BY TONY MWITI – Director, Clark and Hampton
Taxes wholesomely or partially can be replaced by Structured Money Creation. The Government can with ease replace the former with the latter. Structured Money Creation is a far much more efficient Government revenue generation tool over the complicated balancing act that is taxation. In fact the Government never really knows how much it will collect in taxes. It budgets first then raises the money later. Should there be pandemics, new spending needs, etc. then the cracks of taxation are clearly exposed.
It’s been said that “a fine is a tax for doing something wrong but a tax is a fine for doing something right.” This well captures the public’s mood concerning taxes. They seem burdensome in an already depressed economy which seems to be rubbing off on the Finance Ministry too if recent headlines on the Nation newspaper are anything to go by; “Brace yourselves for higher income tax and VAT in January” on 26th November 2020, “Covid-19 tax reliefs are over: CS Yatani” 3rd December 2020, “Yatani: Brace yourselves for tough times” 4th Dec 2020. Doom and gloom are sufficiently predicted.
If its reliance on a taxation / debt model for Government revenue then Yes the Finance CS is correct to predict and inform the nation on the difficulties that lay ahead but we Modern Monetary Economists are of the view that the way forward into sufficient Government revenue isn’t via a heavy dependence on taxation but on new models such as Structured Money Creation which then begs the question, What is Structured Money Creation?
Structured Money Creation
Also known as Modern Monetary Theory, its hinged on the philosophy that Governments have a monopoly over their own currency meaning in principle, the Government can never run out of money and never needs money from sources other than itself. Central Banks can implement a Structured Money Creation System (printing or electronic) as a source of revenue. Yes, the Government can make money out of thin air and inject it into its budget and with a robust electronic financial system such as ours, money should be created and issued electronically and wired into various bank accounts. Now the theory does not suggest a willy-nilly approach, no, it suggests a framework based around a structured system that has guidelines with related checks and balances.
In money creation, the lens the government perceives taxes changes. The question of where to find money becomes the easiest question to answer. As with all models, there are risks and limitations, and so with this. There are two key restrictions namely, inflation and availability of resources.
Excess money in an economy creates inflation but how much is too much? We suggest that for each programme the government proposes, it must first undergo an inflation rating by the Central Bank say out of 10 points with 10 being extremely inflation attractive and thus a safety cap of seven points is put in place. Proposals of projects that score seven and above are returned to be amended. This way we handle the inflation question from inception by economic professionals.
Availability of Resources
Rather than financial limitations, Structured Money Creation helps the government focus on the real limits of resource availability (human capital, raw material, climate, technical expertise, and so on). For example, a government can desire to construct an airport. No problem. The money can always be created and so the question that arises is do we have local construction manpower in numbers? Do we have sufficient raw materials such as steel and concrete locally? Do we have spare machinery so as not to compete with other private sector projects?
The New Role of Taxes
Here taxes start becoming a tool to regulate inflation rather than one that is primarily the source of revenue. It also merges the roles of the Revenue Authority (Revenue Collection) and the Central Bank (Regulation, Currency Creation) into one. How does it regulate? It works at the backend where in the event inflation numbers start to escalate the tax body levies higher taxes into that sub-sector which will reduce the amount of cash flow thus stemming inflation. Collected tax money is then not returned back into the economy, instead it’s destroyed, so as not to re-incur the rise in inflation these monies were warding off.
As a pilot programme we suggest the formation of a Revenue Replacement Grant Scheme as a key anti-corona stimulus programme for businesses of all levels. The grant can be processed electronically after businesses provide bank and mpesa statements of their 2019 revenues (Pre Corona Year). The 2019 revenues can be approved and wired to them monthly for say two years and seeing it’s a replacement plan we don’t foresee inflation. This means rather than retrenching, businesses can continue paying salaries, the economy will recover immediately and rather than Government scrounging for revenue by increasing tax in a depreciated economy they can instead relax, oversee a structured money creation system and fulfill most if not all its pledges to its people. Fulfilled Pledges… What a legacy that would be for an outgoing President. We need a new model for today’s more pressing challenges and this is a viable candidate.
Mr. Tony Mwiti is a director at Clark and Hampton Kenya – a Media and Out Of The Box Economy Consultancy.