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Tax anticipation notes

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  • 08-12-2013 8:34am
    #1
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭


    I have a decent understanding of the range of policy alternatives for resolving the EU economic crisis, and I've come across one I do not know quite as well, which seems to provide an interesting means of allowing countries to act on their own to boost fiscal funding, without EU help, while staying in the Euro:
    ...the following alternative public financing instrument may need to be unilaterally adopted in each peripheral nation in the eurozone. Federal governments will henceforth issue revenue anticipation notes to government employees, government suppliers, and beneficiaries of government transfers.

    These tax anticipation notes, which are a well known instrument of public finance by many state governments across the US, will have the following characteristics: zero coupon (no interest payment), perpetual (meaning no repayment of principal, no redemption, and hence no increase in public debt outstanding), transferable (can be sold onto third parties in open markets), and denominated in euros.

    In addition, and most importantly, these revenue anticipation notes would be accepted at par value by the federal government in settlement of private sector tax liabilities.
    ...
    Essentially, the government is securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit that will not be counted as a liability on its balance sheet, and will not require a stream of future interest payments in fiscal budgets.


    One advantage of this alternative financing approach is that day one, the government issuing these tax anticipation notes [] can pursue the fiscal deficits that are required to return their economy to a full employment growth path. Fiscal austerity can be abandoned without abandoning the euro.
    http://neweconomicperspectives.org/2013/12/exit-austerity-without-exiting-euro.html

    These seem to be analogous to government bonds (but are not counted as public debt), except they don't carry any interest, and even if you give them a due-date, you can still just roll them over (create more when they fall due) for as long as you like.

    The main penalty, is this would likely breach EU 'Stability' and 'Growth' pact conditions, and lead to fines through that, but this would pale in comparison to the benefits of economic recovery.


    I'm not sold on the idea though, and I think there may be some unseen legal/political restrictions on it (there are good discussions in the links comments thread - if there are no such restrictions, there is little Europe can do to stop countries doing this independently), but I'm hopeful it could be workable, and wonder if people can think of any legal/political roadblocks?


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    #2
    ezra_pound
    Registered Users Posts: 2,497 ✭✭✭ezra_pound


    KyussBishop wrote: »
    I have a decent understanding of the range of policy alternatives for resolving the EU economic crisis, and I've come across one I do not know quite as well, which seems to provide an interesting means of allowing countries to act on their own to boost fiscal funding, without EU help, while staying in the Euro:

    http://neweconomicperspectives.org/2013/12/exit-austerity-without-exiting-euro.html

    These seem to be analogous to government bonds (but are not counted as public debt), except they don't carry any interest, and even if you give them a due-date, you can still just roll them over (create more when they fall due) for as long as you like.

    The main penalty, is this would likely breach EU 'Stability' and 'Growth' pact conditions, and lead to fines through that, but this would pale in comparison to the benefits of economic recovery.


    I'm not sold on the idea though, and I think there may be some unseen legal/political restrictions on it (there are good discussions in the links comments thread - if there are no such restrictions, there is little Europe can do to stop countries doing this independently), but I'm hopeful it could be workable, and wonder if people can think of any legal/political roadblocks?

    Tax anticipation notes are only normally issued with a max term of about one year. They also carry a fairly big Discount so its not necessarily a cheap option.

    Would you buy them?


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    #3
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    ezra_pound wrote: »
    Tax anticipation notes are only normally issued with a max term of about one year. They also carry a fairly big Discount so its not necessarily a cheap option.

    Would you buy them?
    By Discount, you mean they are usable to pay down tax, by the same amount as the TAN? (Tax Anticipation Note)

    TAN's don't need to be bought/sold on the private markets, but they can be if holders of them desire to (for instance: if they hold more TAN's than they have tax liabilities).

    If I have taxes to pay, then there's no reason for me not to accept TAN's as payment (either from government or other holders of TAN's), up to my limit of tax liabilities (or more, depending on the due date, which does not have to be any fixed length of time).


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    #4
    ezra_pound
    Registered Users Posts: 2,497 ✭✭✭ezra_pound


    KyussBishop wrote: »
    By Discount, you mean they are usable to pay down tax, by the same amount as the TAN? (Tax Anticipation Note)

    TAN's don't need to be bought/sold on the private markets, but they can be if holders of them desire to (for instance: if they hold more TAN's than they have tax liabilities).

    If I have taxes to pay, then there's no reason for me not to accept TAN's as payment (either from government or other holders of TAN's), up to my limit of tax liabilities (or more, depending on the due date, which does not have to be any fixed length of time).

    No by discount I mean that they are sold for less than they are worth. Ie. 100 $ bond issued for 85 $ etc.


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    #5
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    ezra_pound wrote: »
    No by discount I mean that they are sold for less than they are worth. Ie. 100 $ bond issued for 85 $ etc.
    Government will distribute them at their face value, say €100 worth, and that will extinguish exactly €100 in tax liabilities - if holders of TAN's (the people who are partially paid in them by government) trade them in private markets, for less Euro's than their face value, they would be making a loss compared to just holding on to them and using them to pay taxes, so they would have no reason to do that.

