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Edition 01: 15 November, 2010.

Edition 02 : 08 August, 2011.

Revised and updated version 03 : 11 August, 2011.

Edition 05 : 09 February, 2013.

 

(VERSION EN FRANÇAIS PAS DISPONIBLE)

 

Information on monetary reform :

 

NEW Capital is debt.

 

NEW Comments on the IMF (Benes and Kumhof) paper “The Chicago Plan Revisited”.

 

DNA of the debt-based economy.

General summary of all papers published.(Revised edition).

How to create stable financial systems in four complementary steps. (Revised edition).

How to introduce an e-money financed virtual minimum wage system in New Zealand. (Revised edition) .

How to introduce a guaranteed minimum income in New Zealand. (Revised edition).

Interest-bearing debt system and its economic impacts. (Revised edition).

Manifesto of 95 principles of the debt-based economy.

The Manning plan for permanent debt reduction in the national economy.

Missing links between growth, saving, deposits and GDP.

Savings Myth. (Revised edition).

Unified text of the manifesto of the debt-based economy.

Using a foreign transactions surcharge (FTS) to manage the exchange rate.

 

 

(The following items have not been revised. They show the historic development of the work. )

 

Financial system mechanics explained for the first time. “The Ripple Starts Here.”

Short summary of the paper The Ripple Starts Here.

Financial system mechanics: Power-point presentation. 

 

 

Creative Commons License

 

This work is licensed under a Creative Commons Attribution-Non-commercial Share-Alike 3.0 Licence.

 

 

HOW TO INTRODUCE A GUARANTEED MINIMUM INCOME IN NEW ZEALAND.

 

By Lowell Manning: manning@kapiti.co.nz   Date 08 August, 2011,  PAPER 3. Revision A.

 

Sustento Institute, Christchurch.

 

"The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers..... The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government's greatest creative opportunity. …….The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. …….. Money will cease to be the master and become the servant of humanity."

 

[US President Abraham Lincoln, Senate document 23, Page 91, 1865.]

 

“Financial markets have worked hard to create a system that enforces their views: with free and open capital markets, a small country can be flooded with funds one moment, only to be charged high interest rates - or cut off completely - soon thereafter. In such circumstances, small countries seemingly have no choice: financial markets' diktat on austerity, lest they be punished by withdrawal of financing”.

 

[Joseph E. Stiglitz “Taming Finance in an Age of Austerity” Published by Project Syndicate, Monday July 12, 2010]

 

Key Words: current account deficit, debt, debt model, debt growth, deposit interest, domestic debt, domestic credit, equity in society, exponential debt growth, Financial Transactions Surcharge, Financial Transactions Tax, Fisher equation, foreign debt, FTS, FTT, GMI, guaranteed minimum income, inflation, revised Fisher Equation, savings, structural debt growth, systemic debt growth, systemic inflation, unearned income, UBI, universal basic income.

 

ACKNOWLEDGEMENTS.

 

The author gratefully acknowledges the support of Raf Manji and the Sustento Institute  for  their encouragement and advice; and to Terry Manning and the NGO Bakens Verzet  whose editing and constructive critique have been crucial as the paper has evolved over time.

 

CONTENTS:

 

01. EXECUTIVE SUMMARY.                                                                        

 

02. THE ECONOMIC DILEMMA.                                                                 

 

03. THE GUARANTEED MINIMUM INCOME GMI PLAN.                                                                                                            

 

04. THE GMI PLAN DETAILS.                                                                                   

 

05. CONCLUSION.                                                                                           

 

06. APPENDIX 1 :THEORETICAL BACKGROUND.                                 

 

07. APPENDIX 2: THEORETICAL SUPPORT FOR THE PROPOSAL.              

                                                                                       

08. APPENDIX 3  CALCULATIONS FOR TABLE 4.                                 

 

09. BIBLIOGRAPHY.                                                                                       

 

01. EXECUTIVE SUMMARY.

 

The main dilemma faced by today’s economic policy makers is that the price-based financial system they have been using has run out of room to manoeuvre. It is no longer possible either to substantially increase interest rates to combat inflation or to reduce them to stimulate “economic growth”.

 

This paper offers a practical plan to resolve the world’s problem of exponential debt growth and to control inflation. The plans are based on a revision of the well-known Fisher Equation of exchange enabling it to take account of interest-bearing debt. They are designed to ensure that no low or middle  income group in the community is worse off than it is now.

 

The plan involves introducing a guaranteed minimum income (GMI) for each person in the country to replace the existing welfare system. The GMI can be funded on an income-positive basis by phasing out existing welfare transfer payments, by realigning existing tax thresholds and by introducing a wealth tax of 1% of all net assets.  This paper shows that a fair result is produced using a flat tax of 41.5% on all earned income.

 

GMI income is itself tax-free. For most people, the income tax they pay on their total income will be less than it is now. A flat tax of greater than 41.5% would tend to weight the GMI too much in favour of families with children and those on low incomes. The proposed wealth tax transfers funds from the investment sector to the productive sector as is already done in France and Switzerland.

 

The GMI also involves the injection of new electronic cash or E-notes to stimulate economic growth. The new electronic currency will be created debt-free by the Central Bank. To reduce the possibility of future inflation some of the E-note injection will be distributed in the form of grants to businesses. In this paper a figure of 20% has been used arbitrarily for the capital grant. 

 

The electronic currency injection will have to continue indefinitely because it is built into the GMI structure. Once full employment is reached the growth stimulus might have to be sterilised through savings programs to avoid demand-pull inflation, such as, in New Zealand the Kiwisaver scheme.

 

The modest debt-free injection of purchasing power using E-notes will increase the demand for labour, providing strong economic growth. The labour supply will be provided from existing spare unemployed capacity and from new labour resources made available by the removal of existing benefit-related work constraints.  Prices should not change because increases in production costs tend to be avoided. The plan is expansive because firms can increase their production in the normal way subject to human and physical resource limitations and consumption demand.

 

A supplementary reserve ratio will need to be introduced to the banking system over and above the existing Basel III capital adequacy requirements. It will need to be large enough to sterilise the new E-note deposits in the banking system, and also to support progressive lowering of the OCR (Official Cash Rate).   The banking system will apply quantity controls on debt and money instead of using price controls through interest rates as it does now.  As the OCR is reduced towards zero percent, the existing systemic inflation in the economy caused by the payment of unearned income in the form of interest on bank deposits will in turn drop towards zero.

 

Since the plan can be made practically inflation free it will not measurably increase the cost of exports but it does propose to introduce a variable Foreign Transfer Surcharge or FTS starting at 10%. This would allow the New Zealand dollar exchange rate to be safely lowered, the current account to be brought back into balance and the foreign ownership of the nation’s productive assets (its so-called “foreign debt”) to be repaid over time.

 

On the basis of the preliminary debt model calculations for New Zealand (Manning, 2009) a significant credit crunch developed through the March year 2009-2010.  The productive sector debt Mcd  in the debt model appears to have fallen below the aggregate pool of unearned income Ms. In the debt system this can only be corrected by increasing the total amount of the productive debt Mcd, that is, by injecting new debt (Mcd), or by injecting E-notes (electronic cash) into the economy.  In the absence of a significant economic stimulus New Zealand’s economy risks entering a “deflationary” spiral masked by business collapse and the contraction of government spending.

 

Until now, prices P in the revised Fisher equation (Manning, 2009) have been maintained at the expense of output Q, as firms have sought to maintain or improve profits by cost cutting and shedding labour. Some firms may soon have to begin reducing prices P to maintain output Q at functional levels and still clear their market 01. 

 

The plan offered in this paper provides an incentive for those receiving only their GMI to engage in economically productive activity.  It is also deliberately skewed in favour of families with children and those on low incomes.

 

The plan offers a practical and stable route toward on-going debt reduction with a very low level of inflation in the economy

 

01  The change in the speed of circulation Vy of the circulating debt My in the revised Fisher equation referred to is primarily structural. Vy tends to decline as the payments change. Except for secondary effects related to changes in interest rates, circulating debt My must expand in the debt system if the economy is to grow. 

 

 

02. THE ECONOMIC DILEMMA.

 

The body of work supporting this paper confirms that a revised Fisher Equation of Exchange 02 and the Fisher Theory of Interest  (Fisher 1930) are sufficient to explain why debt is expanding exponentially throughout the world and why orthodox economics has failed to prevent unsustainable debt growth resulting in boom and bust economic cycles interspersed with downturns and recessions. The main difference between the revised Fisher Equation presented, which incorporates the impact of interest-bearing bank debt, and orthodox economics is that while the revised Fisher Equation is based on managing the quantity of debt, orthodox economics is focused on the price of debt. 

 

Both approaches eventually require the quantity of debt to be regulated. The revised Fisher Equation shows that when the price of debt, expressed as the average interest rate paid on bank deposits, is used as a regulator, an exponentially growing pool of unearned income is created. That pool of unearned income has to be funded by inflation in the productive sector because unearned income, by definition, produces nothing itself. As long as that pool of unearned income was relatively small compared with economic output expressed as Gross Domestic Product GDP the interest cost could be funded from increased productivity and economic growth.  The result was an ongoing shift in wealth from the productive sector to the investment sector.  As long as that shift was corrected through socially acceptable income redistribution, the system remained relatively stable 03.  As the world economy has become ever more reliant on interest-bearing debt instead of cash transactions the impact of unearned income on debt levels has increased exponentially.

 

02  Detailed in Appendices 1 and  2.

03  In practice, in many Western Countries like the US and New Zealand, not enough has been done to fairly redistribute unearned income. This has led to growing income inequality and accompanying social problems.

 

Exponential “growth” curves are inexorable.  What started as a relatively small effect has rapidly become unsustainable throughout the world.  In New Zealand, between 1978 and 2011, the pool of unearned income (Ms in the revised Fisher equation) grew from about 8% of GDP to 51% of GDP.  As the ratio of unearned income Ms to GDP increases, the ability of the economy to fund the unearned income decreases.  The background papers cited in the appendices confirm the obvious: when inflation is measured by a rise in prices, the sum of all those price rises over time must account for nearly all current prices. The relationship Domestic Credit/Ms, between the total debt (Domestic Credit) and the pool of unearned income Ms, is a good indicator of a nation’s economic health. It has fallen from 7.3 in 1978 to 3.1 in 2011. That relationship can become distorted when excess “debt bubbles” build up in the productive economy from time to time, producing the now familiar boom and bust cycles. 

 

Excess bubble debt is produced by failure by the banking sector to properly align demand for credit with the productive capacity of the economy. It arises in New Zealand because the regulatory debt price signals provided by the Official Cash Rate (OCR) typically respond to the issue of excess new debt by the private for-profit banking system instead of regulating it in a timely manner.

 

From the March 2009 year through the March 2011 year there is little evidence of real expansion of New Zealand’s economy. The banking system in New Zealand has not been lending enough for expansion to take place. Within the current price-based financial architecture there was not enough demand in New Zealand from creditworthy customers for new debt to satisfy the systemic inflation requirements, let alone to cover any economic growth. This is quite different from other recent downturns and recessions where interest rates at their current levels would have been sufficient to get the economy back on its feet again. Now, late 2011, the New Zealand economy can only be stimulated by reducing the OCR (Official Cash Rate) substantially below its current level. The New Zealand Reserve Bank’s response mid-year 2010 was to increase the OCR instead of reducing it.

