Fiscal Policy

Deciding which sources of funds to use and to what extent is the primary decision of a fiscal policy. This chapter discusses several currently used sources of funds, and concludes that wealth-based taxes and "printing money" are the only two sources of funds that are appropriate for financing the operations of an ideal society. Based on these two sources, we outline the entire fiscal policy and its rules. A few of these rules involve "destroying money", the complement of "printing money". We cannot have one without the other, and both play a key role in the overall fiscal policy.

An Overview

What is a Budget?

Society does its common good in an organized way. The government is the organization that implements all activities necessary for doing the common good. Government being an organization requires planning, estimation, and budgeting.

Each year, the government must have a plan to deliver the services that it is responsible for. It must estimate the cost of providing these services. Thus, for each year, there is a plan to deliver the services, and an estimate of its cost.

This plan and estimate should be approved by citizens or their representatives. At the conclusion of this process, we have the estimated amount of money that represents the total money required to deliver the government services. This activity of planning and estimation about costs and sources of funds is called budgeting; the actual estimates of costs and sources of funds is called the budget. Governments do this even today.

What are the possible sources of funds that can cover these costs?

Government spending needs funds. The broad categories of the possible sources of funds for government spending are: taxes, borrowing money, printing money, service charges, selling some assets of the society, royalties and dividends.

In general, what is a Fiscal Policy?

Deciding which sources of funds to use and to what extent is the primary decision of a fiscal policy. The government will need infrastructure to handle money coming in and going out. It will need to set up accounting for it. The rate at which money flows into the government and the rate at which money flows out of government usually will not be the same, and the government needs a plan to handle this situation.

In general, a Fiscal Policy is the set of rules, and the system that implements those rules to accomplish the above-mentioned tasks.

What is the need to rethink Fiscal Policy?

The section, "The Need to Rethink Fiscal Policy", discusses the answer.

In short, we need to rethink our fiscal policy because we want to eliminate unfairness, and we want to use the right tools to implement the fiscal policy of our society. The first unfairness is related to our current taxation basis. The second unfairness is related to the debt that we continue increasing, and hence holding our children and our future generations responsible for repaying.

The focus of that discussion is to sift through the possible sources of funds for social spending, and figure out which sources are acceptable. The conclusion of that rethink is: for an ideal society, of all the possible sources of funding, the only acceptable sources of funding are wealth-based taxes and freshly printed money.

What is the Utopian Fiscal Policy?

The section, "Conceptual Details of Fiscal Policy" discusses the various stipulations of the fiscal policy followed by an ideal society in detail. Here are just the stipulations:

An ideal society must fund all its upcoming planned expenses through wealth-based taxes.
An ideal society should not borrow its own currency.
An ideal society should handle deficits arising out of unexpected and unplanned spending needs by creating money for that spending need. Money thus created is part of the fiscal deficit.
An ideal society should handle deficits arising out of an imbalance in taxes flowing in and money flowing out due to planned spending by creating money for that spending need. Money thus created is also part of the fiscal deficit.
An ideal society should collect wealth-based taxes specifically to pay off all previously accumulated fiscal deficits. The pay-off period should be just a few years.

Besides these stipulations, there is one more important question: How would fiscal policy deal with unexpected and exceptionally large deficits or unexpected deficits that span several years?

How is the Fiscal Policy implemented?

The section, "Implementation of Fiscal Policy", discusses the answer to this question in detail.

The Need to Rethink Fiscal Policy

A rethink of fiscal policy primarily involves examining all sources of funds and deciding which ones are appropriate for an ideal society.

Let us start by considering taxes as potential sources of funds for social spending needs.

Taxes are a major source of revenue for our current societies, and they will be the major source of revenue for an ideal society. The only reason any society collects taxes is to support the social spending needs; that is, to support the expenses of the governments of the society. Thus, taxes are a major component of fiscal policy.

One can think about reducing our government spending and thus reduce the need for taxation. It should be done, and thinking on the Utopian lines of thought helps determine what is worthy of social spending, and what is not worthy of social spending.

Regardless of whether we reduce our social spending, there will be a need to collect taxes, and choosing a fair basis for collecting taxes is a core decision that is absolutely necessary in the context of fiscal policy.

This makes "tax basis" a major point in the rethinking of our fiscal policy.

