The Great Italian Experiment (part 2)

By J.D. ALT

As I said, Italy, is now experimenting with paying for public services with tax credits. Presumably, this is happening because Italy doesn’t possess enough Euros to pay its citizens to provide all the goods and services needed to maintain and run the public sector of its social economy. And Italy can’t “create” the additional Euros it needs because that prerogative is the exclusive right of the EU Central Bank which Italy, even as a sovereign member of the EU, has no control over. But, as the news article explains, Italy still needs to have the grass mowed and the weeds pulled in its public gardens. So it has decided (out of desperation, the article implies) to pay the gardeners with tax-credits. The gardeners are willing to do the work in exchange for the government’s tax-credits, because it means the Euros they earn (in other ways) can then be used to purchase goods and services rather than for paying their taxes. So, in practical terms, it is “just like” getting paid in Euros.

This, in fact, is way more interesting than it seems. In fact, it might even be mind-expanding! Here’s why:

Presumably, the tax-credit payments described take the form of notations on the gardeners’ tax account. An hour’s worth of weeding is noted as 15 Euros worth of extinguished taxes. If the gardener has a tax liability of, say, €3750, her taxes would be completely paid after providing 250 hours of weeding and pruning. After that, obviously, she’d have no more incentive to provide any services in exchange for the tax-credits. So the amount of services Italy can obtain in this fashion is directly limited by the amount of tax liabilities it can impose on its citizens.

It would be possible, however, to structure the tax-credit payments in another way which would have a very different outcome. Instead of making the payment as a credit notation on a citizen’s tax account, the Italian government could issue paper tax-credits and pay them to the citizens for their gardening services. To be specific, this would be a piece of “official” paper, signed with an important signature, on which was printed something like the following:

The Sovereign Italian Government promises the bearer of this paper ONE EURO of credit on taxes owed to the Sovereign Italian Government.

This amounts to exactly the same thing as making a direct credit on a citizens’ tax account, but we now have set in motion a curious set of subsequent economic actions: Now, after an hour of weeding, upon receiving her 15 paper tax-credits―for convenience, let’s call them “PTCs” and give them the symbol β―the gardener can choose to do the following. She can put the PTCs under her mattress for safekeeping until the day her taxes must be paid. Or she can use the β15 to purchase a lasagna dinner at her neighborhood trattoria. The owner of the trattoria is willing to accept the PTCs in exchange for the lasagna, garlic bread, and wine because he, too, has to pay taxes to the Italian government. So, for all practical purposes, receiving the PTCs is just the same as receiving Euros for him as well.

Now we have to ask an important question: Is the amount of services Italy can obtain by issuing and “spending” its paper tax-credits still directly limited by the amount of tax liabilities it can impose on its citizens? In other words, if every Italian citizen theoretically has received enough PTCs to pay their taxes with—either having received them directly from the government for providing public services, or having received them from other citizens in exchange for lasagna dinners—will the citizens’ willingness to exchange real goods and services in exchange for the PTCs come to a halt?

Crucially, the answer is No. This is because the act of “embodying” the tax-credits in exchangeable pieces of paper has given the PTCs a usefulness in addition to their usefulness as tax payments: This additional usefulness, of course, is the ability to use them to buy goods and services from other Italian citizens and businesses. Thus, the number of paper tax-credits in “circulation” could vastly exceed, at any given time, the total actual tax liabilities of the Italian citizenry. The PTCs would continue to be accepted for lasagna dinners, because the Trattoria owners know they can use the PTCs they receive to subsequently buy Italian shoes and motorcycles— in addition to using them to pay their taxes.

It will no doubt have dawned on most every reader that what we’ve just created is “money.” Specifically, we’ve created what is called “fiat money”—which happens to be the kind of money the world has been using now for the past half century (ever since the U.S. formally abandoned the gold-standard in 1971). Having thus conjured a rudimentary image of fiat-money to life we should quickly make some important (and perhaps startling) observations about it.

Observation 1:  How does the PTC “currency” come into existence? The sovereign Italian government creates it. Paper tax-credits are not created by Italian banks, nor are they borrowed from China—or even the EU Central Bank. They are printed by the Italian government. Note: PTCs could also be created by the Italian government digitally—that is, with keystrokes that enter numbers in an electronic ledger of account. In either case, the point is ONLY the Italian government has the legal right to create them. Why? Because that is the prerogative of sovereignty and the definition of fiat money.

