# autotax: an alternative money system to simplify taxation.

if i had the chance to create a monetary system for a society, what system would i create? disclaimer, i don't know anything about money. i just find it interesting to come up with random rules and then see what properties the resulting system has. let's just pretend i'm 5 years old and it's creative writing time.

# rough summary

• all money is electronic, no more cash.
• track every account in a central bank.
• taxation is simple and not bureaucratic: every evening automatically take 0.05% of the funds on each account as tax.
• no taxation on income or transactions; land ownership is the only other tax income since that's simple too.
• disallow fractional reserve banking.
• only the government can create new money through a very explicit process.

that is a very rough summary but there's a lot more nuance to it. i'll elaborate on that below.

note that i'll use $ as the unit of the new fictional money i'm talking about. it's not meant to represent dollar but my new money.

# taxation in the current system

taxation can be an incredibly complex process. iiuc its goal is to ensure a fair reallocation of resources in a society. but one needs to track all transactions, enumerate all assets, fill long forms. the tax code just keeps on growing which results in an ever growing army of bureaucrats. then there's lot of bickering about how much tax each person and company should owe. i feel there's just way too much effort wasted in this process that could be spent on more fruitful efforts instead.

so i'll think about a system that avoids this problem. i'm sure it would have a new set of yet unknown problems but nevertheless it's worth starting somewhere.

# central bank

the core idea of my proposal is that there is a single big central bank. this bank is not for ordinary citizens but rather for government, community banks, big corporations. this is the only bank the government would enforce strict rules on.

to keep things accountable each account's ledger is public. each citizen can see the transactions between the accounts along with the transaction note if there was one attached.

each evening the accounts are taxed by moving 0.05% of the funds to the government's account. over a full year that's a tax rate of about 20% (1.0005^365.25 = 1.20). the government's account is special, it's not taxed.

# community bank

if a village wants to provide banking for its villagers, it can open a `villagebank` account in the central bank. to kickstart society, let's assume that the government gives $1,000 to each 1,000 villagers. this means that villagebank will have $1,000,000 in its central bank account. the central bank doesn't track each villager's account, that's the responsibility of villagebank's management. the government has no insight into the villagers' actual transactions either.

on the first day the central bank will tax the account with $1,000,000 * 0.05% = $500. so the remaining money is $999,500. it's up to the villagebank's administration how it funds this liability from its customers.

e.g. villagebank can simply charge a daily 0.06% tax on its customer accounts. the extra 0.01% is meant for the bank's profit. but then maybe villagebank2 appears which charges only 0.055% tax. and then the villagers can choose which bank they keep their money in.

if a villager moves to villagebank2 then it will transfer his money to the new bank. this means villagebank will need to transfer $1,000 to villagebank2's central bank account. note in this central bank transaction it's not visible which customer's account is affected. other citizens can only see that a transaction happened between the two banks and villagebank2 is now richer and thus will generate more tax revenue.

# taxation

so after the first day villagebank has $999,500 and the government's account has $500. this means there will be a transaction with the contents of `$500 villagebank->government tax`.

the government wants to invest into the village's education so it sends $500 to the village's school. the school's bank account is also residing in villagebank so this transaction appears: `$500 government->villagebank public education`. from the note villagebank will know to debit that amount to the school's account. villagebank's central bank account is at $1,000,000 again. and the school's administration then distributes those $500 among 4 teachers and 1 administrator.

this demonstrated how a small community can fund education without:

• anyone ever needing to fill tax forms,
• employing even a single tax collector,
• using violence to collect money,
• losing money in the process,
• needing to create a new money out of thin air to finance all the extra bureaucracy.

i'm fine with taxing landownership too since they should be relatively easy to manage without too much bureaucracy. e.g. each day each villager must pay $1 for their little farmland. but then the government sends the collected $1,000 back to the village's major. the major can then spend it on whatever the village needs.

