In our small community that we’ll now know as Aba, there is one lucky family that controls a permanent water resource and three unlucky families that don’t. As a result the lucky family’s wealth and pile of Abacoins is increasing at the expense of the others.

The three other Aba families started to think that this was unfair so they met and to decide what to do. One of the younger members of the family said that the solution was simple. All they needed to do was to gang up on the lucky Aba family, put them to the sword and take over the water resource. No, said the wise heads we need a solution that does not involve killing good people and human resources. Well let’s not kill them replied the youngsters we’ll enslave them. No, said the wise heads, that’s actually worse as we’ll need to feed them and manage them when they probably wont work hard.

At this point the youngster with the group’s major IT, the abacus, said “ let’s use the threat of killing or enslaving the lucky family to do a deal that benefits everyone. The deal would be that the lucky family had to share the water because the reality was that it was really a common resource and the lucky family just found where it came out of the ground. However, the lucky family would be paid abacoins by the other families when they used the water to compensate for the lucky family’s management of such a valuable community resource.” The elders thought that this vary wise coming from the youngster with the abacus and so everyone agreed that this was a good plan.

The youngster with the abacus didn’t think he was wise. He thought he was smart. As any extra payments or calculation of water usage would have to be done by the youngster using abacus technology allowing the charging of even more fees for the abacus services.

So it came to pass that all of the unlucky Aba families including children rocked up at the lucky Aba family’s farm and put the proposition to allow them to use the water resource in exchange for the payment of a small amount of abacoins. The lucky Aba family thought that it was outrageous that the other Aba families could just change effectively the ownership of the water as they were doing very nicely thank-you very much under the old rules. However, in the face of the vast majority being able to impose their will and the implied threats of death or slavery, they reluctantly agreed to the new arrangements.

Allowing access to the permanent water source to all families unsurprisingly benefited all families separately and collectively. All crops and livestock increased yields and allowed the families to do Research and Development on new agricultural products and its uses, increasing the standard of living for all families.

Whilst it was true that the previous lucky Aba family was paid abacoins for water usage this was kept in check by the majority of the Aba community setting the price but also due to the new and improved products produced by the other Aba families that were bought by abacoins from those families by the previously lucky Aba family.

Although they had now settled into a common golden age, some wise heads of the Aba community, in their Sunday discussions on life and the universe, could see a looming issue with the youngster that controlled the abacus. A solution and new rules were needed.

The taxation system and why Money circulation is vital.

The topic of taxation and the Money system is very controversial, with many misconceptions. Why citizens need to pay ‘their’ Money to the government is a noteworthy topic.

The topic is about the fundamentals of taxation and not the merits of any individual tax or tax rate. Some base questions arise on the topic, e.g. What is tax? What comes first, government spending Money or the government collecting tax Money to pay for the spending? And who actually owns the Money?

Now that we understand what Money is, Money creation and Money circulation, we are equipped to discuss Money as it relates to taxation. Tax is simply a levy that a government imposes on citizens. Citizens pay that levy to the government in the form of Money.

Our assumption is that all citizens agree that governments provide necessary services and infrastructure. Governments need Money to pay citizens for those services and infrastructure and repay debt. Whilst we may argue all day about what government services are necessary, there is no argument that some services are necessary.

Governments for millennia created Money by printing or borrowing. In a digital money world it’s easier and faster to create Money. Creating Money by printing even when digital, devalues existing money. It’s possible even responsibly for a government to digitally print Money to pay for its provision of services and that citizens pay by having the value of their Money decreased. However, that’s not the method chosen by governments of all persuasions to pay for services. Taxes or levies are the order of the day.

The government may represent the citizens, but the government can’t control the expenditure and ownership of all Money. The government needs the citizens to have control of their equitable portion of all Money created. This means we have a Money system where the citizens control most of the Money, which the government then taxes to pay for services the government must provide.

The government actually holds very little Money via deposits with Megabank. The government is a conduit through which some of the Money in the economy is collected and distributed. The exception would be if the government held Money in a fund such as a sovereign wealth fund or temporarily in the Central Bank.