 

The dilemma faced by economic policy makers is that the price-based financial system has run out of manoeuvring room. It is no longer possible either to substantially increase interest rates to combat inflation or for that matter to reduce them to stimulate “growth”. In New Zealand, a 1% increase in interest rates would now reduce GDP by about 1.2%. Modest increases in interest rates are enough to drive the economy into recession. The interest rates then have to be cut to lower and lower levels to stimulate economic “recovery” until the OCR approaches zero as has happened in Japan and as is happening in the United States.

 

During 2011, each 1% extra deposit interest in New Zealand has generated about 0.5 % of systemic inflation 04. Deposit interest rates above 6 % would have systemically breached any 3% inflation threshold.  Assuming a bank spread ( which is the difference between the interest rate banks charge on their loans and the interest rate they pay their depositors) of 2.2%, the maximum loan interest (claims) rate the banks could charge their clients for loans in New Zealand was about 8.2 %. Anything above 8.2 % would force an extension of the upper inflation target.  In New Zealand there has been little recorded growth for the year ending March 2011 and systemic inflation is still running at about 1.8% on an annual basis before taking the GST increase of 2.5% in October 2010 into account. Meaningful stimulation of the New Zealand economy would at this point require a fall in the OCR from 3% to below 2% 05.

 

04. Assuming wage rates increase with inflation plus productivity growth and there are no changes in indirect taxes.

05. The OCR in New Zealand was  3.0% in October 2010.  Its reduction to 2%, if fully reflected in interest rates charged by banks to their clients, would increase growth by 1.2%.

 

 

03. THE GUARANTEED MINIMUM INCOME  (GMI) PLAN.

 

This plan proposes to replace most of the current welfare system with a GMI (Guaranteed Minimum Income).  

 

The GMI stands on its own independent of other policy changes. The apparent distortions caused by those in employment receiving both their GMI and their ordinary work incomes can be minimised by adjusting tax rates and thresholds. The effect of the GMI on the basis of the preliminary data in Tables 1 to 4 below may be to encourage minor demographic migration to the provinces where accommodation costs are lower, particularly among those who are not in the labour force.

 

a). Existing imbalances and complexities in the tax system will be corrected by replacing the existing social welfare system with a guaranteed minimum income, (GMI). The GMI will be paid weekly to all permanent legal New Zealand residents including children 06. It will be paid into a unique bank debit account established for each qualifying person in the country.

 

b). The GMI will be funded from:

 

(i)   Transfer of existing government welfare payments to the GMI.

(ii)  An annual wealth tax of 1% on all accumulated net wealth.

(iii) A modest Injection of electronic cash (E-notes) . 

(iv) Revision of the tax thresholds and tax rates for middle and upper income groups.

 

The wealth tax is designed to improve the efficiency in the use of the country’s capital base. The GMI as a whole will be designed to maintain or improve the existing physical incomes of most households07 . The tax will gradually reverse the historical accumulation of wealth in the unearned income sector at the cost of the productive sector caused by the transfer processes inherent in the existing debt-based financial system.

 

c). A Foreign Transaction Surcharge (FTS) will be introduced to minimize the risk of capital flight and manage the foreign currency exchange rate. The FTS will be deducted automatically through the banking system and will apply to all foreign exchange transactions from all sources. The FTS will be applied on a tax-neutral basis, with receipts from the surcharge being used to reduce domestic taxation (such as GST). The FTS could initially be set at 10% that is, 10 times the level of the proposed wealth tax. That would be high enough to dissuade capital flight but not enough to have a serious impact on the exchange rate. It can subsequently be adjusted as the need arises to bring the current account into balance and begin repayment of New Zealand’s foreign debt.  

 

d). Depending on the internal productive resources available to the economy, new electronic cash  (called E-notes) will be injected into the financial system to promote inflation-free growth. The new electronic cash deposits will circulate at the same speed as deposits arising from debt.

 

e). To balance added purchasing power with added production and so keep the E-note injection inflation free, 5/6 (83.3%) of the injection will be used to help fund the individual GMI payments and 1/6 (up to 20% of the virtual wage injection) will be injected into businesses in the form of a capital grant 08..

 

06  The proportion of each dependent child’s GMI available to that child’s caregiver(s) would reduce with the age of the child. Starting at an age (to be decided later), each child would have access to the remaining part of his or her GMI.  Independent children under 18 would receive their full GMI.

07  This refers to incomes. The capital base of asset-rich income-poor households could gradually fall.

08   The E-note injection could be in the form of a virtual increase in the minimum wage as discussed in paper 2 of this series.

 

f). The new cash deposits in the banking system would provide the base for significant   increases in bank lending. Supplementary reserve ratios will need to be introduced into the banking system, over and above existing Basel III capital adequacy criteria, so that bank lending can be managed by quantitative means rather than by price. This will need to be done during the first year of the plan.

 

g). To reduce systemic inflation, the overnight cash rate (OCR) will be gradually reduced towards 0% in accordance with measured macro-economic outcomes. Even if there were to be some residual demand-pull inflation from the E-note injections, it would still be below the target threshold in New Zealand of 3%.

h). The proposal does not significantly affect the cost of exported goods and services, though it would increase the cost of imports.

 

i). In New Zealand, the plan potentially allows the Ministry of Social Development to be abolished. Any residual functions would be transferred to other departments.  For example, special provisions for disabilities and invalids could be administered by the Department of Health. Benefits paid offshore, the termination of the student loan scheme and the administration of other recoverable payments could be handled by the Revenue Department. Training and employment programs including vocational services for those with disabilities could be administered by the Education Department. Youth justice services, adoption, care and protection services for young people and family and community services could be administered by the Department of Justice. Anything relating to preventive or social health, including sport, diets and well-being might go to the education department. Anything relating to curative health and cure of physical defects would go to the Health Department. 

 

j). Payment of the proposed wealth tax may involve new bank borrowing because not all those with significant wealth will have the liquidity they will need to pay the tax. Since the proposed wealth tax is substantial, the additional resulting deposits will tend to be inflationary and the additional borrowing will need to be sterilised. This can be done through savings schemes or through central bank open market operations to siphon off excess liquidity.

 

k). The GMI will improve the purchasing power of most union members. The trade union movement is expected to be strongly attracted to the  Plan because it provides a systemic bottom up approach to reducing income disparity rather than a top down approach.

 

The plan does not automatically remove systemic inflation from the economy.  As in the past, wages may increase to reflect price changes induced by inflation as well as to allow employees to enjoy a share of increased productivity. The whole economy will continue to inflate by an amount equal to the systemic inflation, which is expected to be about 1.8% in New Zealand in 2010/2011. This is because systemic inflation is related to the deposit interest rate.

 

Duration the plan implementation it would be advisable to keep annual wage increases to less than 2.5%, that is, up to 1.8% for inflation and 0.7% for productivity gains.

 

An agreement with the unions would be helpful because there will be some pressure to increase incomes above the median wage to restore skill differentials in the labour market. Skilled employees should not be worse off under this plan than they would have been without it. Upward pressure among middle incomes is dealt with by making the tax system more progressive by adjusting tax thresholds to maintain income differentiation 09.  Overall, average income families with children do best under the particular GMI solution give in Tables 1 to 4 below.

 

l).  Plan continuity

 

There is at this time enough spare capacity in New Zealand’s economy to absorb the proposed annual NZ $4.32 billion per year E-note injection 10. This will result in about 8% additional growth over the three-year transition period. Some people will use their extra income to reduce debt, which is positive because it will slightly reduce the total debt in the financial system and tend to reduce systemic inflation.  Debt reduction favours transition from a debt-based economy to a credit (electronic cash) based economy, but it also tends to offset the stimulatory benefit of introducing cash injections in the first place.  The potential growth arising from the cash injections is diminished by any net ‘saving” that takes place through debt reduction.

 

09  One way to do this would be to replace existing taxation with a single automatically collected Financial Transactions Tax  (FTT) . The FTT would be deducted whenever transfers are made out of any deposit account except a savings account in the name of the same depositor.  That would raise “consumption” taxes by about 80% and allow income taxes to be abolished. FTTs  are strongly progressive because they would apply to all transactions, not just those in the productive economy.

10  With a speed of circulation of Vy of the transaction deposits My of about 18, a physical increase in My of just 4.32/18 or NZ $ 240 million would be enough to increase incomes by NZ $ 4.32 billion on an annual basis.  

 

Most New Zealanders on low incomes struggle to make ends meet now. The bulk of the first cash injections will probably go into new consumption as they are intended to do rather than into debt reduction. This will change as further cash injections make debt reduction more feasible. The process can continue without generating inflation until all the available existing human and physical resources have been utilised.  From that point there could be a little demand-pull inflation but that will be offset by the reduction in systemic inflation produced from lowering the OCR,

 

Economists and political leaders throughout the world are calling for an end to exponential debt growth.  This plan does that by progressive credit monetisation of the existing debt as well as by permanently reducing the OCR (Official Cash Rate) towards zero, at which point systemic inflation would be removed from the financial system.

 

 

04. THE GMI PLAN DETAILS.

 

a). The GMI.

 

Tables 1 and 2 give provisional global figures for the implementation of a GMI in New Zealand 11.  The tables are easily adjusted and are designed so that virtually no group in the society is worse off.  The unique difference between this proposal and any other is the inclusion of a housing provision that is divided automatically among adults who are part of a household, who are on the electoral role and registered as being resident at that address.  The housing provision allows close matching of the GMI to the existing government income transfer structures. The halfway housing provision applies to people living in boarding houses, motor camps, and similar types of residence not included within the definition of “household”.  Those residing in institutions such as prisons and hospitals receive no household allowance 12 .  A separate category could eventually be added for them with a lower personal rate. The existing student loan scheme will be abolished. The GMI is not subject to taxation. Crucially, working people keep their net income from work after deduction of ordinary taxes.

 

Click to see : Table 1. The New Zealand basic income structure  December 2010.

 

Click to see :  Table 2. Funding of basic income in New Zealand.

 

11  The (updated) figures are derived from a presentation by L F. Manning at the BIEN (Basic Income Earth Network) bi-annual conference at ILO Headquarters, Geneva September 2002. 

12  Though their families do if they form a household.

13  Vote Social Development plus Family Tax Credit NZ$ 2.2b and In-Work Tax Credit NZ$ 0.6b and veterans payments NZ$ 0.3b

14  Point i)  Output expenses NZ$ 500m, debt write downs NZ$ 830m, residual transfers to other agencies, say NZ$ 800m, capital input NZ$ 70m.

15  Comprising Net Capital Stock (from National Accounts Table 1.7), Aggregate Land Value (courtesy Quotable Value NZ), Bank Deposits, and provisions for chattels and the private household vehicle fleet and for miscellaneous and intangible assets LESS total debt model debt NZ$ 300 b. Mineral resources excluded.

16  This will tend to involve increasing the tax rate on earned incomes to offset the GMI paid to each legally resident individual in the country as detailed in the Plan.  This paper proposes a flat tax rate of

41.5% on earned income, which seems to satisfy the social and administrative objective of the GMI proposal.