Observation 2:  How many PTCs can the Italian government create and spend? Or, to rephrase the question more precisely, how many times can the Italian government promise to accept one of its paper tax-credits in exchange for a Euro’s worth of taxes owed? The answer is simple: as many times as it wants! It doesn’t matter if all the taxes have been paid in full—it can still issue and spend the promise over and over again. The citizens will continue to accept the promise in exchange for real goods and services for two reasons: first, they know other Italian citizens and businesses will accept the promise as payment for lasagna dinners and, second, they know for sure that taxes due will come around again—and soon.

Observation 3: If (as observation 2 suggests is possible) the Italian government just keeps issuing and spending its paper tax-credits (fiat money) to buy goods and services from its citizens, won’t the number of PTCs in circulation keep growing until, inevitably, the price of things in the Italian economy begins to skyrocket? A lasagna dinner that used to cost β15 suddenly costs β150! In other words: Inflation. The answer, of course, is Yes. So what can the Italian government do to keep a lid on the inflationary pressure created by its continued issuing and spending of PTCs? Two things:

  1. The government can continue to collect taxes from the citizens (or, if necessary, even increase the taxes in collects). Taxes will remove PTCs from circulation, reducing the number of them available in the market-place to buy lasagna dinners and Italian shoes. Taxes, then, have a dual virtue in a fiat money system: they continuously reinforce the citizens’ desire to earn the government’s paper tax-credits—and they drain the paper tax-credits out of the market place, helping to keep prices stable.
  2. The government can also create special savings accounts that citizens can put their excess PTCs in. The accounts would earn interest (paid by the government with new PTCs)—but the agreement would be that the citizen would leave their “old” PTCs in the account, untouched, for a period of time—say 10 years. This means a large number of PTCs which would otherwise be competing to pay for lasagna dinners would be replaced with a much smaller number of PTCs (the interest payments). The net result will be fewer PTCs buying goods and services in the market-place. If you want, you could call these special savings accounts “government bonds.”

Historical Note:  When the U.S. was in the midst of mobilizing to fight WW2 it was issuing and spending historical quantities of U.S. paper tax-credits (fiat dollars) to pay U.S. citizens to build battleships and bombers—and to pay the recruits in its growing army and navy. Inflation was, indeed, starting to become a problem. So what did the government do? Two things: it increased taxes, and it issued War Bonds. It even imposed a requirement that workers take a percentage of their pay in War Bonds. By 1943, inflation was brought back under control.

Observation 3:  What happens to the PTCs when they are presented to the Italian government as tax payments? The mind-money framework we learn from early childhood “tells us” that the taxes collected by a national government are what the government then uses to pay for public goods and services. Crucially, however, this IS NOT TRUE with a fiat-money system. Looking at the paper tax-credit system we’ve just described, it’s clear that (by logical necessity) the government FIRST issues and spends the paper tax-credit, then it accepts it back as a tax payment. At that point of taking it back, the tax-credit is of no further use to the government. It is simply cancelled: it becomes a particular citizen’s tax liability with a line drawn through it. If the government needs to spend another paper tax-credit, it simply issues a new one. (It is actually easier and more efficient to issue new tax-credits than to “recycle” old ones.)

Observation 4:  Is it logical for a sovereign government to borrow the paper tax-credits it has issued? Please try, for a moment, to wrap your mind around this question! Here is something that ONLY the Italian government can create, and something it can create as many of as it needs, at any time it needs them. Why would it ever want, or need, to “borrow” them from the Italian citizens? It is, therefore, illogical to imagine the Italian government ever being “in debt” to its citizens! The Government Bonds we mentioned previously are not a “debt” the Italian government owes to anyone—they are savings accounts which hold the citizens’ excess PTCs for a specified period time. When the bonds “mature,” the PTCs are simply transferred back to the citizen. In a fiat money system, therefore, it is illogical (and irresponsible) to imagine or describe U.S. Government Bonds as being the government’s “debt”—or, more specifically, to talk about that “debt” as being “unsustainable,” or to suggest the government cannot pay its citizens to undertake and accomplish some important task because it will “increase the government’s debt.”