 If a government is running a deficit, it creates Money as previously described and spends that money in the economy, i.e. on citizens. At this point the government has increased the Money balance to fund its deficit spending before taxation. The taxation to repay debt destroys Money and that reduces the economic activity that was previously increased by the government spending and creating Money. The cycle repeats year on year, resulting in the government never having a significant positive Money balance, as Money is either used to repay debt or spent in the economy on citizens.

Government’s income is taxation, so the way a government can reduce debt is through taxation, redistributing Money from citizens to the government. If a government does not tax enough Money to cover debt repayment and is committed to deficit spending, the debt will continue to rise, increasing the Money supply but decreasing its value. The government only needs to increase tax by the amount of Money it created by increasing debt, no more and no less. Therefore, the tax imposed is the government receiving Money back that the government created and distributed to citizens, thus giving with one hand and taking with the other.

In the real world, politics determine that the debt resulting from Money creation may stay outstanding for a very long time, as deciding who and when to tax to repay debt can be unpalatable for politicians and the uniformed citizens.

So conventional wisdom that states that a government taxes and collects Money to spend is incorrect and is the actual reverse of how the system works. Although it can feel like a very complex system, taxation is best viewed simply as citizens repaying Money to the government that was created by the government through printing or borrowing and spent in the economy. This simple explanation also supports a progressive taxation system where the rich don’t just pay more Money in tax but also at increased rates of taxation.

Conventional thinking on tax is wrong, which leads us to Rule 6:

Rule 6: Governments create Money by borrowing, then distribute the Money by spending, and then tax to repay the debt. Not the reverse, where the Money balance is taxed and then those tax receipts spent in the economy. Taxation that repays debt destroys Money created by the government.

We’ve all heard politicians and citizens refer to ‘our money’ or ‘their money’ when referring to their money balance in Megabank or their earnings. But is it theirs? It’s certainly an interesting question when discussing taxation where the common belief is that governments take ‘your’ money through taxation.

When a citizen holds fiat money or cash notes then I’m willing to concede that it is ‘their’ money. They own it. But as soon as Money is deposited in Megabank, who owns it? As we have previously discussed, Money in a bank is not the depositor’s Money. It’s a loan to a bank and that bank, within rules, does whatever it likes with that Money. As all Money is held in banks, then arguably all Money is actually owned by Megabank and not depositors.

However, that’s not the end of the story. Megabank is regulated by the government regulator APRA, and they have extraordinary powers if a bank does not have sufficient capital or liquid assets to back its risk. In addition, the government owned Central Bank provides considerable liquidity support through buying Megabank assets or borrowing Megabank Money in order keep the Money flow going in the right directions in the banking system. It’s not an unsupported argument that in a beneficial sense all Money is owned or controlled by the citizens collectively, through the government via the Central Bank.

So why is who owns the Money so important? We’ve discussed that citizens support the Money system through Megabank, by taking out loans and lending deposits. The system would not work if only say the top 1% of citizens (1%ers) provided support to the Money system. All citizens beneficially own all Money. It follows that all citizens should have a say in the Money created by Megabank and governments through debt, how its distributed and how and when it is repaid. Citizens elect governments that determine taxation policy which should be equitable, as all citizens equitably contribute to supporting the Money system. Equity should determine that those who benefit from Money creation should pay higher taxes than those that create increased beneficial economic activity by circulating most of their Money.

Most of the Money created and spent in the economy gravitates to a small minority of citizens (1%ers) through asset ownership concentration and Rent Seeking that is described in future chapters. The irony in this process is that when Money is spent on social services for most citizens it ultimately gravitates to the 1%ers that generally are opposed to such government expenditure.

The taxation and Money system put in place by successive governments ensures that there is always an inequitable distribution of Money and taxation. That is not equitable Taxation policy. So to Rule 7:

Rule 7: As all citizens essentially own all Money, they should determine taxation policy and that system should be equitable. If a taxpayer is paying a significant percentage of their income in tax, the system is working for them by continually creating Money that gravitates to their benefit. This benefit continues through increased spending of any new Money created in an inequitable distribution.