 

Table 3 provides a few comparisons between the proposed GMI including housing allowances and the existing social welfare net. Comparisons can be difficult because the current operational accommodation supplement in New Zealand has to be calculated on a case by case basis and other minor benefits are also subject to means and income testing.  Since the total paid in accommodation supplements is NZ$ 1.22 billion spread over about 1.56 million households, the nationwide average is just NZ$ 15/week. Very few people receive the maximum accommodation supplement, which applies only to Central Auckland (Area 1) and is subject to a non-subsidised rent deduction plus means and income testing.

 

The second accommodation supplement figure in the table (Area 2) applies to the rest of Auckland, Wellington City and 3 other places. Area 3 takes in most other cities, while Area 4 includes the rest of the country.  For example, to qualify for the maximum accommodation supplement someone on the Domestic Purposes Benefit (DPB) in Auckland with two or more children would have to be living in Central Auckland, paying NZ$ 410/week rent and have no means or income tested deductions.

 

Click to see : Table  3   Selected comparisons GMI & existing transfers 17.

 

17  In Table 3 “Adult ben” and “Child ben” refer to the existing individual transfer payments, “Accom Max” refers to the highest accommodation allowance available in each of the 4 “Areas” of the country,  “other” includes the existing  Family Tax Credit and  In-Work Tax Credit (but does not include  smaller special payments that might be available from time to time). And “Total Max” is the total available from existing transfers used for comparing existing transfers to the GMI.

18  Tax credits are arbitrarily based on NZ$35000 joint income

19  The effect of the wealth tax on pensioners is not included here.

20   Student allowances in New Zealand are means tested and the figure given is for 24 years+. Most students are less than 24 years old. Many students are presently forced to take out student loans.

 

The Table 3 GMI is set to mirror the maximum Area 3 supplement. Some care will need to be taken to ensure adults living in families where the family owns more than one dwelling do not register the adults separately on the electoral roll at their other addresses to obtain additional housing provisions to which to which they are not entitled. The housing provision belongs to the adults collectively residing at their place of residence. Claiming a housing provision for a dwelling, for example, a holiday home, where the adult(s) do not normally reside would be fraudulent.

 

b). The GMI funding.

 

b(i). Existing welfare transfers.

 

For simplicity this paper bundles together as transfers the whole of the 2010 New Zealand “Vote Social Development” and all of the Family Tax Credit and In-Work Tax Credit administered by the Revenue Department. A roughly estimated figure for “rump” activities totalling NZ$ 2.2 billion has been deducted from that total. Those activities are assumed to be incorporated into other NZ Government budget Votes as described under Plan B point i) below. Existing transfers make up 47% of the proposed GMI given in this paper.

 

The transfer incomes in Table 3 do not include work incomes beneficiaries are allowed to earn before their benefit is abated. Under the GMI there is no abatement regime. The so-called “poverty trap” where the incentive to work becomes minimal is eliminated. At present after tax work incomes may in some cases be less than the aggregate transfer payments, especially where travel and other work related costs are taken into account.

 

New Zealand is not alone in having created a cumbersome welfare system with all its attached administrative and compliance costs. System complexity has increased over time in an effort to keep social welfare costs down and maintain fairness within the system. Attempts to maintain fairness have reached the point of absurdity.  For example, the entry level rent deduction for calculating an accommodation supplement for a woman alone living on the Domestic Purposes Benefit is NZ$ 51, while for a person living alone on an Unemployment Benefit or a non-beneficiary living alone the corresponding deduction is NZ$ 49.  Layers of bureaucracy have been added to administer a dollar here and a dollar there to the point where almost every transfer payment has to be individually calculated and compliance costs have reached absurd levels..

 

Since a substantial portion of the population receives some sort of transfer payment New Zealand has unintentionally created a “welfare monster”.

 

The GMI is designed to be “transfer-neutral”. Beneficiaries receive much the same in hand as they do now. The rest of the GMI is distributed among the working population.  The proposed GMI is not an extra “handout” to beneficiaries. Instead, it eliminates all the complexities of the existing welfare system while allowing everyone to participate in measured productive activity and keep what they earn after tax.

 

The GMI makes it attractive for everyone to make a productive contribution to the economy, even for a mother with young children to work part time from home. 

 

The GMI provides a living income as of right. It also re-establishes the right to work by choice. It  provides support to middle-income families in particular.

 

b)(ii). The wealth tax.

 

Wealth taxes are redistributive because they reverse the accumulation of net wealth inherent in the presently dominant debt-based financial system. Only a few countries use them. Some countries like Spain have recently abandoned them, though the reasons for doing so may have been ideological rather than practical.

 

The wealth tax used in this paper is a uniform tax on all net wealth from all sources applied across the board, including publicly owned land and other public assets. 21 In that sense it incorporates the Georgist land tax (George, 1879) for which there has long been considerable support around the world 22. The total land value is of the same order as the Nation’s Net Capital Stock as given in Table 1.7 of the New Zealand National Accounts.

 

21  But excluding minerals.

22  The total land values for New Zealand have been kindly supplied on a confidential basis by Quotable Value NZ Ltd, so only the estimated total net asset figure is stated in the GMI data.

 

In addition to Land and the Net Capital Stock the gross Capital Assets in this paper include all bank deposits, provision for the private non-commercial vehicle fleet, an allowance for private non-commercial chattels and a modest provision for other less tangible wealth. The total comes to about NZ$ 1500 billion. This gives a net asset base of NZ$ 1200 billion after deducting the total debt NZ$ 300 billion outlined in the debt model in Appendix 2 to this paper. Further research will be needed to improve the accuracy of the asset base, not least because many people in New Zealand, including those with low equity home loans, have negative net assets. Those negative net assets need to be deducted from the total debt when calculating the net asset base subject to the wealth tax. The net asset base included in Table 2, over which the wealth tax is calculated, may therefore be a little understated.

 

Whether or not some assets such as family homes, private vehicles and chattels should be exempted from the wealth tax calculation is a decision beyond the scope of this paper. Any reduction in the wealth tax base below that shown in Table 2 will either mean the wealth tax rate would need to be higher than 1% or there would need to be higher compensatory tax adjustments.  Otherwise the GMI shown in Table 1 may not be fully funded.

 

Another wealth-tax related issue is the relationship between the assessed tax and the liquidity level of those paying the tax. If, for example, a person or business has net assets of NZ$ 1 million, that person or business would be liable for a tax of NZ$ 10000/year.  If the tax is paid from the liquid resources of the person or business being taxed, or if that person or business sells assets to obtain the funds to pay the tax, the tax transaction is  “cash-neutral” for the economy as a whole.  If, on the other hand, the tax levy is paid from new bank borrowing, the new deposits arising from that debt are potentially inflationary. There are several ways to offset those new deposits. Savings schemes and the sale of Treasury Bills are examples. In any case appropriate financial instruments must be in place and available for use as the need arises.

 

b)(iii). The injection of electronic E-notes.

 

New electronic cash (not debt) will be supplied to help fund the GMI. The new electronic cash deposits would circulate at the same speed as deposits arising from debt. The first cash injection has been set at about NZ$ 3.6 billion plus a further NZ$ 720 million provided as capital grants to business.

 

The Central Bank does not need new legislative authority to make an injection of electronic cash into the economy. The money in the proposed plan will be used to increase incomes. It is not a subsidy to business, though business will be rewarded for its participation in the scheme and to stimulate business development.  The plan is a non-inflationary way to increase wage-earners’ purchasing power. It is made possible through the greater understanding of the operating mechanisms of the existing interest-based debt system provided by the debt model discussed in detail in the appendices to this paper.

 

b) (iv)   Revision of the tax thresholds and tax rates for middle and upper income groups.

 

The GMI as it is shown in Tables 1 and 2 requires an income tax adjustment of NZ$ 8.623 b. in addition to the NZ$ 12 billion raised from the wealth tax. That additional income tax is not new tax because every taxpayer receives his or her GMI, which is tax-free. At an individual level, as long as the tax adjustment does not exceed the difference between the new GMI and the sum of any transfer payments payable under the existing tax system, the individual cannot be worse off.  A similar principle applies at the household level.

 

The NZ budget for the year ended 31st June 2010 23 shows individual direct taxes of NZ$ 24.3 billion and corporate taxes of NZ$ 7.6 billion drawn from a tax base of some NZ$ 109 billion 24 or NZ$ 31.9 b. all in. The average effective tax rate is therefore NZ$ 31.9/109 b. or 29.3%. Adding NZ$ 8.623 to NZ$ 31.9 billion increases the average tax rate on earned income to 37.2%.

 

23  Befu (Budget Economic and Fiscal Update) 2010 p. 132 Notes to the Forecast Financial Statements

24  Using compensation to employees of NZ$ 84b and net taxable business profits of NZ$ 25b: there might need to be minor adjustment depending on the measured state of the economy.

 

In practice, in New Zealand, the corporate tax rate was reset set at 28% in 2010 and political considerations may dictate that corporate taxes should be left out of the above calculation.  That adjustment increases the tax rate on employee incomes because the NZ$ 8.623b has to be added over a base of NZ$ 84 billion instead of NZ $109 billion.  The flat tax on earned incomes increases in that case from 37.2% to 41.5%.

 

The relationship between the wealth tax and the proposed flat tax rate is a political matter. The solution given in Tables 1 and 2 is an arbitrary “middle of the road” choice. The wealth tax could be set  a little lower than 1% and the tax substitution increased from NZ$ 8.623 b. accordingly. That would increase the flat tax rate applied to personal earned incomes above 41.5%.  The public at large is likely to see a flat tax rate above 41.5%  as a psychological barrier though such figures are common throughout Europe. People are used to tax rates in the mid thirties percent, but not in the forties. The calculations made in this paper show that the flat tax rate needs to be about 41.5% to ensure “fairness”.

 

The GMI can be fully funded by a 1% wealth tax and a flat tax rate of 41.5% on all earned personal income (therefore excluding all GMI payments) compared with the present level of 29%. Strong tax progression is guaranteed by the wealth tax and the relative gain from the GMI provided to families with children and low income earners. This lowers the tax profile among lower- income earners and families with children and raises it among wealth holders. Table 4 shows most people with middle and lower incomes are better off under the GMI.

 

The author of this paper considers a flat tax rate of 41.5%  to be “saleable” to the public at large. A higher wealth tax and a lower flat tax rate would be attractive to income earners, but is likely to be more strongly opposed by wealth holders who would feel they are paying a disproportionate share of the GMI funding. It would also tend to weight the GMI too far towards lower and middle-income families.

 

Click to see : Table 4 : Comparison of GMI with existing earned incomes.

 

Table 4 25  clearly shows how the GMI shift favours families with children and people with lower incomes. The redistributive shift in terms of total incomes can be statistically calculated. That lies outside the scope of this paper but it could be several percentage points of GDP.

 

Whatever format is chosen political decisions on the distributive effect of the GMI will need to be made. The present proposals will bring New Zealand’s income distribution as measured by the GINI coefficient more into line with that of most other developed countries. At the moment New Zealand’s income distribution is among the least equal in the developed world. 