    Lets say though, that TAN's get issued beyond the holders tax liabilities, which would create a reason to trade them privately, and which may cause their trade price to drop, to (for example) €95:
    This would allow private companies (and pretty much anyone with tax liabilities - i.e. everyone) who do not have TAN's, to be able to trade €95, in order to extinguish €100 worth of taxes.

    Effectively, that would allow them to save €5 out of every €100 worth of taxes, reducing their tax liabilities by 5% - this would than create high demand for TAN's, and that would then (through supply and demand) reduce any discount to a very small value, keeping TAN's very close to parity with Euro's.


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    #6
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Interestingly, there is a similar proposal (it's very different in implementation, but has a similar principal of notes - or in this case bonds - that can be used to as payment for taxes) by Phil Pilkington (an Irish economist) and Warren Mosler, which was proposed to the Irish government last year, but which seems to have been knocked-down based on vague/unclarified reasoning by Michael Noonan:
    https://fixingtheeconomists.wordpress.com/2013/12/05/press-release-for-my-new-tax-backed-bonds-policy-note-at-levy

    The link is an updated version of the proposal from a few days ago, for addressing last years concerns; so this makes two (partially related) ideas, which can allow government to pursue boosted fiscal spending, to exit austerity and achieve economic recovery.

    Here is the direct document:
    http://www.levyinstitute.org/pubs/pn_13_10.pdf


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    #7
    [Deleted User]
    Posts: 5,121 ✭✭✭ [Deleted User]


    What would the benefit to a supplier / employee / welfare recipient / whoever of accepting payment (in part or in whole) in these TANs over cash?

    Cash can be used to settle any tax bill, any other bill, can be paid as a dividend and it can earn interest.

    I note from the blog link you gave above:
    Federal governments will henceforth issue revenue anticipation notes to government employees, government suppliers, and beneficiaries of government transfers.
    ...
    or they could be sent as certificates, preferably in denominations of 50 and 100 euros, to facilitate their possible ease of use in other transactions, should private agents elect to do so.
    If the government issued 69,812,000,000 TANs during 2012 but the tax liability was only 56,524,000,000 what happens to the difference? Do those who received the TANs have to sit on them until they can use them or sell them at a discount to those who can afford to wait?

    About the only people I see benefiting from this would be the likes of myself - I might be able to settle my income tax bill with TANs bought from a teacher or welfare recipient for less than their face value and I could pocket the difference.


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    #8
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Deleted User wrote: »
    What would the benefit to a supplier / employee / welfare recipient / whoever of accepting payment (in part or in whole) in these TANs over cash?

    Cash can be used to settle any tax bill, any other bill, can be paid as a dividend and it can earn interest.

    I note from the blog link you gave above:

    If the government issued 69,812,000,000 TANs during 2012 but the tax liability was only 56,524,000,000 what happens to the difference? Do those who received the TANs have to sit on them until they can use them or sell them at a discount to those who can afford to wait?

    About the only people I see benefiting from this would be the likes of myself - I might be able to settle my income tax bill with TANs bought from a teacher or welfare recipient for less than their face value and I could pocket the difference.
    The benefit to the people receiving the TAN's, is that they can get higher payment and actually be given jobs, as opposed to having less payment or remaining unemployed - so that ends up more profitable for everybody, even if there was a discount.

    Since there do not appear to by any major roadblocks to using these, you should be able to completely end unemployment, with the correct jobs program.


    Spending enough TAN's in one year to exceed tax intake, would be a massive overspend, so I don't believe that would happen - I would think that the best way to run such a spending program, is to not let the number of TAN's in the economy, exceed tax intake (but that's just my personal take on it, it can still be exceeded).

    This (through supply and demand) minimizes any discount on the TAN's, while providing all the benefits of economic growth/recovery - and considering the benefits of that, even if a discount did start to develop, it would be kept in homeostasis (i.e. balanced at a relatively low level, due to supply and demand), and it would be far far outweighed by the benefits that economic recovery provides.


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    #9
    Peregrinus
    Registered Users Posts: 26,070 ✭✭✭✭Peregrinus


    I'm not sure that I follow the proposal exactly. Are you suggesting that the government will employ people, and pay them in TANs, as opposed to not employing them?

    If I'm the employee, obviously the bulk of my income is going to be in TANs, and since my income will vastly exceed my tax liablity, I'm going to have to sell my TANS for what they will fetch in a secondary market in order to get euros to pay rent, groceries, etc. And since TANs can only be used to pay one debt whereas money can be used to pay any debt, I'd expect TANs to trade at a material discount.

    That's not a huge problem perhaps. But there are a couple of other problems.

    First, if the government simply prints TANs, that has exactly the same inflationary effect as printing the (discounted) value of the TANs in currency.

    Secondly, what the government is actually doing is simply forgoing future tax revenues.

    Unless I'm missing something, it seems to me that the same result could be achieved by (a) printing money to the discounted value of the TANs and using that to pay wages, plus (b) passing a tax cut for next year equal to the value of the TANs that would have been printed.