As discussed in the chapter, "Reasons for the Rich Getting Richer", the current bases for taxation are causing increasing wealth inequality. The chapter, "Wealth Based Taxes", has discussed in detail why wealth is the right basis for taxation. Between those two chapters, we have also discussed why other bases for taxation range from not appropriate to being wrong.

Based on everything that we have discussed till now in this book, wealth is the right basis for taxation, and nothing else is a good basis for taxation.

So, what we are rethinking is "should we eliminate the unfairness of the current taxation system?". If the goal is an ideal society, then the answer is definitely a "yes". Even when the goal is just a little bit better society, then also the answer should be a "yes".

Now let us consider "sale of social assets" as a source of revenue.

Since the asset being sold is a social asset, it belongs to the society. This means that it really belongs to all citizens, and that too equally. If such a social asset is sold, then the amount received should be distributed equally among all citizens. This can be accomplished along with the redistribution of wealth.

That means, proceeds from the sale of social assets should not be used as sources of funds to finance social spending.

Now let us consider royalties and dividends as potential sources of funds for social spending needs.

Some societies may charge royalties for use of natural resources. Some societies may have investments, and those investments may fetch dividends. Both these streams of revenue should be considered as "earnings" from the common wealth of the society. Since all citizens are the owners of the society, all citizens have a claim over it. Moreover, since all citizens are equal owners of the society, the claim of citizens over these revenues is equal. The only sensible thing to do with this revenue is to distribute it equally to all citizens. This can be accomplished along with the redistribution of wealth.

That means, royalties and dividends should not be used as sources of funds to finance social spending.

Now let us consider revenue from "service charges" and "token user fees" as potential sources of funds for social spending needs.

An ideal society undertakes everything for the common good. Hence those services are available to all citizens free of charge. The citizens are not the government's customers. Hence, citizens are not paying service charges for the services they receive from the society as a "service provider".

However, the government may charge some amount of money for every use of government facilities or services. These are "token user fees", and they are only meant to dissuade wasteful usage of the common services provided by a society to all its citizens. These "token user fees" may seem like present-day "service charges"; the key distinction is that any service charge is commensurate with the service rendered, whereas a token charge is fixed and not commensurate with the rendered service. The monetary distinction is that service charges should cover all costs associated with rendering the service, whereas token fees should form only a small proportion of the cost of rendering the service.

These "token user fees" should not be considered as "tax revenue". Why? Since the "token user fees" are fixed amounts, they are not wealth-based. We have already discussed that wealth is the only right basis for taxation. Using these revenues implies that some amount of wealth-based taxes are being excused, and that implies that some level of unfairness has occurred. So, the revenue from "token user fees" should not be used to fund the spending needs of the society. They should be equally distributed to all citizens along with the redistribution of wealth.

That means, anything that is in the category of what we currently understand as "service charges" or anything that is explicitly a "token user fee" should not be considered as a source of funds to finance social spending.

If you recall from a discussion in the "Reasons for the Rich Getting Richer" chapter that any time some money is given equally to all citizens, it eventually trickles up to the rich. That is the nature of economic activity. By giving the royalties, dividends, proceeds from asset sales, and token user fees to all citizens equally, we are simply being fair. Doing this lets the money circulate in the economy for some time, and through some number of stages, before reaching the rich. It does more good to the society this way instead of directly using it for the spending needs of the society.

Currently, governments of almost all countries borrow every year, and this borrowing is increasing every year. Every year, there is always some reason to borrow. The net result of this borrowing is that countries have been building debt. The debt in many countries is larger than its GDP.

This borrowed money has to be ultimately repaid, and the money for repaying these debts needs to be collected through taxes. Thus, citizens always pay for the government expenditure; either now or later; and always through taxes. The more one delays paying debt, the more it implies that citizens born after the debt was incurred are partially responsible for paying that debt. The longer the debt is not paid, there are more citizens born from the time the debt is incurred, and hence many more future citizens are held partially responsible for paying for our current spending needs.