# public funding

imagine villagebank has 50 students to educate. the government's strategy is to provide $10 per student per day for the school.

after the first day the school would receive $500 and the school's account would contain $500. the next day is account will be taxed with $500 * 0.05% = $0.25. and then they receive $500 so at the end of the day they will have $999.75. the next day they will be taxed almost $0.50. so the net account increase is $500 - $0.50 = $499.50. the more money the school keeps on its bank account, the less money it will receive daily.

as long as the school doesn't spend any money, its account will never exceed $1,000,000. $1,000,000 will be the fixed point of the account since $1,000,000 * 0.05 = $500, the amount it actually receives daily. in other words, all the villager's money will be eventually acquired by the school. the school must invest the money back into the villagers otherwise the village grinds to a halt. since the school is publicly funded, i'd require for its account and its transactions to be publicly auditable so that the villagers can see what they get for their mandatory taxes.

the school is incentivized to spend/reinvest most of its money that it gets but even if it doesn't do it immediately, it doesn't lose too much. i think this system is somewhat nicer than the "use it or lose it" type of budget systems that is commonly used nowadays.

# loaning

first of all, i'd outlaw fractional reserve banking (remember, i'm 5 years old). i feel it's an inherently risky way to manage money. and it also gives the bank the incredible power of creating money out of thin air. i understand that loan repayment then later destroys the money created. but between the two timepoints the additional magic money creates inflation that lasts even after the loan is repaid. basically if you give your money to a bank, then it devalues it without you knowing about it. i think loans can work just fine even without that.

let's take a simplistic example. suppose alice wants to borrow $500. alice can take a loan of $500 if she promises to pay back $600. the bank's sole task is now to find another customer who is willing to part with $500 of their money in exchange of getting $600 back. or if the bank has its own reserves, they can use that too on their own risk. suppose bob is willing to help alice. if alice cannot pay the sum back, bob loses whatever money alice couldn't repay. and that's the end of story.

it may seem $600 was created here but it's not the case. when bob loaned $500, bob's purchasing power dropped by $500. and bob can't use that $100 interest either until alice manages to actually pay that back to him. so eventually that $100 will come from alice's future paycheck, alice will have that much less buying power in the future. there's no extra money flowing in the system at any given moment.

# bank insolvency

what if a bank was run by corrupt administrators and loaned out more money than it is actually available? as people trade, banks have to settle transactions between each other through the central bank. suppose the villagers go to the city and buy bunch of stuff with their villagebank credit cards. now it might be the case that villagebank is owing $1,000,000 to citybank but villagebank has only $500,000 on its account.

one solution: government bails out villagebank and transfers them the missing $500,000 from the government's account. in that case the corrupt bank administrators just managed to extract free $500,000 from the tax paying citizens, yay.

a fairer solution is to do nothing. at this point citybank has to accept that they lost $500,000. it can sue villagebank though. villagebank can close its doors and then maybe citybank can regain some of its value by repossessing some of the assets of its administrators.

to deal with the lost $500,000, citybank can distribute the losses among its customers. if citybank has 10,000 customers, it can charge $50 on each account to make up the loss. maybe it will lose some customers who will go to banks who do more due diligence what other banks they transact with.

but the point is that it's not the taxpayers directly who pay for the bank failures. it's the citizens who keep their money in risky or shady banks who pay for these costs. it's a risk citizens can avoid by choosing their banks carefully. perhaps the government can help enforcing some standards to ensure citizens are aware what they are signing up for.

# privacy

people might be concerned with privacy if everything is electronic. there's nothing stopping someone to create a bank that will give you physical tokens in exchange for government money. and then you can trade with those physical tokens as you see fit. however such activity is a bit riskier in general (e.g. you have to deal with counterfeit tokens) but it's a risk citizens can take if they wish.