Having made these observations, it appears the Italian government has stumbled on an actual solution to the “austerity” it has been forced to impose on itself by the European Union. Except we must now confront the fact that the rules of the EU do now ALLOW Italy to issue and spend its own sovereign fiat currency! The only “money” Italy is allowed to use is the Euro—and the only way the Italian government can obtain Euros is either by collecting them as taxes from its citizens, or by borrowing them from the European Central Bank, which has the exclusive prerogative of issuing them. And these methods of obtaining Euros to spend are falling short of what Italy needs to pay its citizens to do. So…. Italy has decided to pay its citizens with tax-credits, and then (why not?) with paper tax-credits. And then, presumably, the EU says, “Whoa, hold on here! It looks like you are printing your own money, which is not allowed by our rules!”

We could then proceed to an International Court in which Italy claims it isn’t breaking the EU rules because it isn’t printing “money” but is simply issuing tax-credits. The EU would then have to argue that “tax-credits” are, in fact, what “money” is! In making that argument, it would be forced to explain everything we’ve just explained which would, in turn, reveal and establish not only the absurdity of the Eurozone monetary system, but also that the whole world (including the U.S.) is misunderstanding and mismanaging its money system—and unnecessarily making a vast majority of the world’s citizenry miserable in the process.

13 Responses to The Great Italian Experiment (part 2)

  1. Warren Mosler is an American economist and co-founder of the Center for Full Employment And Price Stability at University of Missouri-Kansas City
    https://m.facebook.com/story.php?story_fbid=10213402304550859&id=1196858889&_rdr

    “The US public debt is nothing more than the dollars spent by the federal government that have not yet been used to pay taxes. Those dollars spent and not yet taxed sit in bank accounts at the Federal Reserve Bank that are called ‘reserve accounts’ and ‘securities accounts’, along with the actual cash in circulation.

    ***

    Think of it this way- when the government spends a dollar, that dollar either is used to pay taxes and is lost to the economy, or it’s not used to pay taxes and remains in the economy. Deficit spending adds to those dollars spent but not yet taxed, which is called the public debt.

    So how about what’s called ‘paying off the debt’ as happens to 10’s of billions of Treasury securities every month? That’s just a matter of the Fed shifting dollars from securities accounts to reserve accounts- a simple debit and a credit- all on its own books. And there are no tax payers or grand children in sight when that happens.

    ***
    …..the public debt is nothing more than a component of what can be called the money supply…. there is no risk of default, there is no dependence on foreign or any other lenders, there is no burden being put on future generations, or any other of those trumped up fears…..

    ______________________________________

    Modern Monetary Theory in Canada
    http://mmtincanada.jimdo.com/

  2. Tadit Anderson

    from the history of social movements the adoption of the new praxis begins before the movement gains traction. The Highlander Folk School taught people how to be organizing by adopting a communal learning/organizing process. Likewise Friere teaching literacy by discussing the political contents of the current news. The book by Friere and Horton is “We Make the Road by Walking The fiscal literacy gained in the tax credit swap can be a basis of further participation in fiscal democracy. It is why having a community currency design based upon MMT principles could also be a powerful means to democratic fiscal literacy. The flap about deficits as debt would be properly assigned scary bed time stories from a passed age, when “children” were more easily frightened.

  3. Thanks for sharing your thoughts on this JD.

    There is something in the idea. Proof of work might be a blocker though but I guess if the government vested authority to issue the credits to trusted non-profit partners, whose job it was to validate/verify the work, then that might work?

    Non profit partners might look like community groups with leaders that say are licensed to issue credit? Presumably they would have to cross guarantee the standards of work performed. Without such proof – without quality assurance – the value would collapse because the work wasn’t being done properly.

    Having said that, if communities could solve their own problems, the government would be able to issue credits for a wide variety of cash-saving activities. All would be differentiated but all would be mutually reinforcing.

    I think the challenge lies in standards.

    But I’m sure that’s sortable.

  4. John Bloomfield

    Mr Alt,
    A very interesting concept Italy has come up with – will observe outcome with great interest.
    However, and perhaps minor point, I suggest there is an imbalance in the real ‘worth’ of the tax credits (TC) between individuals – the relative worth depending on the taxation rate of the TC receiver; with progressive rates of taxation complicating the relative advantage of supplying goods/services in return for tax credits in lieu of Euros.

    On broader analysis I consider there are effectively two concurrent currency systems operating – one that pays EU denominated (and decreed) taxes, the other that pays no such tax; rather it delivers direct cash benefit in reducing EU denominated tax payment.