This is forcing our children, our grandchildren and our future generations to pay for our current spending needs. This is contrary to the ideals of Utopia. As individuals, we do not pass on our debts to our children. As a society, we definitely should not pass on our monetary deficits and debts to our children. We value freedom, and we should free our future generations from our debt as well. We like to make spending decisions, and we should also pay for them. We should not burden our future generations with our debt. We should preserve the freedom of our future generations. It is freedom from prior debt. It is freedom to spend on what they desire; on what they think is right; on what they think is more appropriate. It is the fair thing to do.

The right thing to do is to pay for our own expenses, either when they occur or shortly thereafter. Doing this is necessary if we want to live in an ideal society. This implies that if the society incurs a debt, then it should be paid off in a very short time; in a year or two at most.

This means we need to rethink our stance on debt as one of the sources of funds within our fiscal policy. This only says, "we need to rethink". We will discuss that in the next few paragraphs.

While humans get born and humans die in about 100 years, countries tend to survive much longer. More than that, a country is usually a monetary sovereign, but a human is not. So, it is fine for a human to borrow, but silly for a monetary sovereign country to borrow.

Based on the rate at which we are ballooning our debt, our future generations will undoubtedly call us "incompetent" at estimating our expenses and balancing our budgets, "irresponsible" at handling our spending desires, and "poor" in our ethics.

In the past few decades, all societies have moved towards adopting a pure fiat currency as its local currency. A pure fiat currency is a fiat currency that is backed by nothing precious and scarce. This makes all these societies as monetary sovereigns.

In the most recent decades, societies have started exploring the capabilities associated with being a monetary sovereign. One of these capabilities is used by the central banks of some societies when they engage in "quantitative easing". In short, quantitative easing is digitally printing some amount of local currency, and then depositing it in some account, from where it can be used to buy something.

So, if societies can digitally print their local currencies whenever it is deemed necessary, then why do societies have to borrow their own currencies? That is a rhetorical question. In reality, there is no valid reason for societies to borrow their own local currency. Whatever perceived reasons exist, they exist only because it has been done in the past, and these societies have not yet changed those practices.

An ideal society is not merely a sovereign, it is also a "monetary sovereign". Being a sovereign allows a society to collect taxes. Taxation is an inherent part of being a sovereign. Any society who has full control over its own currency is a monetary sovereign. Being a monetary sovereign, a society can create more of its own local currency whenever it is needed.

In light of this recently acquired monetary sovereignty, societies do not need to borrow their own local currency for their spending needs. Thus, the government of an ideal society should not borrow for any government spending. There is a need for this stipulation because governments currently are in the habit of borrowing, and governments don't need to borrow.

The ability to digitally print local currency should not be interpreted as freedom to do so. Doing so without also digitally destroying an equivalent amount of that printed local currency will cause monetary inflation. That too is bad, as discussed in the chapter "Reasons for the Rich Getting Richer".

Monetary sovereignty also means that such a society can collect taxes and destroy that money. Creation and destruction of local currency are two complementary aspects of being a monetary sovereign. A monetary sovereign society can simply create the money with the understanding that it will eventually collect the equivalent in taxes and destroy it.

Thus, ideal societies must also establish a mechanism to eventually collect enough money to cover the fiscal deficit as taxes and destroy all that money.

So, for a monetary sovereign society, there is never a need to borrow local currency. Such a society can simply create the local currency when needed, and later collect it as taxes and destroy it, leaving the net amount of money in the society the same.

Sometimes, for social spending needs, a society may have to buy things from some other societies. This is a case of the society engaging in "foreign trade", and that does not impact the fiscal policy, because such trade is neither conducted in local currency nor is it conducted in a foreign currency; it is conducted in gold. See the chapter "Foreign Trade" for details.

To summarize,

We do not want any unfairness to current citizens. Hence, we need to use wealth as the basis for taxation.
We do not want to appropriate funds that truly belong to citizens equally, and then use them for spending. The fair way of collecting funds for social spending needs is through wealth-based taxes.
We do not want to borrow money because we can print it at will. Borrowing is unnecessary.
We do not want any unfairness to non-decision making citizens and future citizens. Hence, we need to pay off our deficits in the collection of taxes that support our current spending needs.

Thus, for an ideal society, of all the possible sources of funding, the only acceptable sources of funding are wealth-based taxes and freshly printed money.

Conceptual Details of Fiscal Policy

An ideal society adheres to several stipulations regarding its fiscal policy. In this section, we will discuss these stipulations.