 

25  Details are provided in Appendix 4. Income splitting, that is, dividing the specified income between the two adults in a household will reduce the existing taxation and so reduce the positive figures shown in the table.  That applies especially to households with 2 adults but also to  2 adult-families with  children. The column Diff1 is without income splitting. Column Diff2 assumes income splitting where 1 adult earns 1/3 of the household income and the other adult 2/3.

 

c). The Foreign Transactions Surcharge (FTS).

 

It is advisable to introduce a Foreign Transaction Surcharge (FTS) as soon as possible to protect against the export of assets (financial leakage) offshore. The proposed wealth tax at 1% is low, and most wealth cannot be exported, but financial issues could arise if there were some capital flight.

 

An FTS would be simple to administer 26. It has very rarely been used in the past 27. Introducing a financial instrument such as the FTS is essential in the medium term if offshore borrowing and related interest costs, which are among the main causes of exponential inflation in New Zealand, are to be reduced. Orthodox monetary policy efforts to manage the exchange rate and current account using the Official Cash Rate (OCR) have failed, in part because financial deregulation has encouraged unrestricted speculative capital flows.  Some economists may object that a unilateral FTS will not work because banks and traders can evade the surcharge by “bundling” transactions and reporting, say, only a single daily settlement sum, or else trading in New Zealand dollars offshore. Such objections, even where they apply to internet or international card transactions, are a regulatory matter rather than one of policy or principle. Modern technology makes reporting and processing of individual transactions possible both in New Zealand or, where relevant, by offshore correspondents and affiliates. There is no reason why requirements of this type cannot be backed by a legally enforceable regulatory framework .28

 

26  The “beauty” of FTS is that it applies to outward capital flows, not inward capital flows. Moreover, FTS is not a “restriction” on capital flows , it is a universal tax on all outward transactions.

27  It was used successfully in Tonga in the 1980’s, but repealed when it had done its job. However, the Tongan FTS was neither variable nor tax neutral.  Source: personal discussion with the former Tongan Minister of Finance, who introduced it.

28  Setting the parameters for that regulatory framework falls beyond the scope of this paper.

 

A broader issue is whether a foreign transactions surcharge would contravene international financial agreements. There are provisions in the relevant international World Trade Organisation (WTO) protocols for countries to protect their balance of payments. The GATT legal text, Article XI clause 1 appears to specifically permit non-discriminatory taxes to be applied. Provision of funding is a service that falls under the GATS protocols.

 

The so-called policy “trilemma” is important to any debate on the FTS. Obstfeld (1998) put it this way:  In most of the world's economies, the exchange rate is a key instrument, target, or indicator for monetary policy. An open capital market, however, deprives a country's government of the ability simultaneously to target its exchange rate and to use monetary policy in pursuit of other economic objectives”.

 

If the current account is to be managed, some form of exchange management will be required. To restructure the financial architecture as proposed in this paper, a tool such as the FTS will have to be inserted at the currency exchange interface.  Failure to do so could condemn the world to economic ruin. It is now widely, if not yet universally, acknowledged the current economic system is deeply flawed as suggested or implied in recent articles from the Bank for International Settlements, the World Bank, and leading economists like Joesph Stiglitz and Paul Krugman.

 

The exchange management instrument(s) would apply to all outward exchange transactions, not just outward capital flows.

The proposed FTS is not a tariff or trade barrier of any kind. Nor is it a restriction on capital flows as such.  It can be adjusted as net foreign debt is repaid. It is a physically neutral tax on all outgoing exchange transactions. The FTS would be variable. It goes no further than the specified objective of balancing the current account and progressively repaying the accumulated net foreign debt. This proposal mirrors the historical position that existed prior to the removal of the US$ gold peg in 1971 29. It is also very similar to the position advocated by J.M Keynes and the British delegation at Bretton Woods in 1944 30.

 

29  Under the gold standard, capital flows appear to have been unrestricted, but they were not the dominant feature in financial flows they have become in recent decades.

30  The famous Bretton Woods meeting was where the basis for the post World War II financial architecture was agreed among the allied powers. The British position was effectively vetoed by the United States that sought (and obtained) the broadest possible global role for the United States dollar as the world’s reserve currency.

 

Financial receipts from the surcharge would be used to offset a corresponding amount of domestic taxation (for example by reducing GST), to make the surcharge tax-neutral apart from any receipts put towards foreign debt reduction. Its intent is to correct the current account, which is part of the balance of payments as defined in the legal WTO, GATT, GATS texts, by removing the existing subsidy enjoyed by those engaging in foreign currency transactions at the expense of those who do not. Those using foreign currency in New Zealand will, for the first time in decades, pay the actual price for doing so. The subsidy of heavy foreign exchange “users” paid by foreign exchange “savers” may be indirect, but it is very real and very large. New Zealand’s large current account deficits and heavy foreign debt burden mean its interest rate structure is considerably higher than that in other comparable countries with an AAA international debt rating. This keeps both domestic debt servicing and the exchange rate well above what they need to be, seriously affecting the country’s economic performance.

 

The proposal for an FTS also deserves mention in the context of ongoing negotiations for a TPPA (Trans-Pacific Partnership (Free Trade) Agreement) presently being negotiated among eight Pacific Rim countries though other countries could yet join the negotiations. Kelsey and others (2010) discuss the proposed TPPA in detail. Any TPPA chapter on services would be well advised to maintain a reservation in respect of the GATS provisions allowing protection of a nation’s balance of payments. Such provisions have recently been used by at least one large country to exercise control over speculative capital flows 32 and it would be unfortunate if the ability to maintain sovereign control over the national economy were negotiated away as part of a Free Trade Agreement. An FTS could also perhaps be conceived as a “Border Tax Adjustment” (BTA) that matches the cost of capital flows to the true national cost of current account deficits. Such a concept is not too dissimilar from the BTA proposed in the US Cantrill-Collins Carbon Limits and Energy for America’s Renewal (CLEAR) Act.  CLEAR would require carbon emission permits to be presented at the border whenever products imported to the US are produced using a higher carbon intensity than the corresponding domestically produced product 33.  The main difference is that under the FTS, the Border Tax Adjustment is made at the time of exit instead of at the time of entry.

 

The overall saving to the wider New Zealand economy from the introduction of an FTS is likely to be more than the annual current account deficit itself 34 . In addition to the obvious reduction in interest costs and the amount of foreign debt there are consequential “downstream” benefits to the economy of a country like New Zealand using an FTS to properly manage its current account:

 

A foreign transactions surcharge would cause the exchange rate to fall towards a stable base level, allowing exports to increase and imports to decrease, providing a more even playing field for local manufacturers and producers 35. 

 

31  Chile, Peru, United States, Vietnam, Singapore, Brunei, Australia, New Zealand.

32  For example, Brazil presently has unilaterally applied a 2% “Tobin” tax to manage speculative capital flows.

33 The author of this paper is not aware of amy remission policy in cases where the PPMs (Process and Production Methods) is MORE carbon efficient than the  corresponding US domestic product.

34  Each 1% in interest rate alone represents nearly NZ$ 3.1 billion per year on a total debt of around NZ$ 311 b., including net foreign debt, as at March 2011. Estimating the actual economic effect of FTS is outside the scope of this paper.

35  Rose (2009) notes that exchange rates have relatively little influence on imports, but it is likely that the FTS would act more directly on the import sector because it is visible as it is drawn directly from bank accounts.

 

Introduction of the FTS could allow the removal of all remaining tariffs and subsidies in the New Zealand economy, making it one of the very few tariff-free nations in the world.  The FTS would make imported goods more expensive and locally produced goods relatively cheaper, stimulating the domestic economy. NZ dollar currency speculation would be blocked. The level of the FTS would be higher than any conceivable short-term gain from present speculative capital flows. At the same time, long term capital investment should not be affected.

 

The FTS can also be seen as a correction designed to offset the unmanaged volatility in New Zealand’s exchange rate since the New Zealand dollar currency float in 1985.  In New Zealand in March 2008 the Trade Weighted Index (TWI 5) that reflects the country’s exchange rates against the currencies of its five major trading partners stood at 71.6. A year later in March 2009 it was 53.8, a fall of 25%. As of mid July 2011 it was back up to 74.36 FTS starting, say at 10%,  would, on the basis of current total payments to the rest of the world of NZ$ 77 billion 37  yield NZ$6 billion in surcharge income 38. That would be enough to reduce GST to 10% from 15% and begin foreign debt repayment 39 . A higher level of FTS might be needed during a transitional period to reduce any initial tendency toward capital flight and to manage the Keynesian “transfer problem” 40. The level of the FTS would be adjusted by the government in agreement with the central bank as and when required. An  initial 10% FTS would lead to an adjustment in the prevailing Trade Weighted Index (TWI). This adjustment would, however, be lower than the sharp short term New Zealand dollar exchange rate variations which have occurred in recent years.

 

36  Source: Reserve Bank of New Zealand statistical series B1. The series base is 100 back in 1979 when exchange rates were still fixed.

37  New Zealand National Accounts for the year ended March 2009.

38  The outward payments would fall from their present level and inward receipts would increase.

39  This could be done through some form of tender process.  The worked indicative example for Option (B) at Table 1 in Section 6 is conservative and includes only very modest repayments from the FTS receipts.

40  The Keynesian transfer problem implies the current account should go far enough into surplus to meet all transitional foreign investment claims, though that might be optimistic in the short term.

 

There would be a substantial reduction in interest payments as the current account is brought under control, foreign debt repayment begun and inflation reduced to very low levels. Rose (2009) notes: “Effectively the market is pricing country and/or currency risk into national interest rates”. On the other hand, the New Zealand dollar “value” of foreign debt would rise. As much debt as possible should therefore be expressed in domestic currency.

 

Bertram (2009) notes that “In the worst case, where no rolling over of offshore funding was possible at all, the banks would be obliged to raise New Zealand dollar funding to pay down their foreign-currency debt”.  That would produce a sharp fall in the exchange rate. The FTS is a very powerful economic tool because of its redistributive impact within the domestic economy 41.

 

41  On the other hand, debtor countries may be better off “biting the bullet” and dealing with their foreign debt sooner rather than later. Since the volume of exports cannot be rapidly increased, the FTS must rely on changing the relationship between the NZ$ value of exports and imports.

 

The share of the New Zealand current account deficit represented by interest and profit on foreign, mainly Australian, bank investment has increased from 33% in 1997 to 69% in 2008. Nearly all New Zealand’s current account deficits in recent years have been funded by capital inflows from the foreign owned banks. Bertram (2009) notes that :

 

New Zealand’s current account deficit basically reflects the servicing requirements on its overseas debt. 

 

Banks would quickly unwind their dependency on foreign debt when the funding rate falls below what they are paying offshore.  Transitional arrangements may be needed to favour the replacement of foreign funding with domestic funding though, at the end of the day, the only way to retire the accumulated current account deficit is through the exchange settlement mechanism.  A debtor country like New Zealand has to buy back foreign ownership of its economy.

 

Some academic literature supports the need for some form of foreign exchange management to correct the balance of payments and the current account. “Pegged” exchange rates have been widely used by major countries, including Japan and China. The use of the United States dollar as the world’s “reserve” currency comes into the same general category. The FTS, on the other hand, maintains a full currency float, but manages outward financial flows.

