need for some level of taxes around fiat, but really these taxes are about efforts to avoid using the fiat the natural way it exists in my theoretical universe. I agree bad actors exist and will try to bypass any system, so some rules need to exist, but basically these taxes are to prevent abuse of this system rather than our current system of print money and then demand some of it back via taxes. Am I missing something else in your idea?

Qazwer
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Re: Do we need taxes with a fiat currency?

Post by Qazwer »

US dollars and the federal government is a lot better than barter bucs for the average worker with limited negotiation power. Company towns infamously paid in corporate script that could only be redeeemed in the company store (with inflated prices) and company housing. People talking about the rise of Neofeudalism often do not realize that the US has a long history of simmilar stuff.
I will take US dollars and inflation and a stable banking system over any of these ‘new’ plans.
A strong federal government is protection against local tyrants. The federal government is a negotiation among its constitute at. It can raise money through taxes, seigniorage or sales of service. As this post brings up, in some ways, these processes depending on the structure of the populous’ choices yield similar results.

Mister Imperceptible
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Re: Do we need taxes with a fiat currency?

Post by Mister Imperceptible »

At this time I am looking to go places like Texas to ask the local tyrants for protection from the federal tyrants. I would gladly work for Texas bucks (TXB) and exchange them for goods and services and I bet the Texas tyrants would have it in their interests for the TXB to hold their purchasing power better than the USD.

Campitor
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Re: Do we need taxes with a fiat currency?

Post by Campitor »

JCD wrote:
Wed Feb 26, 2020 1:06 pm
It would seem to me that Venezuela's oil cursed, planned, invest in only one resource caused the failure.
Venezuela nationalized the oil industry. Rife with cash that it didn't have before, Venezuela started making all sorts of promises to its population with this oil money. When you nationalize a powerful private industry like oil, it sends shockwaves out to the remaining privately owned businesses. Many businesses predicted their industries would come next and sold their ventures and moved abroad where private ownership is respected. Then oil prices hit the floor. As revenues decreased and brain drain occurred, Venezuela couldn't no longer meet all its obligations. The rest is history.

Venezuela was blessed with the largest oil reserve in the world but that wasn't enough to protect it. They could have increased oil production to compensate for the drop in price but you can't increase production without trained workers.

If the US divorced itself from taxes and just printed money, the incentive to over promise would probably overwhelm any financial prudence that's remains in Washington. Runaway inflation would be very likely. Plus every special interest group would suddenly put demands on this "free" money. Reparations? Just print it. Infrastructure upgrades? Just print it! Invade another country and occupy it for decades? Just print it!!!!

Divorcing the economy from taxes completely would probably be the worst thing that could happen in US history short of thermonuclear war.

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