When we estimate our spending needs well, our society's budget would not have routine deficits.

An ideal society must fund all its upcoming planned expenses through wealth-based taxes.

The discussion in the section "The Need to Rethink Fiscal Policy" has already justified this particular stipulation. There is a need for this stipulation because governments currently do not use wealth as the basis for taxation.

An ideal society should not borrow its own currency.

An ideal society should handle deficits arising out of unexpected and unplanned spending needs by creating money for that spending need. Money thus created is part of the fiscal deficit.

Most of the government expenditure is planned and budgeted. Sometimes, to tackle unexpected problems, there arises a need to do more things than originally planned, and in order to do these additional things, there is a need to spend more money than initially planned and budgeted. Of course, this unexpected spending still needs to be approved, and it can be done either by citizens or their representatives. The result of the unexpected spending is that the government of an ideal society will have a funding deficit.

When faced with a shortage of funds due to unexpected spending, the government can and should print the required money. This printing of money is not in the literal sense, but in an electronic sense. This unexpected, unplanned, additional spending is the "fiscal deficit".

When a society incurs a fiscal deficit for unexpected spending needs, these needs are in addition to all other normal needs, and hence should not be collected as taxes immediately. After all, citizens have to adjust their own plan to accommodate this unexpected spending event.

These deficits should be funded using freshly created money. An ideal society can do this because it is a monetary sovereign.

We may encounter successive years of unexpected spending, and hence we may have to incur a deficit over successive years. Hence, there is a possibility that we may have a deficit from past years that has not yet been paid off, and we incur a new deficit. This is fine. We should accumulate deficits as and when they occur.

In the case of a society or a nation, unforeseen circumstances arise naturally. Handling these situations causes a spike in the need to spend. The desire to flatten the spike is also reasonable. This flattening of the spike in spending is for our convenience. This desire to flatten the spike in spending is the source of the deficit. Being responsible also implies that one is willing to pay off the deficit in a reasonably short amount of time. A few years is a reasonable horizon to deal with such a spike.

Hence, we should always plan to pay off all our deficits over a fixed number of upcoming years. We will discuss the "paying off" of these deficits in the stipulation after the next one.

An ideal society should handle deficits arising out of an imbalance in "taxes flowing in" and "money flowing out due to planned spending" by creating money for that spending need.

During the course of a year, the rate at which taxes are collected and the rate at which planned spending occurs may not match exactly. Conceptually, the taxes collected are deposited in an account and planned spending uses this account to pay for the spending needs. Governments will routinely face temporary imbalance in money flowing in and money flowing out. On some days, this account may not have sufficient money to pay for the spending needs. On some other days, after all the planned spending of the day, there will still be some money left over in this account, and it should stay there for future planned spending.

This is a temporary situation caused by an imbalance in the flow of taxes and spending. This too should be handled by the concept of "printing more money".

Since this spending was planned, not unexpected, we have planned to collect taxes to cover this spending, these taxes will eventually be collected and those will offset this temporarily printed money.

Thus, the government should handle a temporary deficit in collected taxes for planned spending by printing some more money and pay it off when the taxes are collected.

An ideal society should collect wealth-based taxes specifically to pay off all previously accumulated fiscal deficits. The pay-off period should be just a few years.

When an ideal society encounters unexpected spending needs, it simply creates fresh money to satisfy those spending needs. If the spending need was anticipated and planned for, then the society would have provided for that spending in its annual budget. Just because the spending was unexpected does not exempt it from being paid through taxes. But, because it was unexpected, it does not have to be paid through this year's taxes. Thus, this unplanned expense accumulates as a fiscal deficit.

There may be imbalances in revenues and expenditures, but one cannot have these imbalances continue for too long. An ideal society should plan to collect the money spent on these unexpected expenses through wealth-based taxes and pay off the fiscal deficit. Moreover, the fiscal deficit should be paid off in just a few years.

This collection of taxes to pay off part of the fiscal deficit should be viewed as "planned spending" and hence included in the next year's budget. This is in addition to whatever normal expenses are part of the routine budget. Enough additional taxes should be levied so that the entire fiscal deficit can be paid off in just a few years. This additional money collected should be destroyed, and that will reverse the effect of the original creation of money to fund the fiscal deficit caused due to unexpected spending needs.

