Tax anticipation notes

KyussBishop

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?

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?

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).

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.

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.

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

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.

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.

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.

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.

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.

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.

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?

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.

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.

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?

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.

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.

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.

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.

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?

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).

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?

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).

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.

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.

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

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.

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.

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.

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

Peregrinus

KyussBishop wrote: »

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.

Yes, we do. When the note is redeemed, we lose 100 euros in tax revenue - 100 euros which would otherwise have been available to spend on other things.

KyussBishop

Peregrinus wrote: »

Yes, we do. When the note is redeemed, we lose 100 euros in tax revenue - 100 euros which would otherwise have been available to spend on other things.

When we pay a worker 100 Euro worth of TAN's, we lose €100 in future tax intake - next year, the government fills that €100 gap, by paying the same worker 100 Euro in TAN's again (N.B. workers will in practice be paid a proportion of Euro and TAN's - I'm just simplifying) - government is still off by only €100, but it doesn't matter because TAN's can be used instead (it's like rolling-over debts as they fall due - except no interest is carried, so the debt stays the same).

At the end of the second year, government is still down only by €100, and can still 'roll-over' that debt, by paying the worker in TAN's again.

After another couple of years of this, the economy has fully recovered - government drops spending below the level of taxes (and/or followed by a temporary increase in taxes, to recall the TAN's); government accepts 100 Euro of TAN's as payment for tax liabilities (maybe + a little extra in real Euro if taxes are raised), and pays the worker only 75 Euro in TAN's + €25 this time (the + €25 is allowed by reduced government spending relative to taxes, and additionally an optional increase in taxes).

After a few of years of this, all TAN's are recalled, and not only have we achieved full economic recovery, but all these 'debts' are repaid too.


So, there are no sustainability issues with that - government still taxes enough real Euro's, to meet its Euro-only obligations, and gets to expand government spending with TAN's, in areas which don't need to be Euro-only (such as workers wages - which are paid in mixed TAN + Euro payments).

KyussBishop

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).

ezra_pound

These bonds mightn't have a rate but the borrowing needed to cover their discount would so I really think your point about no interest is a no runner.


Also public sector workers are PAYE earners. They only file tax returns for property investments or business outside of their public sector job. So most don't make tax returns. The scheme would he an administrative nightmare.

roro2

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!

KyussBishop

ezra_pound wrote: »

These bonds mightn't have a rate but the borrowing needed to cover their discount would so I really think your point about no interest is a no runner.


Also public sector workers are PAYE earners. They only file tax returns for property investments or business outside of their public sector job. So most don't make tax returns. The scheme would he an administrative nightmare.

Any discount is likely to be miniscule, due to discounts allowing reduced tax liabilities for buyers of TAN's (creating high demand, reducing the discount), and government is not affected by discounts because government doesn't try to get people to invest in TAN's, government pays people in TAN's - nobody needs to borrow anything, and discounts only affect people trying to trade TAN's for Euro's (which government doesn't do).

PAYE wouldn't affect TAN's - government just pays public workers more TAN's than their tax liabilities, and the workers either trade the excess TAN's for Euro's, or hold onto them until government starts recalling TAN's after economic recovery is achieved (at which point they get less TAN's than their tax liabilities, and can start using the TAN's they've built-up to get a tax rebate on the portion of their taxes that is made up of Euro's rather than TAN's).

KyussBishop

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

KyussBishop wrote: »

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.

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.

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).

KyussBishop

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.

ezra_pound

Where's the figure of 400,000 jobs coming from? That is absolute madness.

roro2

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.

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.

roro2

ezra_pound wrote: »

Where's the figure of 400,000 jobs coming from? That is absolute madness.

http://www.cso.ie/en/releasesandpublications/er/lr/liveregisternovember2013/

391,500.

KyussBishop

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.

roro2

I accept that the welfare bill will reduce, the €10bn gross may be something like an additional net €5-6bn. But this €5-6bn (or whatever it is) is still extra spending, it just mainifests itself as reduced tax income. Using this year's figures, €39bn is reduced to €33bn. I don't see how this is double-counting.

The deficit between tax revenue and current spending then increases from €12bn to €18bn. I still don't see how this shortfalll is addressed. We have to fund the current deficit from the market now that the Troika funding is finished, and this plan just leads to an increased defiicit. "we can use TAN's instead"... how? If you transfer all current government spending into TANs (which is not workable), the shortfall still exists - tax revenue will reduce to nil and you'll be left with the excess spending of €18bn. How is this funded, except from current borrowing which is currently the case. Introducing TANs as a payment mechanism doesn't somehow balance the books.

Economic growth (a one-off jump, unless you continually increase the stimulus) will not lead to sufficient tax buoyancy to increase the tax take by over 40% (€39bn to €55bn).

Income Tax totals €15.7bn, VAT totals €10.3bn, Corporation Tax totals €4.3bn, other taxes total €7.5bn. If you believe that this policy will suddenly lead to a balanced budget so that we don't need market funding, that's fine. But I don't.