# high liquidity

the biggest problem with this monetary system is that it is not worth keeping your saving in the state currency. you are incentivized to exchange your money for something else so that it's not you who gets taxed at the end of the day.

on an individual level i think this is more of a presentation problem. it can be psychologically damaging to see that your money is getting smaller every day. but maybe villagebank will allow you to prepay 365 * $0.6 = $219. then you never need to think about your account throughout the year as long as you don't exceed $1,000. and then all the taxation is out of mind.

another way to solve this problem is to transfer the salary on a daily basis. then just like in the school's case all you will see is that your account keeps growing. it's just that it will grow at a slower rate as you get richer.

the problem is bigger for big companies who want to hoard large amount of money. hoarding money is expensive for them. this system incentivizes them to invest their money, keep things flowing. i think it's generally healthier to have agile, living organisms than just companies that lazily grow to enormous sizes without bounds.

# less wealth inequality

the system itself has no protection against someone earning a bigger share of the total pie than deserved. however the system is self-correcting. 1.0005 ^ (2.2 * 365) = 1.494. this means that after 2.2 years you lose half of your wealth.

this might sound crazy but keep in mind it's not the money that gets devalued but rather unused money gets repurposed. if you don't want to lose your wealth, take on risks and sell loans, hold stocks or commodities. then that money goes to the creators, entrepreneurs, farmers so life moves on even if you decided to retire. you can no longer idly sit on money.

in today's system our money is at risk thanks to the fractional reserve banking. but it's all abstracted away and we don't realize that the system might crumble overnight after a bank run. if in this new system you decide to invest your money into financing loans then at least you are aware what risks are you taking on. financing loans could be a safe default option for people wanting to maintain their wealth in an indirect manner.

i'd expect it would be much harder to keep a large wealth inequality in this system because it makes no sense to directly own a large chunk of the total wealth.

but i admit, account half-life being 2 years might be too aggressive. the numbers can be tweaked in an actual implementation though.

# incentive to operate publicly

public institutions have a great advantage compared to private companies. they have their income guaranteed so they don't need to do capital management. i'd expect that companies would outsource more research and development to universities to keep their companies leaner. or perhaps big companies would try to convert themselves into public utilities to avoid dealing with said capital management. so over time i'd expect that the economy might turn out to be of socialistic nature. i don't think that's a bad thing as long as the institutions are well managed (see @/corerepr). the free market remains to correct inefficiently managed public institutions though.

# capital flight

another nice property of this system is that capital cannot escape it. you can't simply pick up cash and move abroad. the money must always sit in one of the accounts.

one thing you can do is to convert all your money into a commodity, say, oil. but in this case you are actually doing an economic activity. keeping oil is expensive and dangerous. you take on all this work and risk on you in exchange for future reward.

so people are incentivized to take risks and do something useful with their money. i think that's actually a good thing!

# new money

a small amount of inflation is probably healthy to avoid the bad effects of deflation. a nice thing with having a central bank is that you can know exactly the amount of money society has. you can then have a rule that statically adds a 0.003% of the total money to the government's account every day. over time this adds up to 1.00003^365 = 1.011 => ~1% growth per year. so you would have 1% government generated money inflation per year. i think that's relatively harmless.

# bootstrapping

initially the value could be tied to another currency, e.g. euro. then the government sets up the first community bank, say, govbank. then as a bootstrapping investment, it commits to regularly transfer $1M to govbank. interestingly at this point the government already starts receiving tax income on its government account. that growing tax income can be later used to pay government employees as the system slowly rolls out.

then govbank provides a service to the citizens that allows easily converting between $ and euro. if someone has $1, they can ask govbank to give them 1 euro in exchange and vice versa.

once that works the government slowly switches government employee paychecks to the new system. initially this would be optional: if people choose to do so, they no longer need to do taxes. this could be a strong incentive to opt for the new currency. sure, people can then immediately convert their money to euro. let them do so. make this available only to a few people first so that the shock on the system is small.

then start allowing people to pay their taxes with $. and if they do so, give them a small discount. basically people will be incentivised to start using the new currency.

also start giving our welfare in the new currency. start asking government duties in the new currency.

over time start slowly loosening the connection to euro. e.g. once enough $ is circulating, allow the conversion rate to be between [0.9, 1.1] of euro. and then increase that to [0.8, 1.2] and so on over time until you remove it completely.

allow more people to forego tax forms in exchange for receiving income in the new currency. slowly ramp down the old taxation system.

so basically keep doing one small step at a time until the old system simply disappears.