The number of years over which to fully pay off our deficit is a policy parameter that citizens collectively decide. Let us call this parameter "Deficit Elimination Years". For example, citizens may decide to pay down all deficits in 2 years, or 5 years, or some such number of years. Citizens need to keep in mind the principle that "our expenses are our responsibilities" when collectively setting the "Deficit Elimination Years" policy parameter.

Every year, one part out of "DeficitEliminationYears" parts of the accumulated fiscal deficit must be budgeted for paying down. It must be collected as taxes, and as those taxes are collected it should be gradually paid off.

Since we incur a deficit when we create some money instead of collecting taxes, paying it off means we collect that amount of money as taxes and destroy it. Just as creating money is an electronic action, destroying it also is an electronic action.

Thus, the government should handle spending to tackle unexpected situations by printing required money and recording it as accumulated deficit, and eventually collect additional taxes and pay off the accumulated deficit over a fixed number of years.

This stipulation ensures that the citizens of an ideal society do not burden their children or their future generations with their own spending needs. The goodness of an ideal society is, in part, inversely proportional to the "Deficit Elimination Years". A reasonable default value of this policy parameter is 2 years.

How would fiscal policy deal with unexpected and exceptionally large deficits or unexpected deficits that span several years?

That leaves only the big, once in a generation or once in a century kind of unforeseen and unexpected events that we need to deal with. A very good example for this kind is the year 2020. Before that, the years from 1939 to 1945 serve as another good example for many countries. If one has to go even before that, then the years 1914 to 1918 is another example for many countries. Since unforeseen and unexpected events of such magnitude occur infrequently, we cannot account for them in our routine annual budgets.

So, when such events occur, we will use our mechanism of handling deficits. The mechanism of allowing deficit is intended for these kinds of rare calamities. And when this occurs, we will still be able to eliminate the deficit incurred in just a few years.

If we ask a single individual his or her opinion, then that individual may say that for a year like 2020, the fiscal deficit can be easily eliminated in a couple of years. That individual may also say that for years like 1939-1945, the fiscal deficit could be eliminated in about 10 years. However, that is just one individual's opinion. Every citizen can have their opinion, and that opinion plays a role in deciding how soon to eliminate the deficit.

Citizens can decide if the value of the Deficit Elimination Years parameter needs to be increased or decreased depending on their view of the situation. Deficit Elimination Years being a policy parameter, they can change it at any time. Because it is a policy parameter, its actual value is a composite of the values specified by all citizens and hence represents citizens' verdict on how long to take to eliminate the deficit. Harsher situations warrant a longer time, and citizens will do their part to smooth out the tax consequences of these harsh situations.

There is one more tool to handle severe hardships due to these kinds of severe unexpected events. In case of severe hardships, the monetary value of total privately owned wealth of a society drops significantly. Monetary policy deals with these kinds of situations. In case of such hardships, monetary policy has provisions that help in reducing the fiscal deficit. See that chapter for the relationship of monetary policy to fiscal policy. But, in short, the "DeficitEliminationYears" does not need to be any larger than a corresponding parameter in the monetary policy.

Implementation of Fiscal Policy

Here is a conceptual overview of the implementation of fiscal policy. It outlines how a government in utopia collects taxes and deals with deficits and surpluses in revenue that support the spending needs.

Conceptually, one can think of an account called "Current Spending Account" from which the government pays for all the spending that it is authorized to spend. Taxes that we collect get deposited in this account and payments are made from this account.

Government must collect taxes that are equal to planned spending. Taxes are based on wealth as explained in the chapter on taxes, and every citizen pays at the same rate of taxes. Government must fund its expenses using taxes thus collected. For each year, the amount of budgeted spending should be represented as a percentage of the total wealth of all citizens of the nation. Let us call this percentage as "Annual Spending as Percentage of Wealth".

Conceptually, there is an account called "Fiscal Deficit Account". Printing one unit of money means adding one to the Fiscal Deficit Account and also adding one to the Current Spending Account. Till such time that the fiscal deficit is not paid, the Fiscal Deficit Account will have a value of greater than zero. This account represents the accumulated fiscal deficit.