 

Preston (2009) argues that the levels of the New Zealand current account and foreign debt are substantially due to (over)reliance by the New Zealand banking system on external borrowing. When times are good and offshore funding is plentiful the Trade Weighted Index (TWI) rises and offshore interest rates fall. When times are bad and offshore funding is harder to obtain, the TWI falls and offshore interest rates rise. To deal with such instability Preston (2009) proposes (page 13) an alternative monetary policy framework that would extend existing monetary policy beyond its present emphasis on inflation measured by the Consumer Price Index (CPI) to take into account “trends in domestic expenditure, trends in asset prices, maintaining a sustainable trend in the balance of payment, an exchange rate which is moving broadly in line with economic fundamentals”. To achieve this Preston proposes Mandatory Deposit Ratios (MDR) for foreign currency deposits to help manage private sector credit expansion. 

 

The FTS outlined above is much broader in scope than Preston’s MDR because it would operate on two levels. At the domestic level, supplementary deposit ratios will be applied to manage domestic lending.  At the exchange rate interface, the FTS would be used to manage external flows. The proposals in this paper are designed to enable very low domestic deposit rates tending towards zero to be sustained. Preston on the other hand tries to address the large-scale offshore borrowing by the banking sector. A primary difference between the FTS proposed and Preston’s MDR is that while Preston’s MDR is an instrument of monetary policy, the FTS is a domestic fiscal policy.

 

d). E-note injection.

 

This has been discussed under point b(iii) above.

 

e). Capital injections for business.

 

Supply a corresponding injection to businesses to facilitate business growth, to be paid to businesses weekly. This supplementary support for businesses has been arbitrarily set at 20% of the direct GMI injection, that is, 20% of NZ$ 3.6 billion, or $720m/year.  It will appear in incomes as firms spend it.

 

In many countries, the business gross operating surplus is 50% or more of the purchase price of goods and services. It is therefore usually beneficial for firms to expand production capacity as demand rises. Businesses will be required to show how they use the capital grant provided to them to increase productive capacity. All businesses employing wage and salary workers will be eligible, The proposed level of 20% of the planned initial E-Note injection of NZ$ 3.6b/year would provide an annual capital injection to business of about NZ$ 500 for each FTE (Full Time Equivalent) worker, or in round terms, about NZ$ 10 per worker per week.  This would, in principle, continue indefinitely.

 

f). Supplementary reserve ratio.

 

This plan will progressively and significantly increase cash deposits in the banking system.  The difference between cash deposits and deposits arising from debt is that cash deposits reduce the banks’ risk-based capital requirements thereby increasing their lending capacity.  Nobody can default on a cash deposit because it can’t be liquidated. Cash deposits remain somewhere in the banking system unless they are used to repay debt.  That makes a credit (electronic cash) based financial system inherently more stable than the existing debt-based system.

 

Bank deposits will continue to increase, but at a slower rate than during recent decades. The increased deposits will result from population expansion and from residual systemic inflation. They will tend to be offset by increased productivity derived from increases in employees’ purchasing power. The growth of debt in the economy will reduce towards zero as the OCR is progressively reduced towards zero, eliminating most, if not all, exponential debt growth.

 

The main element of past exponential debt growth has been the use of the price mechanism to “manage” it. This has turned out to be a perverse system. The debt model set out in the appendices shows how raising interest rates increases systemic inflation instead of reducing it.  During downturns and recessions the systemic inflation is still there. Higher inflation is, however, masked by falling purchasing power caused by higher debt financing costs, falling production with aggregate discounting of goods and services by producers leading to a reduction of their gross operating surpluses. It is not in consumer prices and therefore tends to go unnoticed.

 

Since cash deposits increase banks’ nominal lending capacity this paper proposes using variable supplementary bank reserve ratios to limit bank lending. This is to avoid risk of  added inflation caused by increases in circulating debt My over and above what is needed to maintain real GDP growth within the resource constraints of the economy. 

 

There is nothing new about reserve ratios for bank lending. Most countries still have them in some form even though they have usually played a minor role in economic management in recent years. How the supplementary deposit ratio would be incorporated in this plan is outside the scope of this paper. Its purpose is to slow down the exponential growth of bank lending as new debt is replaced by electronic cash injections so that systemic inflation can be reduced and eliminated altogether over time. 

 

Over the longer term, household debt can be first stabilized and then gradually reduced. The banks will be gradually transformed into savings and loan institutions. This process will reduce systemic banking risk while at the same time maintaining banks’ profit margins.

 

The main change under this GMI Plan will be the elimination of unsustainable exponential debt growth. This is what the world wants to happen. Orthodox economics offers no mechanism to achieve it.

 

g). Reducing the OCR (Official Cash Rate).

 

The introduction of electronic cash credit injections and variable supplementary reserve ratios into the financial system allows gradual reduction of the OCR (Official Cash rate)  and removal of systemic inflation from the financial system.  The financial system becomes based on the quantity of debt rather than its price.  The persistent problem of exponential debt growth will be solved. Over time, interest-bearing debt can be removed entirely from the financial system.

 

From a systemic point of view, the decline in the OCR can be carefully managed to allow the New Zealand dollar exchange rate to adapt gradually over time. 

 

The plan does not, of itself, resolve either the current account deficits of debtor nations or the current account surpluses of creditor nations.  It does, however, provide a platform from which the exchange rate and current account can be effectively dealt with using other options such as the Foreign Transactions Surcharge (FTS) discussed briefly below.

 

From the structural macroeconomic point of view debtor countries clearly need to get their current account deficits under control.  One mechanism to do this is by applying a variable Foreign Transactions Surcharge (FTS) whereby a currency exchange surcharge is automatically collected whenever domestic currency is converted into foreign currency.  It would have no effect on export prices, but it would increase effective import prices. The proposal would be made tax neutral by reducing domestic taxation by the amount of the surcharge collected.

 

h). Effect of the GMI on the cost of export goods and services.

 

Conceptually, the GMI is not inflationary. It is redistributive. It corrects the exponential flow of deposits from the productive sector into the investment sector.  Orthodox economics suggests that pricing capital will make its use more efficient. The net capital asset base in New Zealand is more than six times the size of the economy measured by GDP. A 1% wealth tax as proposed in this paper could therefore have a considerable impact on investment choices. While the vast bulk of net assets will remain in land and property, there could be a greater incentive to invest in productive output. That increase should, over time, increase exports. A slight downward trend in the production cost of exports could be anticipated where new investment in the form of the proposed productivity grants increases production efficiency.

 

Inflation risks are in the low to medium range and are off-set by the re-introduction of supplementary reserve ratios into the banking system. Reserve ratios are also needed when a Foreign Transactions Surcharge is used to manage the exchange rate to help prevent capital flight as the OCR and consequently the exchange rate are reduced. The plan does not provide for increases in wages beyond the usual provisions for inflation and productivity increases.

 

The proposed initial FTS of 10% is modest compared with regular fluctuations in the New Zealand dollar exchange rate but it is sufficient to support a progressive reduction of the OCR and of the New Zealand interest rate structure. This, together with the E-note injections under the plan, will ensure that domestic debt levels are first brought under control and then progressively reduced.

 

i). Potential abolition of the Ministry of Social Development.

 

A GMI offers a vast array of benefits for society at large. They range from increasing the pool of people able and willing to work, increasing the freedom and independence of women and relieving financial pressures on families. GMI creates other “downstream” possibilities too. For example, increases in disposable incomes for low income earners and families could favour the introduction of “at source” health-based excise taxes on unhealthy foods similar to those on for tobacco and alcohol, with the long term objective of reducing health care costs arising from problems such as obesity, diabetes and heart disease.

 

There will always be people with special care needs and children and families with special problems. With GMI there will be no need for the Ministry of Social development’s Work and Income functions that presently make up the vast bulk of its administrative output.  Residual outputs of the Ministry could be distributed among other relevant departments. The GMI itself would be administered by the Revenue Department. Special needs payments would be administered by other departments on a case by case basis. Issues relating to family violence and abuse could be handled at arms length by the Justice Department that already administers the parole system and the family courts. Social health issues could be handled by the Ministry of Education. Curative health issues including care for the handicapped and the aged could be handled by the Ministry of Health.

 

The introduction of GMI will remove the stigma of social dependency and poverty existing systems try to avoid but, by their nature, inevitably create. Those are issues that lead to many of the social problems so characteristic of industrialised societies. Under the GMI, individuals receive their own income as of right. This should favour review of compliance measures like those related to the child support programme which are so difficult to administer under the present system.     

 

j).    Wealth tax can create new bank borrowing.

 

One further potential inflationary effect from Plan B is the possibility that some of the wealth tax will be borrowed into existence where those liable for the wealth tax do not have liquid resources to pay the tax or choose not to dispose of wealth to generate the deposits needed to pay the tax. Most people with substantial net assets will also have substantial incomes so this issue mainly affects a limited number of asset-rich, cash-poor families. For example, a pensioner couple living in a mortgage-free home worth, say NZ$ 500,000 would need to find at least NZ$ 5000 each year to pay their wealth tax. From Table 3, that couple’s GMI income would be NZ$ 570/week compared with about NZ$ 512 now, since they will not at present be eligible for an accommodation supplement.  The wealth tax will leave that couple at least NZ$ 2000 short each year in comparison with what they get now because while their GMI will be NZ$ 3000 higher than their present income their wealth tax will be at least NZ$ 5000.  The GMI plan include measures to offset any minor inflationary impacts caused by borrowing to cover the difference.

 

 

05.          CONCLUSION.

 

The paper sets out the underlying economic problems relating to the exponential growth of debt and offers a plan based on a Guaranteed Minimum Income (GMI) to deal with them. The private interest-bearing debt-based financial system generates systemic exponentially increasing transfers of wealth from the productive sector of the economy to the investment sector.  The transfers take the form of net interest paid on bank deposits.  The deposit interest has to be funded from the productive economy. This causes an inflationary expansion in the debt levels the productive economy has to service. Over the past few decades, the orthodox economic approach to that inflationary expansion has been to increase the price of debt by raising interest rates.  Not only is that approach shown to be counterproductive, but debt levels in developed economies are now so high that small increases in interest rates are enough to force them into recession. Interest rates now have to be reduced close to zero to stimulate the economy.

 

The plan introduces a Guaranteed Minimum Income for each legal resident as of right, thereby eliminating the need for social welfare programs and releasing potential productive capacity presently locked into welfare dependency and poverty.

 

The basic details of the proposal are shown in Tables 1 and 2. The GMI will free a large pool of productive capacity that is barely used now. That capacity arises because all welfare-induced constraints on productive activity will be removed.  Everyone will be able to contribute to the economy and be rewarded like everyone else for doing so.  The GMI has been set to match existing social transfer incomes. The plan is sufficiently accurate as a first approximation, though the numbers may need minor adjustment or updating here and there depending on the political policy perspective adopted by those implementing it. The GMI proposal shown in the plan is unique as it is the only one to incorporate a universal housing allowance without which it is not possible to generate a simple GMI that matches the existing transfer system.  Failure to match existing transfer payments would be politically unacceptable as system implementation would create winners and losers and funding would become very difficult to manage. Table 3 shows that the proposed GMI follows the existing transfer system very closely.