KyussBishop

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).

I guess my general problem is that of deficit spending generally. Using TANs may or may not increase economic activity enough to make it worthwhile.

If the TANs are exchanged for cash and the cash is hoarded or spent on imported items there may be no benefit to issuing them or it may even be detrimental to the state's finances (but not necessarily to the individuals finances or wellbeing)

The system does have a certain attractiveness of nominally being an interest free way of deficit spending but I don't believe the people we currently owe money to would disregard them - I believe they would demand a higher rate of interest to compensate for the greater risk.

KyussBishop

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.

KyussBishop

Yanis Varoufakis, has just posted an article proposing a plan very similar in ways to TAN's, except relying on a discount instead - this is something to take note of, as Yanis is one of the foremost experts out there, on resolving the Eurozone crisis:

Yanis Varoufakis wrote:

Governments in Europe’s Periphery are asphyxiating in a Gold Standard-like monetary union that is buffeted by the winds of recession and outright deflation. Their economies are in desperate need of greater liquidity and of a respite from austerity. The problem is that Europe’s leadership is refusing even to enter into a rational debate of the institutional reforms that can render the Eurozone viable again. The question is: Is there something that the peripheral countries can do to give themselves a chance to breathe better and to act as a bargaining chip that will make Berlin, Frankfurt and Brussels take notice?

The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes.

FT-coin could work as follows:

• You pay, say, €1000 to buy 1 FT-coin from a national Treasury’s website (Spain, Italy, Ireland etc. would run their separate FT-coin markets) under a contract that binds the national Treasury: (a) to redeem your FT-coin for €1000 at any time or (b) to accept your FT-coin two years after it was issued as payment that extinguishes, say, €1500 worth of taxes.
• Each FT-coin is time stamped i.e. in its code the date of issue is contained and can be used to check that it is not used to extinguish taxes before two years have passed.
• Every year (after the system has been operating for at least two years) the Treasury issues a new batch of FT-coins to replace the ones that have been extinguished (as taxpayers use them, two years after the system’s inauguration, to pay their taxes) on the understanding that the nominal value of the total number of FT-coins in circulation does not exceed a certain percentage of GDP (e.g. 10% of nominal GDP so that there is no danger that, if all FT-coins are redeemed simultaneously, the government will end up, during that year, with no taxes).

...
(read on - much more detail)

http://yanisvaroufakis.eu/2014/02/15/bitcoin-a-flawed-currency-blueprint-with-a-potentially-useful-application-for-the-eurozone/

This is not TAN's, but it is nonetheless very interesting, and as said, Yanis is an economist to take very seriously, as his Modest Proposal document (co-authored with James K. Galbraith - another notable economist - and who's father John Kenneth Galbraith, was particularly notable, with an excellent economics documentary series you can find all episodes of on YouTube) is one of the most comprehensive proposals for resolving the Eurozone crisis:
http://yanisvaroufakis.eu/euro-crisis/modest-proposal/

I'm not sure yet what I think of Yanis' new TAN-like proposal, having only just read it, but it's very promising to see him take up the idea of (a form of) tax anticipation notes.

noodler

roro2 wrote: »

http://www.cso.ie/en/releasesandpublications/er/lr/liveregisternovember2013/

391,500.

Thats not correct. Number of people on the live register is not the number of unemployed as it contains part-time workers etc.

The real number as measured by the CSO is 282,500

http://www.cso.ie/en/media/csoie/releasespublications/documents/labourmarket/2013/qnhs_q32013.pdf

(Although I have always thought counting someone as employed if they worked as little as one hour in the preceding week was a bit fanciful but that is the international standard).

KomradeBishop

KyussBishop wrote: »

Yanis Varoufakis, has just posted an article proposing a plan very similar in ways to TAN's, except relying on a discount instead - this is something to take note of, as Yanis is one of the foremost experts out there, on resolving the Eurozone crisis:

http://yanisvaroufakis.eu/2014/02/15/bitcoin-a-flawed-currency-blueprint-with-a-potentially-useful-application-for-the-eurozone/

This is not TAN's, but it is nonetheless very interesting, and as said, Yanis is an economist to take very seriously, as his Modest Proposal document (co-authored with James K. Galbraith - another notable economist - and who's father John Kenneth Galbraith, was particularly notable, with an excellent economics documentary series you can find all episodes of on YouTube) is one of the most comprehensive proposals for resolving the Eurozone crisis:
http://yanisvaroufakis.eu/euro-crisis/modest-proposal/

I'm not sure yet what I think of Yanis' new TAN-like proposal, having only just read it, but it's very promising to see him take up the idea of (a form of) tax anticipation notes.

Nearly a year later now, and Yanis is Greek Finance Minister - if Greece can negotiate through its immediate funding crisis, wonder if Yanis' version of TAN's might see some use, for boosting Greek fiscal spending.