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    #10
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Yes, people would be partially paid in TAN's - some of the payment (preferably most) would need to be in Euro's, which means likely a portion of all the public services wage pay, would be in TAN's.

    So no, not the whole income will be made up of TAN's; when you consider selling on TAN's on the private market, then (as I described in posts above):
    KyussBishop wrote:
    Lets say though, that TAN's get issued beyond the holders tax liabilities, which would create a reason to trade them privately, and which may cause their trade price to drop, [from €100] to (for example) €95:
    This would allow private companies (and pretty much anyone with tax liabilities - i.e. everyone) who do not have TAN's, to be able to trade €95, in order to extinguish €100 worth of taxes.

    Effectively, that would allow them to save €5 out of every €100 worth of taxes, reducing their tax liabilities by 5% - this would than create high demand for TAN's, and that would then (through supply and demand) reduce any discount to a very small value, keeping TAN's very close to parity with Euro's.
    So that quote above, explains how TAN's would be kept very close to parity with Euro's - there may be a discount, but the above would make sure the discount is tiny.

    Considering that TAN's would allow not just an expansion of public services and public spending, but also an increase in wages in the public sector, people would be more than happy to accept the wage increase, since that can easily be made to exceed any (miniscule) discount.


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    #11
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Peregrinus wrote: »
    First, if the government simply prints TANs, that has exactly the same inflationary effect as printing the (discounted) value of the TANs in currency.

    Secondly, what the government is actually doing is simply forgoing future tax revenues.

    Unless I'm missing something, it seems to me that the same result could be achieved by (a) printing money to the discounted value of the TANs and using that to pay wages, plus (b) passing a tax cut for next year equal to the value of the TANs that would have been printed.
    Replying to this second part about inflation, in another post:
    TAN's are basically like government bonds, or in other words, they are comparable to (even if not quite the same as) public debt - they function very differently, but are (in the end) pretty much just zero-interest bonds.

    So TAN's are (at worst) equally as inflationary as expanding public debt - in fact, public debt is worse in terms of inflation, because it pays interest on top of the original debt.

    We are also under a period of extremely low inflation, and disinflation:
    http://www.irishtimes.com/business/economy/euro-zone-inflation-at-lowest-level-in-almost-four-years-1.1596272

    So we need some inflation, so that we don't slip into a deflationary spiral.
    The TAN proposal, would also need to be monitored by the central bank, who would be responsible for monitoring inflation with respect to TAN's.


    Yes it's forgoing future tax revenues, and by doing this, it allows a massive boost in spending now, to recover the economy, at which point those taxes (in the form of TAN's) can be recollected once the economy is fully recovered.

    We don't even need to increase taxes later on, to achieve this - just drop government spending to below the tax rate.

    This can't be done by printing money, because that needs EU help and the EU would not allow that (the massive benefit of the TAN's, is that we don't even need to consult Europe in order to use them), and if we simply cut tax intake instead of using TAN's, then we also have to either borrow (expanding burdensome interest-bearing public debt) or cut spending - with TAN's, we simply increase spending now, and recollect the TAN's after we have recovered economically.


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    #12
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    In a post on another thread, I put forward this analogy (in the second quote), which may help understand them better:
    KyussBishop wrote: »
    Gandhi wrote:
    When you do your taxes, and pay the government in TANs instead of Euros, where is the government going to get the Euros to plug the resultant budget hole?
    The government can fund the budget hole, with more TAN's - essentially keeping the same amount of TAN's in circulation.

    Once the economy has fully recovered, which is judged by having full private sector employment - with all the workers in the government jobs program, having been re-employed in the private sector, after the private sector has re-inflated.
    Once the economy has fully recovered like that, government will reduce spending but will keep taxes at the same level (so that spending is less than taxes), and this will gradually reduce the amount of TAN's in circulation, until there are none left.

    This lets government extend spending today (with TAN's), in order to achieve economic recovery faster, and reel-in the extended spending (TAN's) once recovery is achieved.
    KyussBishop wrote: »
    Another way to think of it, is that it is like being able to extend public debt, but it carries zero interest, and it can be paid back whenever we like - there is a cost (the debt must be repaid), but we can defer it into the future without any additional cost, since we don't have any interest payments to pay on it - so this makes it completely sustainable, and totally different to borrowing (we in fact, would not seek out investors to borrow from, but would be directly paying people in these bond-like notes instead - this debt would be 'repaid' when people use TAN's to pay tax liabilities, but as my post above describes, this can be extended by reissuing TAN's).

    I don't personally like this public-debt analogy, because it can give people the wrong idea (and because this actually wouldn't be counted as debt), but it's a more understandable way of looking at it.
    It has its limits (we would not want to have too many TAN's in circulation), but it allows a significant expansion in spending, which can achieve recovery.


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    #13
    Peregrinus
    Registered Users Posts: 26,070 ✭✭✭✭Peregrinus


    These are just a form of government debt, surely?