 

The GMI is funded by a combination of redirecting most existing transfer payments to the GMI, a 1% wealth tax on all net capital assets, an annual electronic cash injection of NZ$ 4.32 billion and rearrangement of existing taxation.  The plan shows that one socially acceptable solution is to have a flat-tax of 41.5% on all earned income, bearing in mind that the GMI itself is not taxed.

 

The tax rate taken over both the untaxed GMI and earned income will be less than what it is now for the majority of income earners including almost everyone in the low to middle income bands.

 

Appendix 3 examines 15 specific household incomes. The results are summarised in Table 4 which shows how net GMI incomes relate to existing net incomes.  It proves the proposed  tax rate of 41.5% and a 1% wealth tax together give “appropriate” GMI outcomes when compared with the existing earned income structure.  More work will be needed to fine-tune the proposal. For example, Table 4 first considers the case where there is just one income earner per household.  Income sharing among adults reduces the positive “difference” figures shown in the column “Diff1” in Table 4 because shared incomes reduce the income tax paid by the household compared with the amount presently paid by a single earner. The result with a 1/3 and 2/3 income split is shown in column “Diff2 of Table 4.

 

Overall GMI outcomes for most families will be close to or better than what they are now. The particular GMI solution selected for this paper deliberately weights those net final outcomes in favour of families with children and lower incomes to offset the rapid increase in income inequality that has occurred in New Zealand over the past 30 years.  The weighting finally chosen for implementation will be a matter for political debate.  To retain relative income inequality the wealth tax would need to be slightly reduced and the income tax slightly increased. More than one tax rate instead of the proposed single flat tax could be adopted. However, there is no doubt that the GMI coupled with a wealth tax and a flat tax on earned income produces a very simple, fair and well-balanced progressive tax system.

 

The introduction of a Foreign Transactions Surcharge (FTS) is also proposed. The FTS serves two main purposes. The first is to avoid any risk of capital flight arising from implementation of the GMI. The second is to provide a powerful ongoing instrument to regulate the exchange rate and progressively repay the nation’s foreign debt.  The FTS is a variable tax on all foreign transfers of NZ currency. It would start at about 10% and be automatically collected through the banking system. The income received would be used to reduce domestic taxes, such as GST, and to begin foreign debt retirement.  The proposed 10% initial level for the FTS is lower than the recent percentage variations in the NZ$ exchange rate. The proposed FTS rate would apply to ALL exchange transactions including speculative financial transactions, though it would be technically feasible to apply more than one rate.

 

The FTS appears to come within the rules of existing international protocols such as GATT and the WTO that allow for protecting a nation’s balance of payments. It is important that this position is reserved in any TPPA (Trans –Pacific Partnership Free Trade Agreement) the country decides to enter into.

 

06.        APPENDIX 1 : THEORETICAL BACKGROUND.

                                     

The first paper of this series (Paper 1) “The Interest-Bearing Debt System and its Economic Impacts” 42 looked at the fundamental cause of exponential debt growth and proposed several key concepts:

 

(a)   The fundamental debt problem is that the economy has institutionalised the payment to deposit holders of unearned income.

(b)   That unearned income takes the form of interest paid on bank deposits.

(c)    Interest paid on bank deposits creates systemic inflation and exponential increase of the debt burden.

(d)  Culture and institutional “capture” of the debt debate has made rational discussion of the debt problem difficult.

(e)   Sustainable debt levels cannot be achieved without removing most if not all new deposit interest.

(f)    Quantitative analysis can be provided using a new debt model of the economy based on a revised form of the Fisher Equation of Exchange.

 

Paper 1 showed that the debt system in New Zealand has become unstable because the debt servicing demands are now outstripping the ability of the economy to fund them from nominal GDP growth.

 

The productive economy is progressively becoming paralysed. The exponentially growing pool of unearned deposit income is funded by inflation of the productive economy. The unearned income investment sector is becoming so large that servicing the nation’s total debt (including its “foreign debt”) requires a level of debt servicing the productive economy can no longer sustain unless interest rates are close to zero43 . The present situation has probably never arisen before, not even during the depression of the 1930’s. 

 

42  L.F.Manning,  Sustento Institute Christchurch., September 2010. This is published as PAPER 1 :THE INTEREST-BEARING DEBT SYSTEM AND ITS ECONOMIC IMPACTS.

43  Some of the inflation is masked by the current account deficit and offshore borrowing.

 

Orthodox economic instruments such as the use of interest rates to manage inflation mask systemic inflation at the cost of economic growth.  The inflation cost is still there and it is still being paid, but it is being paid in the form of lost production and unemployment instead of showing up in prices.

 

Appendix 2 provides detailed evidence of the current position for New Zealand. It is likely many other world economies are at or approaching the same position as New Zealand, especially those with a history of high real interest rates.

 

The world’s financial system is approaching a state of collapse and cannot be repaired using orthodox economic theory.  Orthodox economics has failed to reveal the fundamental mechanisms at the root of the debt problem or to offer any practical long-term solution to address it.

 

07.  APPENDIX 2 :  THE THEORETICAL SUPPORT FOR THE PROPOSAL.

 

The first version of the debt model was published in the paper:  Manning, L “The Ripple Starts Here: 1694-2009 : Finishing the Past”,  presented at the 50th Conference of the New Zealand Association of Economists (NZAE), Wellington, July 2009 44.  

 

While the debt model is based on the volume of debt, it is unrelated to earlier volume-based reform proposals like those of Social Credit that failed to offer a viable theoretical basis to support them.

 

The premise in both the debt model and Figure 4 is that the circulating deposits and cash My = Prices P x output q where q is the quantum of domestic output produced by My over a single cycle.  Taken over a whole year, the SNA definition of Gross Domestic Product GDP is given in the debt model by mathematically integrating the expression Pq* Vy, where Vy is the number of times the circulating deposits and cash My are used during the year 45.

 

The SNA should reflect an expression of the original Fisher Equation of Exchange as shown in Figure 2 46.  The only difference is that the money supply M in the Fisher equation of exchange included hoarded cash, whereas in the debt system shown in Figure 2 for practical purposes there is now very little cash contributing to measured GDP. 

 

In Figure 4 My cannot include hoarding of debt beyond the term of the production cycle because all the productive bank debt giving rise to My is conceptually repaid at the end of the cycle 47.

 

44. http://www.nzae.org.nz/conferences/2009/pdfs/The_Ripple_starts_here_1694-2009__Finishing_the_Past.pdf . Non-members can access the paper by Google search: NZAE The Ripple Starts Here   (use “quick view”).

45. The contribution of cash transactions in industrialised countries is now  (very) small.

46. The Fisher equation has been very widely discussed in relation to the economic difficulties arising from the sub-prime mortgage defaults in the US 2007-2009. 

47. As previously noted, in practice there is a continuous flow of production and consumption so the deposits and cash My are always present, but they are being used in the production cycle, not hoarded.

 

At any point in time there are five broad blocks of deposits in the domestic financial system.

 

They are:

 

Mt  The transaction deposits representing the productive debt My - M0y so:

 

My =  Mt + M0y                                                                                                                                             (1)

 

Mca The accumulated domestic deposits representing the sale of assets to pay for the accumulated current account deficit (see section 5 of this paper for details). 

 

M0y The cash in circulation included in Mv and used to contribute to productive output.

 

Ms The net after tax accumulated deposits arising from unearned deposit income on the total domestic banking system deposits M3 (excluding repos) 48.

 

 (M0-M0y)  Cash hoarded by the public and not used to generate measured GDP.

 

In this paper the total of these deposits, that is, Mt + Mca + M0y + Ms , is provisionally assumed to be the M3 (excluding repos) monetary aggregate published by most central banks monthly less the amount of cash in circulation M0 except for the part M0v that is included in My.  In this paper M0y is assumed to have the same speed of circulation as My.  In industrialised countries, the contribution of cash transactions to the measured output of goods and services (GDP) has been declining in recent decades and their contribution to the GDP has been provisionally calibrated for the purposes of this paper 49. 

 

In this paper, the total debt in the domestic financial system is assumed to be the Domestic Credit, DC debt aggregate published by most central banks monthly.

 

At any point in time there are four broad blocks of domestic debt in the domestic financial system. Three of them together add up to DC such that:

 

DC   = Dt  + Dca 50  + Ds                                                                                                                                                                  (2)

 

Where

 

Dt   The productive debt supporting the transaction deposits Mt.

 

Dca      The whole of the debt created in the domestic banking system to satisfy the accumulated current account deficit 51.

 

Ds      The residual debt to balance equation (2)  

 

48. Repos refer to inter-institutional lending 

49. More accurate assessment of the cash contribution to GDP over time requires further detailed study.

50. Arguably the accumulated sum of capital transfers could be included here, in which case the net international investment position (NIIP) would be used instead of the accumulated current account. The decision affects the size of the “residual” Db.

51. This is greater than the monetary deposits Mca because the banking system may have sold commercial paper to borrow foreign currency to satisfy the foreign exchange settlement.

 

The fourth block of debt is :

 

Db,  the virtual “bubble” debt, the excess credit expansion or contraction in the banking system such that  Ds - Db  = the debt supporting  the accumulated deposit interest Ms defined above.  Db can be positive or negative as discussed further below in relation to Figure 5.

 

There is also a fifth block of debt Is that is, conceptually, not bank debt .

Is, the total debt accumulated by investors arising from Saving Sy = S/Vy.

 

The investor pays the investment Iy =I/Vy = Sy = S/Vy  to the producer and the money is used to retire the outstanding part of My relating to the investment in question. Conceptually the investor borrows the purchase price from employee incomes and the business operating surplus as discussed in section 7. Except for households buying new homes discussed separately on pages 27-28, the investor then becomes a producer, and the interest on investment Iy is included as a production cost in the subsequent production cycle loans My.

 

The predicament of new homeowners is quite different. They cannot service their debt because they cannot, conceptually earn more than they were before they bought their new home, because the home itself is nearly always unproductive. There is no new income stream from their housing investment. If economic demand is to be maintained, homeowners must, in aggregate, rely upon increasing house prices and refinancing of their properties, creating an aggregate “pass the baton” systemic increase in debt.  

 

When non-productive investment assets are traded there is typically a capital gain because of asset inflation on investment (Dca + Ms + the property component of Is).  The new purchaser pays more for the asset because of asset inflation, allowing the seller to retire the outstanding mortgage debt on the property.

 

By definition in this paper :

 

My x Vy = GDP

Ms = Ds

 

The cash contribution to GDP = M0y * Vy.  Therefore :

 

DC  = (GDP)/Vy  - M0y + Ms + Dca +  Db                                                                                                   (3)

 

Ms =Ds = (DC – Dca ) – GDP/Vy + M0y  - Db                                                                                            (4)

 

GDP = Vy *(DC - (Ms +Dca +Db ) + M0y  )                                                                                                 (5)

 

My  = GDP/Vy  = DC - (Ms  +Dca  + Db) + M0y                                                                                           (6)

 

Where the terms are as defined on pages 28-29.