# adoption incentives

assuming the small scale experiments didn't fail, the government would adopt the new money across the whole public sector. all nurses, teachers, policemen, would be funded by this new money. all welfare benefits would be paid in the new money too. and as i wrote in "incentive to operate publicly" i'd expect that the public sector would keep growing. in my @/utopia post i even talk about how easy it would be for the unskilled masses to enter the public sector fueling its further growth. so the new money would get a forced adoption by a large slice of the population. then it should make economic sense for companies to also serve customers owning the new money.

to further increase adoption among citizens, the government could commit to a universal income of $1 per day for each person who signs up for a govbank account. that's $365 / person / year, not that much. accounts under $2,000 end up having negative tax. the account will slowly grow towards $2,000. when it reaches $2,000, the tax due will be exactly $1 so the growth stops. this should incentivise people to have a govbank account and keep using it to receive further free money. of course such government commitment would be rolled out slowly to keep the shock effect small.

as for business owners: i'd offer them a deal. go new money only and you don't need to deal with taxes at all. i think there are a lot of people who don't like dealing with taxes so this would be a sweet deal. and then consumers would need acquire this new money to have a purchasing power for these new businesses.

furthermore, for the first few small business owners the government could offer a similar early adopter benefit: $10 / company / day. that would cost the government only $3,650 / company / year. that would mean that such companies would have a negative tax rate if their account is under $20,000. that could be super advantageous for small companies.

in the end it's mainly the business owners who need to be convinced to accept the new money. but hopefully the tax accounting simplification will be a strong enough incentive for them.

# budget management for private companies

i talked about governments at large but such a system could be used internally by larger private companies too. suppose the company wants to manage a budget for fun team activities, travel, equipment purchases, bonus payments. then each team has a shared account that the company tops up with $10 per day per employee but also taxes it 0.05% per day.

after each purchase the employee files an expense report. then the employee's manager reviews whether it was a valid business expense and there's budget remaining. if so then the refund is transferred from the shared account to the employee's next salary. or if the company can issue personal credit cards, things could be implemented even simpler.

the employees can send each other mini-bonuses while charging the shared account whenever a peer does something extra nice. if the attached justification makes sense, i think this is a good use of money too.

it's then up to the individual teams to decide whether they spend their money on fun events, travel, high tech equipment, or peer bonuses. the company doesn't really need to think too hard how the employees spend their money. the company doesn't lose much money through this process since unused money gets repurposed automatically. and if the company is in a tight spot, it can just decide to reduce the daily payment and let individual teams decide what to cut.

# conclusion

and that concludes my idea of this alternative monetary system. it probably requires a competent government to manage it well. the government can no longer create money out of thin air and hope things work out. but i hope it cannot be messed up too much since it tries to self-correct wealth inequality. it would probably take a while to get used to it, but i can totally imagine this could end up being a stable system.

# demurrage (added on 2023-01-29)

in the meantime i've learned that a similar can be applied to physical money too and in fact has been tried in the past: https://en.wikipedia.org/wiki/Demurrage_(currency). And there are existing currencies operating in this way: https://en.wikipedia.org/wiki/Chiemgauer#Demurrage. The idea is this:

... in order to prevent this complementary currency from degenerating into a means of hoarding and to confer it on high liquidity. It is required to put a stamp of 2% of the face value (€0.10 for 5 Chiemgauer, for instance) every three months to keep it valid, obliging its bearers to give up hoarding this complementary currency and to spend it as soon as possible and stimulating consequently the regional economy.

neat!

published on 2022-10-11, last modified on 2023-01-29

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