Money Redefined, Part II

THE SPHERE OF INDIVIDUALS

Redefinition One: For individuals, money is a depreciating store of value. 

Imagine a post-capitalistic society (to borrow a phrase from Peter Drucker) that is divided, from a financial standpoint, into three transactional spheres-individual, business, and governmental-and that money performs somewhat differently in each.  Further picture that the spheres are separated by Chinese Walls that are, in specific applications, permeable.  The fictitious land is known as Postcapia and its happy occupants as Postcapians.

A Postcapian’s financial life is centered on his account at the National Bank-the privately-held institution that has been granted the authority to handle consumer transactions for the entire population.  Every Postcap is issued an account at birth and keeps it for life.  For simplicity, his bank account number and his official identification number are the same.  All his transactions-deposits and deductions-flow through this one account for there can be no other account or other means of exchange: no paper currency, no coinage.  Purchases, from that of a newspaper to that of an automobile are paid by check or by debit card.  All deposits are likewise handled electronically.  The account earns no interest.

Postcapia has only one form of taxation.  Each month a government agency sweeps all the customers’ accounts in the National Bank and deducts a levy, currently one percent, from their balances.  (As is shown below, Postcapians cannot escape the tax by buying hard assets.)  The consequences of this policy can be summarized as follows:

a) By applying what is, in effect, a negative rate of return on capital, money becomes less a store of value and more a catalyst for expediting trade.  This characterization is more nearly in accord with the reality that money has no real substance but is, instead, an amorphous instrumentality that mankind has infused into the natural world. 

b) Since the accounts of the poor afford meager pickings, the tax load is borne almost entirely by the rich and middle class.

c) In that any deposit made by Postcapians depreciates by about 50% every six years, inheritances, family fortunes, and the like dwindle rapidly yielding a more egalitarian society and a reduction in class envy.

d) Because their income is not taxed and their assets afford them little or no income, those Postcapians who wish to enjoy a higher standard of living have a strong incentive to acquire a good, steady income through their own efforts.

e) Personal credit is either altogether unobtainable or very costly because the borrower would be subject not only to the interest on the loan itself but to the 12% (roughly) a year tax on the loan’s proceeds.

f) Children of wealthy parents cannot count on large inheritances and thus must make their own way in the world.  There are no “idle rich.”

g) The rate of taxation is determined by a feedback provision of the law that requires the rate of one year to entirely reimburse governmental outlays of the preceding year.  Needless to say, were the rate to substantially increase from one year to the next, the political backlash would be considerable.

h) The system is highly efficient.  Taxpayers waste no time on filing their income tax.  From the government’s standpoint, tax collections are swift, dependable, predictable, and very cost effective.  There is virtually no loss to tax cheats.  And for the economy as a whole, there is no crazy patchwork of fees, hidden taxes, assessments, etc.-each with its own administration and cost structure.

i) Few Postcapians have the means to self-insure so they turn to commercial sources for their casualty, supplementary health care, and term life coverage.  Whole life insurance, thanks to its cash value provisions, is unavailable.

j) On the downside, the rich can afford to donate less to charities and other worthwhile, sometimes idiosyncratic, causes that might not otherwise be funded.  However, once donors decide to gift, they do so without delay so as to beat the taxman.

k) Except for contributions to their retirement subaccounts (see below) the Postcapians have little incentive to save since the government eventually confiscates practically everything they put away.  Nevertheless, it has been the country’s experience that deterring personal savings has not led to a noticeable increase in ostentatious spending or hedonistic life styles.  Indeed, Postcapia’s culture tends to discourage both.

l) Although the overall economy cannot depend upon personal savings to support its cash flow, it can obtain the resources it needs from businesses as noted in Part III.

*    *    *

 Six subsidiary accounts are associated with every Postcapian’s main account.

 1) PAYABLES SUBACCOUNT:

 All of an individual’s routine purchases on credit, such as utility bills, credit card debt, and rentals, are posted electronically by their respective vendors directly to this account.  Upon an individual’s approval of the invoices, payment is immediately deducted from his main account and delivered to his creditor. 

 2) RETIREMENT SUBACCOUNT:

 Another one percent per month is automatically transferred from an individual’s main account into his retirement account up to a limit of $250,000  (a couple of roughly the same age would, of course, have $500,000 at their disposal).  Individuals can supplement the mandatory transfers with voluntary payments of their own.

 The benefit to the individual is that funds in this account are sheltered from taxation, but they cannot be withdrawn in part or in full until he reaches at least the age of sixty-five and is no longer employed.  If he continues to work after sixty-five, he is denied access to his retirement fund during the interim.

  In verified cases of extreme hardship, an individual can obtain approval to withdraw funds prior to his retirement and is later permitted to restore his depleted retirement subaccount by a continuation of the one percent allocation up to the prescribed limit.

 The mechanics of the system clearly encourage a retired person to first exhaust his main account before dipping into his retirement account.  Any funds remaining in his accounts are distributed in accordance with his will.

 3) SHADOW ASSET SUBACCOUNT:

 Postcapians are free to speculate on hard assets such as real estate improvements, metals, corporate bonds, antiques, artwork, etc. (raw land and common stock are a different matter).  However, shadow asset regulations prevent such purchases from being the means to shelter one’s main account for tax avoidance purposes.

To begin with, every seller of hard assets must be registered as such.  Thus when Jones pays Yellow Metals, Inc. $1,000 for an ounce of gold, the transaction is automatically recognized by the National Bank as a hard asset sale and entered as such in Jone’s shadow-asset subaccount where it is taxed exactly the same way as if the $1,000 were still in his main account.  More specifically, the first year’s tax of approximately $120 is drawn from Jone’s main account and the subaccount balance reduced to $880.  Likewise, the second year’s tax of about $105 comes out of his main account and the subaccount is reduced to $775.  If, at that point, Jones sells his gold for, let’s say, $1,300 and that sum is perforce deposited in his main account, whatever is left of the original subaccount entry is expunged.  Thus, as far as the government is concerned, Jone’s entry into the gold market had no impact upon his tax obligations.  From Jone’s standpoint, his net gain on the transaction is his $300 gross profit less the $225 paid in taxes-a better outcome than if he had not speculated at all since his tax liability would have been the same in either case.

There is no limit on the number of entries a shadow asset account may contain, but each entry must be kept discrete.  For example, Jones cannot elect to sell only a half of his gold holding nor can he add more gold to that particular entry.   

4) & 5) The food and shelter subaccounts will be discussed in Part IV in conjunction with governmental activities.

It might be well to interject a general observation at this point.  It’s clear, even at this initial juncture, that the structure of Postcapia’s society imposes a number of restrictions on the economic life of its citizens.  More will ensue later and there could be privacy concerns as well since, financially at least, there is no place to hide.  Somewhat paradoxically, however, these same restrictions allow for an improvement in the quality of life in the form of a tranquil economic environment unmarred by want, the absence of class antagonisms, a reduction in criminality, and safer lives.  The tradeoffs, I would argue, favor the Postcapian approach.