    Look at it this way:

    If the state issued a zero-coupon bond redeemable in twelve months time, they'd have to issue it at a discount. Purchasers of the bond would be lending money to the state, and they would demand interest for doing so.

    The TAN is like a zero coupond bond, redeemable at a future date. But it can only be redeemed in settlement of a tax liablity, which means you can't redeem it until (a) you have a tax liablity, and (b) it's due for payment. So, all other things being equal, it will have to be issued at a steeper discount than the "ordinary" bond.

    Right. Let's suppose, just to make things easier to talk about, that a hundred euro bond redeemable at a fixed date in the future would have to be issued at 90 euro, and that a 100 euro TAN, redeemable for a tax liability maturing on or after the same fixed date, would have to be issed at 85 euro.

    If you employ someone, and pay him with the 100 euro TAN, you are in effect paying him 85 euro. But you are foregoing 100 euro worth of tax revenue in a future year. You could borrow 90 euro, pay him that, and commmit 100 euro of tax revenue in a future year to repaying the borrowing. You'd be no worse off, and he'd be better off by five euro.

    It seems to me that, by going the TAN route, all you are doing is borrowing, but paying more than you need to for your borrowings. How is this a good thing?

    You may argue that by some technical definition it's not borrowing, and so it circumvents limits or restrictions on borrowing to which we are committed. But in terms of its effects on the public financing, it is exactly like borrowing of a particularly expensive kind. For 85 euro of value today, the state forgoes 100 euro of revenue tomorrow. That 100 euro shortfall is not going to hurt any less than it would have hurt had it been absorbed in conventional debt repayments, is it?


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    #14
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    TAN's do not work like bonds (not even zero-coupon bonds) - they are only analogous, but they do not work the same, so they are not like borrowing:
    People invest in bonds (meaning Euro's are exchanged for bonds, and if the demand is not there for the bonds, they may trade at a discount - government is borrowing, and pays interest).
    People are paid with TAN's (government gets €100 worth of labour for every 100 Euro worth of TAN's, at no loss, no Euro's are exchanged, not subject to supply/demand, government is not borrowing, and pays no interest).

    Bond's also can not be used to pay tax liabilities, but TAN's can - this increases demand for TAN's if workers paid in them trade them at a discount, because the people who buy discounted TAN's off the workers, get to reduce their tax liabilities by the discount.
    A 100 Euro TAN trading at €95, a 5% discount, allows anyone who buys that to pay 100 Euro in tax liabilities for €95, to effectively get a 5% reduction in their tax liabilities - that would create huge demand for TAN's, particularly among corporations.

    Do you see the self-correcting balance there? Supply and demand will ensure any discount remains tiny, because any increase in the discount, will make demand for TAN's jump for anyone who wants to lessen their tax burden.


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    #15
    Peregrinus
    Registered Users Posts: 26,070 ✭✭✭✭Peregrinus


    Look at it this way, KB. Suppose I’m the worker. I’m giving the state money’s worth – my labour – but instead of taking payment for that today (or at the end of the week) I’m agreeing that the state can, at a future day, set off what it owes me against some amount that, by then, will be owing to them. So (a) the state doesn’t have to find any money today to pay me for the work I do today, and (b) when the day of reckoning does arrive they won’t have to find cash; they can set off what they owe me against some amount that is owed to them.

    The first of these two features means that I am giving the state credit; they’re getting my labour today, but I don’t demand payment today; they don’t have to settle up until some date in the future. And if I’m giving the state credit, that’s enough to tell you that, economically, this is a form of borrowing. The state gets value today; in return for which they accept an obligation which they must settle at a later date. That obligation is a public debt, even if we don’t name it as such.

    True, what they get today is not money, but so what? If I borrow half a cup of sugar from you, would you deny that I had borrowed it merely because it wasn’t cash? Likewise, the state is going to settle this obligation not by making a payment, but by setting of one payment due against another. But that doesn’t change the fundamental nature of the transaction. You get something today; you accept an obligation to settle up for it in a year’s time; you're buying on credit; until you settle up for it, you’re in debt.

    As for the discount on TANs, that’s going to be determined by prevailing interest rates. Suppose the state issues me a 100 euro TAN today which can be used to settle a tax liability on 30 June next. I have a grocery bill to settle, so I need to sell the TAN. I offer it to a company with a large tax bill due on 30 June next. They reason as follows: “We don’t have to pay this tax bill until 30 June next. If we put, say, 96 euros in some sound investment paying market interest rates, that will accumulate to 100 euros by 30 June. So we can provide in full for this tax liability today at a cost of 96 euros. Why would we pay more than 96 euros for this TAN?”

    In fact, they will pay slightly less than that, since if they put the 96 euros in a more conventional investment they would get back 100 euros cash on 30 June which they could use to pay their tax or for any other purpose, whereas the TAN is inflexible. And they will have to be offered an inducement to accept this inflexiblity.

    So the 100 euro TAN the government issues has a present value of only 96 euros. They will only get 96 euros worth of work for it, but when the day of reckoning comes next year they will have to forego 100 euros worth of tax revenue. That extra 4 euros is the interest they pay on their borrowing of the worker’s labour.

