Savers have hoarded huge stocks of the US dollar both nationally and internationally. No wonder—the world is becoming increasingly wealthy, and part of that wealth is kept in cash. What is more, with globalisation the trade in assets (securities, holdings, real estate, etc.) has also become more accelerated. For example, in recent decades investors’ average holding period for stocks has decreased radically. Consequently, the amount of money required to carry out the transactions is increasing.
In the meantime, in addition to lubing the transfer of assets, the same money is being used for lubing the real economy. The goal of the monetary system, however, only concerns the latter: it aims to stabilise the price level of consumer goods. The achievement of the goal is interfered with by the increasingly prominent role of money in connection with money. If the hoarded stock of money finds it way to the real economy for some reason, it will lead to soaring inflation.
What integrated mechanism could prevent this from happening? Whatever it is, it should motivate people to spend evenly on consumption so that demand shocks do not occur. If they do occur, it should punish those responsible for their occurrence, i.e. those wishing to consume more than usual within a short time.
One good solution is progressive VAT assigning a higher tax rate to higher consumption. This would indeed motivate people to space out their consumption evenly, or pay more in taxes. And if the money held as assets were to flow into the real economy in large quantities, a higher VAT would only be charged to the rich. Only they would perceive rising prices and they would take the brunt of it all, which is fair since they would be causing the demand shock in the first place. Conversely, the system would protect the poor against inflation.
As we know it today, VAT is the tax of the poor. The poor spend their entire income on consumption, whereas the rich only a fraction of theirs, while VAT is charged at a fixed rate. Therefore, it is in fact the poor who give the greatest share of their income to the government in the form if value-added tax.
Progressive VAT would also change this unjust situation. One can even imagine a world in which a tax is charged on consumption only, but not on income. Savings would be tax-free for everyone, and tax would only be paid on consumption. The more was consumed, the higher the rate would be.
The mechanism of progressive VAT outlined above is obviously not an elaborate concept. It is rather an idea, a direction for thinking, with a lot of question marks. Among these, it is only a tiny problem that, depending on their total consumption, everyone would have to pay a different amount for their bread and milk at the grocer’s, which is not viable in the present monetary system. However, that difficulty could be handled—this will be one of the issues addressed in the next part.
Next in the series: The missing element
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