 

Equations (3 ) to (6) are all forms of the debt model developed in previous papers 52.

 

52. Links are provided in the conclusion to this paper.

 

Ms is the same format as Ms in the earlier forms of the model. It has been freshly calibrated. Unlike the previous forms of the model equations (3) to (6) are general and include the contribution made to the economy by cash transactions.

 

In equation (4), all the terms except GDP/Vy = My and Db are known or can be estimated with reasonable accuracy. For the purposes of equations (1)  and (6) My can be approximated using trend-lines because it is small compared with Ms. Db is unknown but can be approximated through the calibration as in Figure 5. The calculations in equations (5) and (6) involve the subtraction of large numbers to get relatively small numbers, which leaves them sensitive to modelling and data error.

 

If Ms, calculated as “the accumulated deposits arising from unearned deposit income on the total domestic banking system deposits M3(excluding repos) ”agrees more or less with that calculated in equation (4), bearing in mind the value of Mb, the proposition that debt growth is determined by deposit interest will be proven.  The model will require further calibration as further data becomes available.  Despite that, it is self-evident Db will be positive during periods of rapid expansion, particularly as bubbles form, and will become negative during periods of rapid contraction, particularly as bubbles collapse. The classic case of this in New Zealand is shown in Figure 5. Financial contraction continued following the 1987 share market crash long after the asset bubble was gone.

 

The dependence of the gross domestic product (GDP) on the Domestic Credit DC and the interest rate on bank deposits in the modern cash-free economy from which Ms is calculated has profound implications for economics.

 

In the light of the worldwide financial chaos of 2007-2009 the indicative debt model shown in Figure 1 provides a powerful argument in support of public control of a nation’s financial system.

 

Click here to view FIGURE 1 : THE SCHEMATIC DEBT MODEL OF A DEBT-BASED ECONOMY.

 

The vertical axis in Figure 1 applies to the Domestic Credit for New Zealand only. The other curves are purely to demonstrate the debt model structure. The present system shown in Figure 1 leaves the world economy at the mercy of private banking institutions working for private profit by allowing irresponsible increases and contractions (Db in equation (2)) of the Domestic Credit and its associated bubble formation. The problem is systemic because the existing financial system requires exponential growth (Figure 2), that allows the accumulated current account debt Dca to expand. In the case of New Zealand, the expansion of foreign ownership caused by the accumulated current account deficit largely defines the deposit interest rate and systemic inflation.

 

It isn’t possible to have a simpler model of the economy than equation (5):

 

My =Nominal GDP/Vy equals domestic credit DC less (unearned net deposit income Ms + the accumulated current account Dca + the cash contribution to GDP  M0y  plus a correction for bubble activity Db (+/-))

 

Domestic Credit DC, Unearned Income Ms and nominal GDP must all grow exponentially because they are all a function of the deposit interest rate. The exponentials of the curves in equations (3) to (5) will be different with respect to each other and because of large variations in the deposit rate over time. In New Zealand, Domestic Credit has grown exponentially by an average of about 9% per year since 1993 while nominal GDP has increased by about 5.25% annually as shown in Figure 2. Figure 2 shows both the 2005-2009 bubble and the 2010-2011 bust clearly. The difference between the two curves is mainly the result of domestic debt needed to fund the accumulated current account deficit that, in New Zealand, is  roughly 90% of GDP.


Click here to view FIGURE 2 :  EXPONENTIAL DEBT AND GDP NEW ZEALAND, 1993-2011.

 

It is theoretically impossible to maintain exponential debt expansion faster than GDP expansion over an extended period because the added debt servicing costs will always leave the productive sector insolvent.

 

To avoid national bankruptcy, each nation must maintain, in aggregate, a zero accumulated current account deficit.

 

A first approximation for the speed of circulation Vy of productive debt plus cash transactions My is given in Figure 3. Vy varies with the change in the payments systems. Minor secondary shorter-term cyclical variability also occurs through changes in the average time taken to pay bills.  When times are tough people take longer to pay their bills, and each change of a day in the time taken to pay them can alter Vy by perhaps 0.25%. The process is usually reversed in better times. Otherwise Vy reached a constant value of about 18.7 in 2006 and Vy will remain more or less constant unless the payment systems change 53.

 

53. Vy is estimated at the moment so the present figures are indicative. Once further research accurately refines the present estimates, Vy will be sufficiently accurate for predictive purposes.

 

Click here to view FIGURE 3 : SPEED OF CIRCULATION Vy NEW ZEALAND 1978-2011.

 

Note that in Figure 3, no correction has been applied to Vy for secondary increases in payment time during recessions or decreases in payment time during economic boom periods. The maximum correction in Vy appears to be in the order of +/- 0.3 or up to 1.5%. The series shown is less stable from 1978 to 1989. This is possibly due to distinctly different growth exponentials 1978-1989 arising from the very high interest rates that were typical during those years.

 

As shown in Figure 4, My in New Zealand was about NZ$ 10 b or  just 5% of GDP. 

 

Click here to view FIGURE 4 : ESTIMATED TRANSACTION FUNDING My NEW ZEALAND 1990-2011.

 

The methodology used to calculate Vy in Figure 4 is as follows. The GDP in New Zealand in March 2010 was made up of about 45% compensation to employees, 42.7% gross operating surplus and 12.3% indirect taxes such as GST (VAT).  That distribution varies over time and is influenced by political decisions.  For example, in 2005 in New Zealand the proportion was 42%, 45%, 13% respectively, but small variations do not have too much effect on My.

 

Businesses pay suppliers monthly, and indirect payments are usually made on a monthly basis too, so their speed of circulation is about 12 on average. Most workers get paid fortnightly (though some get paid weekly and some monthly) so an average speed of circulation of 26 has been assumed for that.

 

When the above figures are weighted the weighted average speed of circulation is (12x(42.7+12.3)+45 x 26)/100  = 18.3.

 

A similar estimate of payment trends and a separate Vy calculation was made for each of the other years, and a polynomial best fit curve was drawn as in Figure 15. 

 

My was then obtained by dividing the official GDP figure by the speed of circulation taken off the best fit trend curve.  This gives the data series shown in Figure 5 and used  when applying the debt model.  

 

The methodology is easily replicable using better information about payment trends and is applicable to any country.

 

Figure 4 shows the preliminary estimate for estimated production debt and cash My in New Zealand between 1990 and 2011. The reason the exponential for My in Figure 4 (5.72%) and GDP in Figure 2 (5.27%) are different is that the speed of circulation Vy has also been changing from year to year (as a second order polynomial). Vy has been changing because income payment patterns have changed over time as shown in Figure 3, especially as a greater proportion of people have been paid fortnightly instead of weekly. The productive debt Mv is obtained by dividing the actual gross domestic product (GDP) by the estimated value of Vy. The curve of My clearly shows the expansions and contractions in New Zealand’s economy over the past two decades. The loss of productive liquidity in the March 2010 year is the stand-out event over the past 20 years.

 

Figure 5 shows an indicative comparison between the residual debt Ds for New Zealand calculated from equation (2) and plotted against the model Ms calculated as the accumulated after tax deposit interest on M3 (excluding repos). The curve for Ms is a first approximation because assumptions have been made on the average tax deducted from the gross payments of unearned income (M3 (excluding repos x the average interest paid on deposits).  The tax is the average tax paid by each income-earner on his or her total income. It is not the marginal tax rate 54.  The losses from the 1987 share market crash in New Zealand were very large. Figure 4 suggests a figure as high as 10% of Domestic Credit.

 

Once the tax rates on Ms have been accurately calibrated, the size of any debt bubble Db  can be immediately calculated. Measures can then be taken to eliminate the bubble without risking any economic downturn.

 

Click here to view FIGURE 5 : BUBBLE DEBT Db AND Ms NEW ZEALAND 1978-2011.

 

54. In theory, the average tax rates could be quite accurately determined from income tax returns.

 

 

08.  APPENDIX 3:  CALCULATIONS FOR TABLE 4.

 

i)  High income family -2 children.

 

Take an “upper” New Zealand household with an income of NZ$ 150,000 (1 earner) and net assets of NZ$ 1,000,000. The present income tax is about NZ$ 40,420 so the net income is NZ$ 109,580.  Under the proposed GMI the family would receive:

 

- GMI   NZ$ 670/week  (Table 3) x 52                                                              NZ$  34,840

- Earned income NZ$ 150,000 x (1-0.415)                                                        NZ$  87,750

- Less NZ$ 1,000,000 x 1%                                                                              (NZ$  10,000)

 

Total                                                                                                                   NZ$ 112,590

 

High income New Zealand families will be NZ$ 3,010 better off.

 

With income splitting, one adult earning NZ$ 50,000 and the other earning NZ$ 100,000

Their combined income tax would be NZ$ 31,940 instead of NZ$ 40,240 and the family would be NZ$ 5,480 worse off instead of NZ$ 3,010 better off.

 

ii)  High family income – no children.

 

When the same calculation is applied to a married couple without children, the numbers change significantly.

 

- GMI   NZ$ 470/week  (Table 3) x 52                                                              NZ$  24,440

- Earned income NZ$ 150,000 x (1-0.415)                                                        NZ$  87,750

- Less NZ$ 1.000,000 x 1%                                                                               (NZ$ 10,000)

 

Total                                                                                                                   NZ$ 102,190

 

A couple in the high household income bracket is NZ$ 7,390 worse off.

 

With income splitting, one adult earning NZ$ 50,000 and the other earning NZ$ 100,000

Their combined income tax would be NZ$ 31,940 and the couple would be NZ$ 15,700 worse off instead of  NZ$ 7,400 worse off.

 

iii) High  income – single person household.

 

When applied to a single person household on a similar basis the calculation becomes:

 

- GMI   NZ$ 350/week  (Table 3) x 52                                                              NZ$ 18,200

- Earned income NZ$ 150,000x(1-0.415)                                                          NZ$ 87,750

- Less NZ$ 1,000,000 x 1%                                                                              (NZ$ 10,000)

Total                                                                                                                   NZ$ 95,950

 

The single person upper income working household with substantial assets loses about NZ$ 13,630 in net income, showing again how the GMI  is weighted towards families with children, and lower incomes.

 

iv) Upper income family -2 children.

 

Take an “upper” New Zealand household with an income of NZ$ 100,000 (1 earner) and net assets of NZ$ 500,000. The present income tax is about NZ$ 23,920 so the net income is NZ$ 76,080.  Under the proposed GMI the family would receive:

 

- GMI   NZ$ 670/week  (Table 3) x 52                                                              NZ$ 34,840

- Earned income NZ$ 100,000 x (1-0.415)                                                        NZ$ 58,500

- Less NZ$ 500,000 x 1%                                                                                  (NZ$  5,000)

 

Total                                                                                                                     NZ$ 88,340

 

Upper income New Zealand families will be much better off (NZ$ 12,260) under the proposed GMI where there is no income splitting between adults in the household.

 

With income splitting, one adult earning NZ$ 33,333 and the other earning NZ$ 66,666

Their combined income tax would be NZ$ 13,020 instead of NZ$ 23,920 and the family would be NZ$ 1,360 better off instead of NZ$ 12,260 better off.