    The only way you can have a TAN which has a present value near to face value is to issue a TAN which can be immediately redeemed for a tax liability. In which case, it will be redeemed pretty well immediately. (Because why would you wait? It doesn’t pay interest or appreciate in value, and there are grocery bills to be paid!) So the government will have to meet the full cost of employing the worker almost immediately, which defeats the whole point of issuing the TAN.


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    #16
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    The problem with calling it borrowing, and then comparing that to government bonds that are put out at interest (which is what the public debt is made up of), is that it has the potential to confuse/mislead due to how different TAN's are.

    You are correct though: You can consider TAN's a form of borrowing (borrowing labour rather than Euro - though I think this may confuse understanding of them), and you can consider it a form of public debt (but one which is, legally, not counted alongside our normal public debts) - but to mix up TAN's with government borrowing through bonds and the legal form of public debt, isn't accurate, because TAN's and regular government bonds function in completely different ways.


    Yes, that's true that TAN's trading value can be affected by the interest rate, but the closer you are to the 31st of October (when taxes are due), the closer to parity with Euro TAN's must be - people holding TAN's, can trade them then for very little discount - or simply just pay off their tax liabilities with them.

    So, at worst, the TAN's discount will be (after taxes are paid, from mid-November onwards) equal to the interest rate + a small amount, and our interest rates are currently at their lowest in recent memory - currently 0.25%.
    In 6 months time, that will then be "0.125% + a small amount" - the discount drops the closer you are to the next tax date.

    You're looking at a discount in the low single-digits, at worst - and the wages of people being paid in TAN's, will be increased far beyond this discount - that's a net gain for everybody (for all of the people currently employed, all of the unemployed - since we would have full employment, the economy in general would improve, government wouldn't be affected by any discount - only holders of TAN's and they now have higher wages).


    Also, government doesn't need to forego future tax revenue - government can respend every year, the same amount of TAN's that are paid down in taxes, rolling it over perpetually until economic recovery is complete.

    You're mistaken in counting that discount as government interest; that discount only affects people who hold TAN's - the government already gets their €100 worth of labour (per 100 Euro in TAN's) from the workers, and government does not really lose any tax revenue, it just gets collected when TAN's are recalled far into the future, after the economy has recovered.


    You're right to point out the discount, but don't you see how the discount does not affect government (only people holding TAN's), how the discount would be really small (very low single-digits - since interest rates are 0.25%, maybe even less than 1%) and how you can still massively expand government spending (and peoples wages), without the discount causing a problem?


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    #17
    Peregrinus
    Registered Users Posts: 26,070 ✭✭✭✭Peregrinus


    Exactly the same result could be achieved by the state paying its workers in promissory notes, redeemable at a future date. But pro notes issued by the state are, of course, public debt. And so, in all ways that matter, would the TANs be.

    What the state is effectively doing is bullying its workers into lending money to it, interest free. Leaving aside the morality of whether that's the way an employer should treat its workers, it's just not a way of spending without incurring debt. Until the state meets its obligations on the pro notes/TANs, it will, by any meaningful definition, be in debt.


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    #18
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    You can consider it public debt, yes, and that is an accurate way of describing it - but it is not legally counted as part of our public debt (it still effectively is public debt though, yes), and it does not carry interest, so there are no sustainability issues like there is with regular public debt.
    Other than having to repay the original debt in the future, there is no additional cost that would be incurred through interest and such.

    It would be different from promissory notes, in that promissory notes are not tax redeemable, whereas TAN's are, and TAN's would not have a due date like promissory notes would.


    Paying workers in TAN's, would actually benefit them compared to now, because:
    1: You can increase the workers wages using TAN's (which can easily be made to wipe out any minor discount that may occur with TAN's - thus workers would hold more Euro's than their original salary, if they trade the TAN's), allowing them to spend more than before (boosting the private economy).

    2: All of the unemployed, can be employed in a temporary jobs program (receiving payment in Euro's and a portion in TAN's, like all others working with government), which actually gets them earning, paying down debts, and spending again - these workers immediately benefit from being back in work, and getting paid for it, and the economy benefits from full employment.

    3: The above expansion in spending, and the jobs program, would gradually restore the private economy to full health - workers in the temporary jobs program, would gradually be re-hired by the private sector, exiting the jobs program until nobody is left in it - economic recovery would then be complete, with full private sector employment. Government spending would drop below taxation, and TAN's would be recalled.


    I understand the skepticism (and appreciate it, as it's helping me find ways to frame this better), but I think there is one remaining part where there's a bit of confusion:
    That TAN's can be used to pay tax liabilities, is an important thing to look at, because this (along with people being paid in TAN's, rather than government having to find investors) is one of the more significant ways they are different to bonds and other similar financial instruments, like promissory notes. It changes how they work in a very large way, that is important for understanding them.