    The operation/impact of such a system is akin to tax avoiding cash transactions in any taxed national economy – the price offered for the ‘cash’ or TC service can be discounted to reflect the vendors ‘saving’ by avoidance of ‘proper’ tax liabilities.

    It would appear to me that the EU central bank could contest the arrangement on the basis that as a member country Italy is not abiding by its agreements, such as:
    https://europa.eu/european-union/topics/taxation_en
    “The EU’s role is to oversee national tax rules – to ensure they are consistent with certain EU policies, such as:
    …..making sure businesses in one country don’t have an unfair advantage over competitors in another…
    ensuring taxes don’t discriminate against consumers, workers or businesses from other EU countries…”
    … and further
    “….EU countries have agreed to align their rules for taxing goods and services.
    Minimum tax rates are in place for VAT and excise duties, along with rules on how these taxes should be applied….”

    These are desperate times for working class peoples.
    I wish them well – there are few attractive alternatives left for lesser EU ‘nations’ to counter imposed austerity.

    • John Bloomfield, thank you for your comment. Please take your logic to the next step, however, and see that what the essay is trying to reveal is the fact that tax-credits are money! The U.S. dollar is a tax credit good for the cancellation of one dollar’s worth of U.S. taxes. When the tax-credits are embodied as a “legal tender” paper currency―and subsequently in digital form as well―citizens can then use them to pay for things other than taxes. Even if a citizen owes zero taxes to the sovereign government, that citizen can still use the paper tax-credits to buy the same lasagna dinner as he could if he did owe taxes. So all citizens have the same incentive to earn the paper tax-credits (money) whether they owe taxes or not. The desperate times you rightly refer to would be much less desperate if the E.U. and the U.S. acknowledged that, as sovereign governments, they can issue and spend as much “money” as required to employ every citizen to provide useful services to collective society.

      • John Bloomfield

        My starting point accepted TC’s as defacto ‘money’ – hence my thoughts were primarily on the the practical operation of two concurrent money systems. At first I tried to calculate a flat exchange rate – but soon realised it depended on the service providers income tax rate.

        Further thoughts:-
        Since no tax is levied on TC’s, the tax savings makes them an attractive alternative to Euros.
        From an accounting perspective consider the business selling the lasagna dinner – on tallying the books for income tax assessment TC’s received through lasagna sales do not count as income. Given the costs of lasagna production remain accounted for in euros, the lasagna providing business will record a net EU loss on TC sales transactions, thus a (welcome) reduced income tax liability – and an incentive to buy supplies ‘local’.
        From a business operation point of view, pay for stock/inventory in euros, sell in TC’s – pay minimal income tax, but live well on the ‘black’ economy. Carried to an extreme conclusion, no-one would need euros except to import necessities from other EU ‘states’.
        Voila – one’s own domestic currency – now, as you suggest, for some ‘domestic’ inflation and corruption control …we might just need an accounting system that flies below the EU currency accounting radar.
        Perhaps an expiry date on the TC’s to expedite circulation/prevent accumulation.

        • This is actually very helpful to me! Thanks! You’re seeing this in a way that I was not. Perhaps this really does have actual, practical applications!

  5. Thomas Bergbusch

    Good MMT exposition. Politically, it is helpful to remember that the Italian state has been using tax credits to support provision by co-operatives of a range of social services since the early 1970s.

  6. Too bad the Greek government did not have the courage to do this a few years ago.

  7. So when will Italy leave the European Union then?

  8. The UK has its cake and eats it at the same time: a member of the EU and it kept its sovereign currency. So there was no need for the frigging austerity at all.

  9. It would seem initially weird that the Germans were happy to use Mefo certificates redeemable at the German Central Bank to grow their economy through re-armament under the noses of the Allied Powers yet modern day Germans have completely ignored the lessons about the nature of modern money from this episode in German history. The fact, however, that the international exchange rate of the Euro is weighted down by the lower performing Eurozone member countries is undoubtedly a factor in Germany benefiting from increased exports by not having its own sovereign currency and this argument must win the day for them! Germany is therefore the principle obstacle to any reform of the Eurozone. It simply isn’t in their best interest!

    http://www.nakedcapitalism.com/2013/12/philip-pilkington-hjalmar-schacht-mefo-bills-restoration-german-economy-1933-1939.html

  10. So, J.D. — the question is, is this legal under the EU rules for Euro countrues? I get the mechanics, just not whether it’s permissible.