 

v) Upper family income – no children.

 

When the same calculation is applied to a married couple without children, the numbers change significantly.

 

- GMI   NZ$ 470/week  (Table 3) x 52                                                              NZ$ 24,440

- Earned income NZ$ 100,000 x (1-0.415)                                                        NZ$ 58,500

- Less NZ$ 500,000 x 1%                                                                                  (NZ$  5,000)

Total                                                                                                                     NZ$ 77,940

 

A couple without children in the upper household income bracket is NZ$ 1,860 better off.

 

With income splitting, one adult earning NZ$ 33,333 and the other earning NZ$ 66,666

Their combined income tax would be NZ$ 13,020 instead of NZ$ 23,920 and the family would be NZ$ 9,040 worse off instead of NZ$ 1,860 better off.

 

vi) Upper family income – single person household.

 

When applied to a single person household on a similar basis the calculation becomes:

 

- GMI   NZ$ 350/week  (Table 3) x 52                                                              NZ$ 18,200

- Earned income NZ$ 100,000x(1-0.415)                                                          NZ$ 58,500

- Less NZ$ 500,000 x 1%                                                                                  (NZ$  5,000)

Total                                                                                                                    NZ$ 71,700

 

The single person upper income working household loses NZ$ 4,380 in net income, showing again how the GMI  is weighted towards families with children and lower incomes.

 

vii)   Average family income -2 children.

 

Take an “average” New Zealand household with an income of NZ$ 75,000 (1 earner) and net assets of NZ$ 300,000. The present income tax is about NZ$ 15,670 plus a tax credit $57/week  so the net income is NZ$ 62,297 55.  Under the proposed GMI the family would receive:

 

- GMI   NZ$ 670/week  (Table 3) x 52                                                              NZ$ 34,840

- Earned income NZ$ 75,000 x (1-0.415)                                                          NZ$ 43,875

- Less NZ$ 300,000 x 1%                                                                                  (NZ$  3,000)

 

Total                                                                                                                   NZ$ 75,715

 

Average New Zealand families with children will be much better off (NZ$ 13,418) under the proposed GMI.

 

With income splitting, one adult earning NZ$ 25,000 and the other earning NZ$ 50,000

Their combined income tax would be NZ$ 11,415 instead of NZ$ 15,670 before the tax credit is taken into account and the family would be NZ$ 9,163 better off instead of NZ$ 13,418 better off.

 

55  Before allowing for any government transfers.

 

viii) Average family income – no children.

 

When the same calculation is applied to a married couple without children, the numbers change significantly because there is no tax credit and the income is $59, 333

 

- GMI   NZ$ 470/week  (Table 3) x 52                                                              NZ$ 24,440

- Earned income NZ$ 75,000 x (1-0.415)                                                          NZ$ 43,875

- Less NZ$ 300,000 x 1%                                                                                  (NZ$  3,000)

 

Total                                                                                                                   NZ$ 65,315

 

A couple on the average household income is still NZ$ 5,982 better off.

 

With income splitting, one adult earning NZ$ 25,000 and the other earning NZ$ 50,000

Their combined income tax would be NZ$ 11,415 instead of NZ$ 15,670, and they would be NZ$ 1,727 better off instead of NZ$ 5,982 better off.

 

ix) Average family income – single person household.

 

When applied to a single person household on a similar basis the calculation becomes:

 

- GMI   NZ$ 350/week  (Table 3) x 52                                                              NZ$ 18,200

- Earned income NZ$ 75,000 x (1-0.415)                                                          NZ$ 43,875

- Less NZ$ 300,000 x 1%                                                                                  (NZ$  3,000)

 

Total                                                                                                                   NZ$ 59,075

 

The single person average income working household is tax neutral.

 

x) Lower income family -2 children (a) income 50000.

 

Take a “ low” New Zealand household with an income of NZ$ 50,000 (1 earner) and no net assets. The present income tax is about NZ$ 8,020 so the net income is NZ$ 41,980.  To that add (from table 3) tax credits of NZ$ 155/week and an accommodation allowance of, say NZ$ 165/week), bringing the total income to NZ$ 58,620. Under the proposed GMI the family would receive:

 

- GMI   NZ$ 670/week  (Table 3) x 52                                                              NZ$ 34,840

-  Earned income NZ$ 50,000 x (1-0.415)                                                         NZ$ 29,250

- Less NZ$ 0 x 1%                                                                                             (NZ$          0)

 

Total                                                                                                                    NZ$ 64,090

 

Low income New Zealand families with children will be NZ$ 5,470 better off under the proposed GMI.   

 

With income splitting, one adult earning NZ$ 16,667 and the other earning NZ$ 33,333

Their combined income tax would be NZ$ 6.790 instead of NZ$ 8,020 before the tax credit is taken into account and the family would be NZ$ 4,240 better off instead of NZ$ 5,470 better off.

 

xi) Low family income – no children.

 

When the same calculation is applied to a married couple without children, the numbers change significantly because the only addition to the after tax income would be, say,

NZ$ 125/week for the accommodation allowance. For a total income of NZ$ 48, 480. The GMI offers substantial relief to these very low income households

 

- GMI   NZ$ 470/week  (Table 3) x 52                                                              NZ$ 24,440

- Earned income NZ$ 50,000 x (1-0.415)                                                          NZ$ 29,250

- Less NZ$ 0 x 1%                                                                                              (NZ$        0)

 

Total                                                                                                                    NZ$ 53,690

 

A  low income couple will be much better off by about NZ$ 5,210/year.

 

With income splitting, one adult earning NZ$ 16,667 and the other earning NZ$ 33,333

Their combined income tax would be NZ$ 6,790 instead of NZ$ 8,020 and the couple would be NZ$ 3,980 better off instead of NZ$ 5,210 better off.

 

xii) Low income – single person household.

 

When applied to a single person household on a similar basis but with the accommodation allowance at NZ$ 100/week present total income is NZ$ 47,180: the calculation becomes:

 

- GMI   NZ$ 350/week  (Table 3) x 52                                                              NZ$ 18,200

- Earned income NZ$ 35,000 x (1-0.415)                                                          NZ$ 29,250

- Less NZ$ 0 x 1%                                                                                            (NZ$          0)

 

Total                                                                                                                    NZ$ 47,450

 

The single person low income working household is tax neutral.

 

xiii) Bottom income family -2 children (a) income 35000.

 

Take a “very low” New Zealand household with an income of NZ$ 35,000 (1 earner) and no net assets. The present income tax is about NZ$ 5,145 so the net income is NZ$ 29,855.  To that add (from table 3) tax credits of NZ$ 226/week and an accommodation allowance of, say NZ$ 165/week), bringing the total income to NZ$ 50,187. Under the proposed GMI the family would receive:

 

- GMI   NZ$ 670/week  (Table 3) x 52                                                              NZ$ 34,840

- Earned income NZ$ 35,000 x (1-0.415)                                                          NZ$ 20,475

- Less NZ$ 0 x 1%                                                                                             (NZ$          0)

 

Total                                                                                                                     NZ$ 55,315

 

Very low income New Zealand families with children will be NZ$ 5,128 better off under the proposed GMI.

 

With income splitting, one adult earning NZ$ 11,667 and the other earning NZ$ 23,333

Their combined income tax would be NZ$ 4,328 instead of NZ$ 5,145 before the tax credit is taken into account and the family would be NZ$ 4,311 better off instead of NZ$ 5,128 better off.

 

xiv) Bottom family income – no children.

 

When the same calculation is applied to a married couple without children, the numbers change significantly because the only addition to the after tax income would be, say, NZ$ 125/week for the accommodation allowance. For a total income of NZ$ 36,355. The GMI offers substantial relief to these very low income households.

 

-  GMI NZ$ 470/week  (Table 3) x 52                                                               NZ$ 24,440

-  Earned income NZ$ 35,000 x (1-0.415)                                                         NZ$ 20,475

- Less NZ$ 0 x 1%                                                                                            (NZ$          0)

Total                                                                                                                    NZ$ 44,915

 

A very low income couple will be much better off by NZ$ 8,560/year.

 

With income splitting, one adult earning NZ$ 11,667 and the other earning NZ$ 23,333

Their combined income tax would be NZ$ 4,328 instead of NZ$ 5,145 and the couple would be NZ$ 7,743 better off instead of NZ$ 8,560 better off.

 

xv) Bottom income – single person household.

 

When applied to a single person household on a similar basis but with the accommodation allowance at NZ$ 100/week present total income is NZ$ 35,055: the calculation becomes:

 

- GMI   NZ$ 350/week  (Table 3) x 52                                                              NZ$ 18,200

- Earned income NZ$ 35,000 x (1-0.415)                                                          NZ$ 20,475

- Less NZ$ 0 x 1%                                                                                            (NZ$          0)

 

Total                                                                                                                    NZ$ 38,675

 

The single person very low income working household is NZ$ 3620 better off.

 

 

09.  BIBLIOGRAPHY.

 

Allsopp C & Vines D, (2008) “Fiscal policy, intercountry adjustment and the real exchange rate in Europe”, European Commission, Economic and Financial Affairs, Economic Papers  344, October 2008

 

Baker D (2008),  “The Benefits of a Financial Transactions Tax” Center for Economic and Policy Research,  December 2008. 

 

Bertram G (2009), “The Banks, the Current Account, the Financial Crisis and the Outlook”, Policy Quarterly, Vol. 5 Issue 1, February 2009.

 

Brand C (2010), “Commission Calls for Tax on Financial Transactions”, 6/April/2010.

 

Brash D (1996), .  New Zealand and international financial markets: have we lost control of our own destiny?”   Address by Donald T Brash, Governor of the Reserve Bank of New Zealand to the 31st Foreign Policy School, University of  Otago, Dunedin, 29th June 1996.

 

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Unknown authors, (ca. 2000) “Alternative monetary policy instruments”. 

 


 

MORE ON MONETARY REFORM :

 

NEW Capital is debt.

 

NEW Comments on the IMF (Benes and Kumhof) paper “The Chicago Plan Revisited”.

 

DNA of the debt-based economy.

General summary of all papers published.(Revised edition).

How to create stable financial systems in four complementary steps. (Revised edition).

How to introduce an e-money financed virtual minimum wage system in New Zealand. (Revised edition) .

How to introduce a guaranteed minimum income in New Zealand. (Revised edition).

Interest-bearing debt system and its economic impacts. (Revised edition).

Manifesto of 95 principles of the debt-based economy.

The Manning plan for permanent debt reduction in the national economy.

Missing links between growth, saving, deposits and GDP.

Savings Myth. (Revised edition).

Unified text of the manifesto of the debt-based economy.

Using a foreign transactions surcharge (FTS) to manage the exchange rate.

 

 

(The following items have not been revised. They show the historic development of the work. )

 

Financial system mechanics explained for the first time. “The Ripple Starts Here.”

Short summary of the paper The Ripple Starts Here.

Financial system mechanics: Power-point presentation. 

 

 


 

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"Money is not the key that opens the gates of the market but the bolt that bars them."

Gesell, Silvio, The Natural Economic Order, revised English edition, Peter Owen, London 1958, page 228.


 

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