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    #19
    Peregrinus
    Registered Users Posts: 26,070 ✭✭✭✭Peregrinus


    KyussBishop wrote: »
    It would be different from promissory notes, in that promissory notes are not tax redeemable, whereas TAN's are, and TAN's would not have a due date like promissory notes would.
    Do you mean that a TAN issued today can be exchanged tomorrow to settle a tax liabilty?

    Because, if it can be, it will. Since it bears no interest and does not appreciate, there is no reason to hold a TAN which can be redeemed. The worker would sell it immediately to a taxpayer with a liablity already due who would use it immediate to settle his tax liablity.

    Which, on the plus side, would mean that this would not be borrowing. But on the negative side, it would not enable stimulus spending. The cost of employing the worker would not be reflected in an increase in current expenditure, but by a decrease in current revenue; the state's budgetary position would be exactly the same as if they had employed him for cash.


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    #20
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Well no, more I mean that there's no fixed time period that TAN's have to be in circulation - a person can hold onto their TAN's for a year, two years, three etc., and when TAN's are used as payment for tax liabilities, government can just recirculate them, keeping the level of TAN's in the private economy constant (so there's no paydown of principal by government, until TAN's are 'reeled in' after economic recovery, by letting government spending fall below taxation levels).

    People don't have the opportunity to redeem them whenever they like though, they would have to do it around the 31st October-14th November like usual, if they don't trade the TAN's for Euro earlier.


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    #21
    Peregrinus
    Registered Users Posts: 26,070 ✭✭✭✭Peregrinus


    KyussBishop wrote: »
    Well no, more I mean that there's no fixed time period that TAN's have to be in circulation - a person can hold onto their TAN's for a year, two years, three etc., and when TAN's are used as payment for tax liabilities, government can just recirculate them, keeping the level of TAN's in the private economy constant (so there's no paydown of principal by government, until TAN's are 'reeled in' after economic recovery, by letting government spending fall below taxation levels).

    People don't have the opportunity to redeem them whenever they like though, they would have to do it around the 31st October-14th November like usual, if they don't trade the TAN's for Euro earlier.
    Since TANs are not interest bearing and do not appreciate in value, the rational course is to trade them immediately, if you can get near-face value. Even if you don't need to buy groceries, you can deposit the proceeds in a bank and get interest, so you are better off doing that than holding the TAN.

    And there will always be somebody who has a tax liablity due soon. Income Tax may be payable once a year, but VAT is payable bi-monthly, if I'm not mistaken. Hell, there are people whose tax is already overdue. Unless TANs have a deferred date before which they cannot be redeemed, you should expect the bulk of them to be redeemed immediately. Why would anyone hold on to them?


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    #22
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Perhaps, though it depends upon the discount and the interest rates available - there's no reason TAN's can not be made tradeable as a currency itself (businesses who accept them, will see a boost in trade/profits by accepting them, so it's win-win for everyone - doesn't matter that they don't bear interest, the greater profits can still outstrip that), so you could easily see workers spending them like that, rather than trading them at a discount.

    Ah, I didn't know VAT was payable bi-monthly - that would in fact bolster the argument for business accepting TAN's as payment for goods as well then - that fast rate of tax liability repayment for VAT, will further reduce the discount, to "(interest rate / 24) + a small amount" (24 for bi-monthly VAT payments) - tiny single digits, if not fractional instead.

    If they are redeemed (almost) immediately, then this will arguably happen through increased consumer spending with the TAN's, since that is when consumers will get the most out of their TAN's - while people are spending them, and businesses paying down taxes with them, government just keeps spending more TAN's back out into the economy all the time, keeping the amount in the economy constant.

    So even if they get used to pay down taxes quickly, that doesn't hamper them at all (it actually benefits them by further reducing the discount), since government can easily keep more flowing back into the economy through spending/wages - that's still a massive boost to government spending and business in the private economy, with everyone at a net-benefit even after you consider possible discounts and lack of added interest (because both profits and wages will increase, to far outstrip those potential negatives).


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    #23
    Peregrinus
    Registered Users Posts: 26,070 ✭✭✭✭Peregrinus


    But if they're sufficiently tradeable that people will accept them as, e.g., payment for goods, and they can be used at any time to pay tax debts to the government, in what way are they different from, well, money? In what way is your plan different from the government simply printing money to pay the workers it hires?


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    #24
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Peregrinus wrote: »
    But if they're sufficiently tradeable that people will accept them as, e.g., payment for goods, and they can be used at any time to pay tax debts to the government, in what way are they different from, well, money? In what way is your plan different from the government simply printing money to pay the workers it hires?
    That's a good question ;) and a useful thing to pause on for a moment, to consider:
    1: These are like public debt, even being in the form of bond-like notes, that allow expansion of spending, and
    2: These also act like money, and are (at worst) equally as inflationary as public debt (public debt is in fact more inflationary, since interest gets paid on top of the principal).

    Consider this also: The bonds used for public debt (regular public debt, not TAN's), are practically guaranteed against default, and are not just as good as holding money, but better than money, since they carry interest - they are tradeable too, and usually in high enough demand, so (even though you can't pay taxes with them), they can be considered a form of money too.

