Tax anticipation notes

I think that over-long explanation might not aid understanding, it's hard to think of ways to put some of this succintly - a simplified explanation is that the gap you see can be filled with TAN's.

Adding to all of the above: The economic recovery that the TAN's will spark, will increase tax revenues as well, which will automatically increase the amount of Euro's collected in taxes as well (maybe not beyond what was collected before TAN's were introduced, but it would help close the gap later on, when TAN's are recalled).

Ah, missed this post:

roro2 wrote: »

Apart from plenty of other issues, the point about it not affecting our creditworthiness, being an interest-free solution, etc just isn't true.

Total tax revenues this year will be €38bn and total current spending will be €51bn. Investors have bought billions of euro of Irish bonds over the last 2 years and reduced interest rates on these bonds to affordable levels on the basis that this huge gap between revenue and spending will be closed. If you now turn around and say that we are going to forego €10bn of future tax revenue per year (400,000 unemployed paid €25k in TANs), will these investors say "that's ok, we still think you'll have enough tax revenue left over to pay us our interest and redeem our bonds"? I don't think so - they will flee, and any market funding that we do manage to get will be at unaffordable levels. It's akin to hoping the economic payoff is so large that you don't need external support or financing anymore, i.e. that the benefits outweigh the current €12bn revenue gap. I don't see where these benefits are coming from, other than the hope that the private sector can very quickly absorb the 400,000 unemployed, full employment is achieved and everybody pays enough tax again. (A similar argument to those that said we should default and move to a permanent self-funding position overnight without our debt burden).

I do admire your "out of the box" thinking though!

There aren't other issues though - pretty much none put forward, provide any show-stopping challenges for TAN's; the majority of the issues presented thus far, are non-issues due to the way TAN's work.

With TAN's we don't need any more market funding - and once they are demonstrated, showing they restore the economy, any lack of confidence from the markets would disappear - it would be bolstered in fact, by a recovering economy.

Even that wouldn't benefit-us/matter though: We wouldn't be depending on government bonds for funding anymore. We wouldn't need investors buying any more bonds.

Full-employment would be achieved within a very short time with the Job Guarantee program - though full private sector employment would take longer.
That's a pretty enormous benefit straight off the bat - all those people working/earning again, restoration of public services and expansion of infrastructure (among other useful work done), and spending increased in the private economy due to the wages paid.

roro2 wrote: »

Full employment in name perhaps, but 400,000 additional public sector workers being paid by future tax revenues/government borrowing. At the moment we have about 20% of tax revenues being used to service government debt, and now the suggestion is that another 25% of tax revenues are foregone to fund massive increases to the public sector. The remaining tax revenues are going to have to stretch an awful long way, particularly with all this new infrastructure development to fund and maintain...

I accept that a government stimulus package of this magnitude would boost GDP (temporarily), but there's no surprise there - that is standard economics and would have solved a lot of the current problems had we been able to fund such a programme. And that is the crux of the problem. Tax revenues in 2013 will be €12bn short of funding current government spending, and now this proposes to reduce tax revenues by 1/4 and increase spending by an unspecified amount.

You don't service payments on TAN's like you do regular government bonds - TAN's don't carry interest, so don't suffer the same problem of burdensome interest payments.

So long as your remaining tax intake of Euro's, meets all your Euro-only obligations, there's no 'stretching' of tax revenue - you are taking in less Euro in taxes, but equally, you are using less Euro in spending as well.

For every Euro in TAN's paid out as part of government spending, that's one less Euro you need to raise in taxes if you use TAN's for the same spending next year as well; for every TAN used to pay a tax liability, that shortfall in tax revenue, isn't really a shortfall because you'll just be spending the same amount as the shortfall in TAN's again - which keeps the amount of TAN's circulating, constant (the TAN's aren't recalled until later on, after economic recovery is achieved).

roro2 wrote: »

How do we not need to sell government bonds? How do you fund this increased hole without going to the markets? And how do you not spook the markets? Also, as things currently stand, bondholders are effectively senior in the payment structure to other parts of government spending (austerity measures reduce public sector wages, capital spending, etc - bond interest or redemptions are not reduced). It also sounds like this proposal effectively subordinates bondholders and prioritises the TANs (unless the value of the TANs could be arbitrarily reduced by government in the future if they need to balance the books).

Government don't need to sell bonds, because government can spend with TAN's. Markets would not be spooked, because they would see the countries economy gradually recovery due to TAN's, which benefits everybody - that (market perceptions) doesn't matter to government though, because government do not need to seek investors for bonds, because government can just use TAN's instead (which carry no interest, so are inherently preferable to bonds).

Additionally, the increase in economic activity, is going to increase tax revenues, due to (generally) increased profits and wages - this is going to close any non-TAN-based tax/revenue gaps.

It doesn't subordinate anyone either - bondholders etc. still have first dibs on Euro payouts; TAN's are never actually redeemed for Euro's, only to pay down tax liabilities.

roro2 wrote: »

The current government is spending €51bn and taking in €39bn. You are proposing to increase spending by approx. €10bn (400,000 added to the public payroll) and an unspecified amount due to the costs of a massive infrastructure programme (building costs, etc and then maintenance). But the wage costs will be paid in TANs. So, spending increases to something like €55bn cash + non-cash TANs of about €10bn. At the same time, revenue reduces by the TANs, so €39bn goes to €29bn. How is the (55-29) €26bn hole plugged? Am I missing something? Is the bigger hole just plugged by more TANs? Are they introduced into the wider public sector, all wages, supplier payments, etc?

