Cactus offers a reader's new tax system:

In a nutshell, here is my idea:

1. All taxes are removed - income tax, sales tax, company tax... everything.
2. The government creates the money it needs via seigniorage (printing money).
3. The Central bank then controls inflation by increasing the Reserve requirement of bank deposits (on M2 and maybe M3).



Cactus muses:


1. Government spending in 2006 was over 20% of GDP. Can that be funded simply by printing money? And if not, can government spending could be shrunk enough for it to be funded entirely this way?
2. Fiddling with the money multiplier does affect the money supply (and hence, inflation), but its small potatoes relative to open market operations (the Fed buying and selling bonds). Will it be enough?
3. Banks make their money by loaning out money. One Salient Oversight's plan wouldn't necessarily create funds out of thin air - some of those funds would come from reduced profits that the current system creates (out of thin air) for the banks. Will the banks agree to it? And if not, can they be forced into it? After all, banks are powerful enough, politically, to get bail outs when they do incredibly stupid things?
4. As much as they say they're for tax simplification, I just don't see the big accounting and tax law firms agreeing to something like this, and they're pretty powerful entities too.



Let's say money supply needs to grow an average of 3% a year, and we can tolerate inflation of 3% a year. That implies, I think, a limit to economically tolerable seignorage of 6% a year. Above that, the Fed will have to start raising reserve requirements to tamp down credit creation. The problem is, reserve requirements have a hard upper limit of 100%, since you will probably find few banks willing to get into the business of holding more money than people will deposit with them. The practical limit on reserve requirement increases is, of course, well below this; long before you hit 100%, the credit system would basically shut down. Need I point out that capital accumulation and distribution to investments in future productivity is one of the main reasons that we have this awesome modern economy?

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