    So, if expanding TAN's is like printing money, why not expanding public debt too? Hell, can not all debt/bond instruments be considered money then, as long as people are willing to trade them? ;)

    There's even a separate (not-too-dissimilar) proposal I linked earlier in the thread, from an Irish economist Phil Pilkington (along with US economist Warren Mosler), that proposed to make government bonds (our public debt) redeemable for tax payments (primarily to reduce market concern about possible default) - would that suddenly make all of our public debt, created money? :)
    https://fixingtheeconomists.wordpress.com/2013/12/05/press-release-for-my-new-tax-backed-bonds-policy-note-at-levy
    http://www.boards.ie/vbulletin/showpost.php?p=87932578&postcount=6


    Going back to your question though: The main difference here, is that the ECB controls money creation, and so Europe would have to come to a political agreement first, to agree to do that, before it could be done.
    Europe is in a political deadlock though, and the massive strength of TAN's, is that the Irish government doesn't need to consult Europe in order to use them, but can do this independently (possibly with our central bank supervising it, while monitoring inflation).


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    #25
    [Deleted User]
    Posts: 5,121 ✭✭✭ [Deleted User]


    Ignoring getting European approval for the moment - if these were issued and looked like debt why would a dispassionate investor (some big foreign pension fund for example) not consider them as debt and factor them into their pricing model?

    Separately from that - what are all these newly created jobs to do? And how would a private employer compete with these jobs when the rival public employer can just print an IOU to pay the wages.

    Edit:For some reason Gresham's law is knocking around in the back of my mind:
    When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.


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    #26
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Deleted User wrote: »
    Ignoring getting European approval for the moment
    We don't need it, which is why this is so powerful - if European approval was needed, there are much better EU-wide policies that could be done, separate to this.

    The big advantage of TAN's, is sidestepping the political deadlock in Europe, and being able to act/seek-recovery on our own.
    Deleted User wrote: »
    - if these were issued and looked like debt why would a dispassionate investor (some big foreign pension fund for example) not consider them as debt and factor them into their pricing model?

    Separately from that - what are all these newly created jobs to do? And how would a private employer compete with these jobs when the rival public employer can just print an IOU to pay the wages.

    Edit:For some reason Gresham's law is knocking around in the back of my mind:
    I don't see what you mean with foreign investors - what pricing model would they factor them into, for what assets, and how would that be relevant for Ireland?


    As for the jobs, the public sector can be restaffed for one, and parts of it like public health can be expanded to provide proper coverage (since it's straining now), particularly a large expansion in mental health facilities/resources/treatment (since this is very poorly provided right now), and resources for education surrounding mental health and health issues can be properly expanded too.

    Beyond that, you can have an expansion of jobs with community development - proper maintenance of rundown community areas, and for areas troubled with social issues, resources put forward to help tackle that (like more facilities/education for help with drug addiction, among other issues), more facilities/jobs for helping the elderly.

    We also would have the resources for going ahead with shelved infrastructural projects, and planning/starting new ones as well - in particular, new ones we definitely should be looking at, are large R&D and infrastructural work on moving our energy system away from fossil fuels - and expansion of public transport infrastructure (in addition to restaffing cut public transport services).

    That's only a handful of things off the top of my head as well - there's not really an end to the different types of useful work that can be thought of and people put to work at (also ones which target social purposes, rather than just economic).

    The jobs in general, would be aimed at not competing with the private sector - that would want to be avoided.
    The wages for the jobs program would want to be kept at a wage consistent with a minimum decent standard of living (with wriggle room on pay for more skilled jobs), so the wages will be kept at a low level (to minimize competition with the private sector) - which the private sector will need to do better than to hire the workers out of the jobs program.


    Since the workers getting paid, and spending money into the private economy, will reinflate the private economy again, the private sector will gradually regain health, and will hire people out of the jobs program until nobody is left in it - that will be the point (full private sector employment) at which our economy has completely recovered from the crisis.


    I posted a thread here on the Job Guarantee idea when I first learned about it, but my opinions and knowledge of the topic have changed a lot since I wrote it, so it may contain some mistaken information that I've since learned better.


    Greshams law is a good point, but I don't believe it should be an issue, since the discount on TAN's (if any) should be extremely small.


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    #27
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Actually, right here my post from a while ago in the other thread, links to a paper from the economist L. Randall Wray (a prominent writer on Job Guarantee based programs), where he has actually specifically written up a paper for Ireland:
    http://www.boards.ie/vbulletin/showpost.php?p=82910878&postcount=14
    http://www.levyinstitute.org/pubs/wp_707.pdf


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    #28
    ezra_pound
    Registered Users Posts: 2,497 ✭✭✭ezra_pound


    KyussBishop wrote: »
    We don't need it, which is why this is so powerful - if European approval was needed, there are much better EU-wide policies that could be done, separate to this.

    The big advantage of TAN's, is sidestepping the political deadlock in Europe, and being able to act/seek-recovery on our own.


    I don't see what you mean with foreign investors - what pricing model would they factor them into, for what assets, and how would that be relevant for Ireland?