I think markets would take more of a fright from this then any stimulus-induced boost to GDP. Bondholders care about governments having enough cash to pay them - they do not directly benefit from a gradually recovering economy. And if you forego all your tax revenues, there is no cash to pay them.

As for the amount of TAN's being constant, that's fine. But assuming the 400,000 don't migrate to the private sector by the following year, another €10bn of tax will be foregone the following year by having them still on the public payroll.

You would have a portion of the public sectors existing pay switched over to TAN's as well, and you would have a massive reduction in the welfare budget, due to people being put on the jobs program instead - so a large portion of the wages that will be getting paid, will already be factored into, from the existing welfare payments (so it would not be a whole €10 billion out of nowhere - which itself is an arbitrary figure - you need to deduct current welfare cost).

Spending, in terms of Euro's, reduces by the amount of TAN's used for spending - precisely the same as tax income does; they mirror one another, so you're double-counting in your figures there.


Current bondholders won't really have any influence - their interest rate is fixed, and we are not going to seek investors for new bonds (whose interest rate is not fixed), because we can use TAN's instead.
What investors think, does not matter, when you won't be selling bonds to them.


What matters, is solely that these policies lead to enough economic growth, to recover the economy, which would balance out revenue vs spending (ensuring the sustainability of the increased spending), and allow recalling the TAN's once full economic recovery is achieved.

Your statement that there will be a shortfall by the same amount, year on year, is wrong - because economic growth would be increasing tax revenue, and workers moving back into the private sector would be reducing government spending, bringing the budget closer to balance.

Double-counting may not be the correct word - it's just important to focus on how shortfall in revenue due to TAN's, also decreases (Euro-based) government spending by the same amount.

You're right to point out the imbalance in the budget though, because this will require an increase in tax revenue year on year to close the gap, and that will either have to come from economic growth (which will both increase tax revenue due to increased wages/profits, and decrease government spending due to private employment taking workers out of the jobs program), or growth and increased taxation (doing it with reduced spending wouldn't work and would be no different to now - need growth, even if taxation ends up slowing the growth).

You can even delay any changes to taxation for a good few years (even if spending more than taxing), because there will mainly be a problem when so many TAN's are circulating that Euro-based tax revenue gets so low, that governments Euro-only obligations (including a portion of workers wages being in Euro's) become threatened, which would take a number of years (or, if economic recovery/growth occurs fast enough, this may not be a problem as the budget would balance itself out).


Alternatively, you could look at having more TAN's in circulation than can be taxed in a year, while having a mechanism in place to enforce collection of enough Euro's in tax - this could be done, by requiring a certain percentage of taxes be paid in Euro, or by having TAN's which can only be used to extinguish tax liabilities after a longer period of time (say, 2 years), but these would both require a larger discount (still likely quite low single digits), and it's not something I've thought about in detail yet - but I don't see any show-stoppers with that (I like the percentage-based method better).

That would allow prolonged expansion of the TAN circulation, beyond tax revenue, giving plenty of time to grow the economy towards recovery and recall those TAN's later.


In the end, the whole idea of it is to allow government spending in excess of taxes - Euro-only obligations still have to be met though, which limits the scope of this, but much of the rest of the spending can be met with TAN's.

I'm slowly reforming my thoughts on this as I type: Another way to look at this, would be to think of two separate government spending and taxation systems:
1: The Euro-based system. Government has a certain amount of Euro-only obligations that must be met, and you must tax at least this amount of Euro's. This budget must not be in deficit.

2: The TAN-based system where government can deficit spend TAN's, and tax less TAN's than it spends, which itself can take two forms:
A: Peoples full tax liability can be paid off with TAN's. Economic growth/recovery has to be fast, to close the budget gap - if it is not, this only allows a few years of deficit spending TAN's, before the number of circulating TAN's threaten the Euro-only budget - at that point, the budget must be balanced, or you are forced to rely on government bonds again.

B: Only a percentage of peoples tax liability can be paid off with TAN's (say, 50-80% - this percentage, depends on how much of government spending must be Euro-only), the rest must be paid in Euro's. This has a higher discount, but allows much larger and prolonged deficit spending of TAN's (with no budget balancing - not even the potential tax increases, mentioned above), up to the point at which the central bank steps in, due to hitting inflation targets (the budget would then be balanced, and there would still be enough economic activity and TAN's circulating, to restore the economy).

Yes Euro's exiting the economy through imports is a good point, and (just like government having to be concerned about it's Euro-only obligations) is something that would have to be monitored - and something that may place a limit on how many TAN's can be circulated (but I don't think this would happen).

There are a lot of Euro's in the economy though, so I don't view it as too much of a problem - we can actually use the time that we are spending TAN's, to invest in significantly boosting our competitiveness on international markets (without having to undergo 'internal devaluation'), then when Europe and the rest of the worlds economy recovers, we will be ready to earn back all of those Euro's - and then some - because we will have gotten back on our feet economically, long before others.

So I don't think the length of time that TAN's are used, or the length of time deficit spending, is very important (I think it has a low cost - not nothing, but with far more gain than cost) - we have all this idle labour and industry sitting around, and with the rest of the world (in a sense) choosing to depress their economic activity and resource usage (by not engaging in recovery), it's actually a really great opportunity to get ahead of everyone else and build-up/future-proof our real economy for less cost, before the rest of the world catches on and begins economic recovery - thus making use of the same worldwide resources we can purchase now for less, bidding up their price back to normal.


The people we currently owe interest to, wouldn't really be able to gain higher interest - it would only be newly issued bonds which are open to interest rate changes, and we wouldn't be issuing more of those.