There might be accumulated deficits from past years as well. So, at the beginning of any fiscal year, there might be an amount in the Fiscal Deficit Account. When there is an accumulated fiscal deficit, the government must plan to collect some extra taxes and pay the currently accumulated fiscal deficit in the next few years. The policy parameter "Deficit Elimination Years" will specify the number of years in which to collect the deficit as taxes.

Dividing the value of Fiscal Deficit Account by Deficit Elimination Years gives us an amount that needs to be collected every year so that the fiscal deficit is paid for by taxes. This number can be represented as a percentage of total wealth of all citizens of the nation. Let us call this number "Annual Deficit Reduction as Percentage of Wealth".

Every year, in order to pay for government expenses, we need to collect taxes. These are called "Fiscal Taxes" and these are expressed as a percentage of wealth and collected from all citizens at the same rate. Thus,

Fiscal Taxes as Percentage of Wealth = Annual Spending as Percentage of Wealth + Annual Deficit Reduction as Percentage of Wealth.

The government should collect this fiscal tax. Let us call the amounts represented by Annual Spending as Percentage of Wealth and Annual Deficit Reduction as Percentage of Wealth as "Taxes for Annual Spending" and "Taxes for Deficit Reduction" respectively.

The amount represented by Taxes for Annual Spending gets deposited in the Current Spending Account. That is, we add the collected Taxes for Annual Spending to the value of the Current Spending Account.

Regarding Taxes for Deficit Reduction, since this amount is to pay for past deficits and since those deficits were funded by conceptually printing some money, this amount should reverse the effect of that printing of money, which means we need to destroy this money. Thus, when we collect Taxes for Deficit Reduction, we should reduce the number in the Fiscal Deficit Account by Taxes for Deficit Reduction.

When we no longer have a fiscal deficit, the number in the Fiscal Deficit Account will be zero.

If for any reason, after applying Taxes for Deficit Reduction to the Fiscal Deficit Account, the Fiscal Deficit Account reduces to zero and there is still some money left over, then that money should be added to the Current Spending Account.

During the course of a year, the rate at which taxes flow into the Current Spending Account may not exactly match the rate at which spending occurs. Hence, there might be days when the value in the Current Spending Account is zero and yet the government needs to pay some bills. This is a situation where there is a current fiscal deficit.

One can think of an account called "Current Fiscal Deficit Account", which is similar to Fiscal Deficit Account. When an authorized spending is required and when the Current Spending Account has insufficient funds, then the amount of deficit gets added to the Current Fiscal Deficit Account and Current Spending Account. Thus, payment can be made in full from the Current Spending Account and the deficit is accounted for in the Current Fiscal Deficit Account.

Usually, when taxes are collected, the entire Taxes for Annual Spending is deposited into the Current Spending Account.

However, when the Current Fiscal Deficit Account has a value greater than zero, then for every dollar collected as Taxes for Annual Spending, instead of adding that dollar to the Current Spending Account, we should reduce the Current Fiscal Deficit Account by one.

Once the Current Fiscal Deficit Account reduces to zero, every subsequent tax dollar can continue getting added to the Current Spending Account.

At the end of a year, if the Current Fiscal Deficit Account has a value greater than zero, then it also means that the Current Spending Account has a value of zero. If this is the situation, then we add the amount in Current Fiscal Deficit Account to Fiscal Deficit Account, that is increase our accumulated fiscal deficit by the amount of the current fiscal deficit and set Current Fiscal Deficit Account to zero.

At the end of a year, if the Current Spending Account has a value greater than zero, then it either means we have collected some surplus taxes or we have not spent all the money that was budgeted and collected as taxes.

At this point, if the value in the Fiscal Deficit Account is greater than zero, then it means that there is an accumulated fiscal deficit. We can reduce this accumulated fiscal deficit using the surplus.

If the accumulated fiscal deficit is greater than the surplus, then it gets reduced by the amount of surplus and the Current Spending Account gets set to zero.

If the accumulated fiscal deficit is less than the surplus, then the Current Spending Account gets reduced by the amount in the Fiscal Deficit Account and the Fiscal Deficit Account gets set to zero. That is, we have no accumulated deficit. This also means that we have some leftover surplus in the Current Spending Account.

If at the end of a year, there is surplus left in the Current Spending Account, then this existing surplus will be taken into consideration as already collected taxes when calculating taxes for the upcoming year.