    As for the jobs, the public sector can be restaffed for one, and parts of it like public health can be expanded to provide proper coverage (since it's straining now), particularly a large expansion in mental health facilities/resources/treatment (since this is very poorly provided right now), and resources for education surrounding mental health and health issues can be properly expanded too.

    Beyond that, you can have an expansion of jobs with community development - proper maintenance of rundown community areas, and for areas troubled with social issues, resources put forward to help tackle that (like more facilities/education for help with drug addiction, among other issues), more facilities/jobs for helping the elderly.

    We also would have the resources for going ahead with shelved infrastructural projects, and planning/starting new ones as well - in particular, new ones we definitely should be looking at, are large R&D and infrastructural work on moving our energy system away from fossil fuels - and expansion of public transport infrastructure (in addition to restaffing cut public transport services).

    That's only a handful of things off the top of my head as well - there's not really an end to the different types of useful work that can be thought of and people put to work at (also ones which target social purposes, rather than just economic).

    The jobs in general, would be aimed at not competing with the private sector - that would want to be avoided.
    The wages for the jobs program would want to be kept at a wage consistent with a minimum decent standard of living (with wriggle room on pay for more skilled jobs), so the wages will be kept at a low level (to minimize competition with the private sector) - which the private sector will need to do better than to hire the workers out of the jobs program.


    Since the workers getting paid, and spending money into the private economy, will reinflate the private economy again, the private sector will gradually regain health, and will hire people out of the jobs program until nobody is left in it - that will be the point (full private sector employment) at which our economy has completely recovered from the crisis.


    I posted a thread here on the Job Guarantee idea when I first learned about it, but my opinions and knowledge of the topic have changed a lot since I wrote it, so it may contain some mistaken information that I've since learned better.


    Greshams law is a good point, but I don't believe it should be an issue, since the discount on TAN's (if any) should be extremely small.

    It would seem that the main argument of this post is that these bonds could be used to increase government debt and spending. Kind of the opposite of the fiscal consolidation which Ireland has worked so hard to achieve.


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    #29
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    ezra_pound wrote: »
    It would seem that the main argument of this post is that these bonds could be used to increase government debt and spending. Kind of the opposite of the fiscal consolidation which Ireland has worked so hard to achieve.
    Yes, it would be fiscal expansion, without the burden of greater tax rates or interest payments on debt. While these TAN's can be considered 'debt', they work differently to government bonds and public debt, in very significant ways.

    One of the differences (by no means the primary or most important one), is that TAN's do not carry interest, and (through keeping the amount of TAN's in the private sector constant) do not have a set date for 'paying down' (not quite the correct term, since they aren't paid down like bonds are, but used for tax liability payments), so they do not have the sustainability issues that public debt does, since the public debt does carry interest.


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    #30
    Peregrinus
    Registered Users Posts: 26,070 ✭✭✭✭Peregrinus


    KyussBishop wrote: »
    One of the differences (by no means the primary or most important one), is that TAN's do not carry interest, and (through keeping the amount of TAN's in the private sector constant) do not have a set date for 'paying down' (not quite the correct term, since they aren't paid down like bonds are, but used for tax liability payments), so they do not have the sustainability issues that public debt does, since the public debt does carry interest.
    I don't think this matters as much as you suggest. Issuing a hundred-euro TAN reduces tax revenue by 100 euro. It makes no difference that that 100 euro is characterised as capital rather than interest; 100 euro is 100 euro, and investors now now that the Irish state has 100 euro less to meet other obligations. Therefore Ireland's credit does suffer.


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    #31
    KyussBishop
    Closed Accounts Posts: 5,797 ✭✭✭KyussBishop


    Peregrinus wrote: »
    I don't think this matters as much as you suggest. Issuing a hundred-euro TAN reduces tax revenue by 100 euro. It makes no difference that that 100 euro is characterised as capital rather than interest; 100 euro is 100 euro, and investors now now that the Irish state has 100 euro less to meet other obligations. Therefore Ireland's credit does suffer.
    We don't have 100 less to meet other obligations - we just meet a portion of our current obligations (part of workers wages) in TAN's instead.

    Some portion of our obligations will have to be paid in Euro though, yes, and we will want our yearly tax intake to contain way more Euro's than this - so we do not want anywhere near the amount of TAN's circulating, that could cause that problem - and we wouldn't need to, because there's plenty of room to expand spending with TAN's without going that far.


    You mention Ireland's credit, and this is another essential point about TAN's:
    Ireland's credit rating determines how easily we can convince investors to buy government bonds (i.e. how sustainable expanding normal government debt is) - with TAN's, we don't need investors buying government bonds, we just use TAN's.

    TAN's do not require interest payments, and do not suffer the sustainability problems that high-interest-payment public debt (normal public debt, based on government bonds) does.


    So not only would TAN's mean our country is no longer affected by investors opinion of our credit rating, but it actually would make our economic prospects and the sustainability of government spending, look so good, that it would improve our credit rating - even though that would no longer benefit us ;)


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