Tax Credit Certificates: Fixing the Dysfunctionalities of the Euro Monetary System

Tax Credit Certificates: almost a currency, but not quite

 

 

TCCs are a security incorporating the right to reduce future tax payments due to the issuing government.

 

 

After two years from their issuance, TCCs would be used to exercise the right to a reduction in whatever financial obligation toward public administrations (taxes, social contributions, fines etc.).

 

 

The TCCs would be exchanged for euros in the financial market similarly to any zero-coupon government bond.

 

 

They would presumably trade at a small discount vis-à-vis par value, as their acceptance to settle taxes implies that they do not carry any default risk.

 

 

TCCs would also presumably be accepted as a means of payment, to be used for instance in combination with credit or debit cards.

TCCs advantages

 

 

TCCs would be allocated at no charge to several recipients:

 

 

To employed workers, including self-employed, to increase their purchasing power.

 

 

To enterprises, as a function of their labor costs, to reduce them and immediately improve competitiveness.

 

 

To partially fund government expenditures such as higher pensions, unemployment subsidies, public investments etc.

 

 

Two major benefits:

Higher internal demand.

Improved enterprises competitiveness.

 

 

===> GDP and employment expansion, no external trade imbalances.

TCCs are neither debt nor “legal tender” money

 

 

TCCs are not debt, as the issuing government has no obligation, under whatever circumstance, to reimburse them.

 

 

TCCs are not legal tender money either: nobody, other than the issuing government, is forced to accept them to settle a euro-denominated financial obligation. As such, they do not conflict with the ECB monopoly to issue legal tender money in the Eurozone.

 

 

Only the issuing government commits itself, by law, to accept TCCs to honor the right to tax reduction attached to them. This is the source of TCCs value.

Issuing and allocating TCCs: basic principles

 

 

TCCs issuances would follow a set of rules.

 

 

Issuances size and allocation must be such to:

Closing the current output gap.

Reducing unemployment to pre-2008 financial crisis levels.

Raising inflation close to ECB 2% target.

Preventing external trade imbalances.

 

 

In addition, the TCC program can be structured in a way that:

In each year, the issuing government has a zero balance between euro outflows and euro inflows.

The public debt / GDP ratio steadily falls to attain the Fiscal Compact 60% target.

 

 

Remember: TCCs are not debt.

Neither in theory, nor in practice, the issuing government could be forced to default on a TCC, since TCCs imply a commitment to accept them, not to reimburse them.

TCCs program main features: the case of Italy

 

 

				2016	2017	2018	2019	2020
TCCs issuances – bln				90	150	200	200	200
TCCs uses						90	150	200

 

 

TCCs annual issuances would gradually increase up to € 200 bln.

 

It is worth remembering that the Italian 2015 GDP is 9% lower than 2007’s. Output gap estimate is 19% assuming potential GDP to have grown at a modest 1% per year. This approximately corresponds to € 300 bln.

 

The two-year delay between issuances and uses allows the economy to grow, to generate higher gross tax revenues and to offset TCCs uses.

 

 

TCCs issuances: proposed break down
To employees			35%
To enterprises			40%
Others			25%

 

Issuances to employees implies increasing net salary by up to 20% (€ 240 in TCC) for a worker making € 1.200 per month.

 

Meanwhile, enterprises gross labor costs achieve a reduction of up to 18%.

 

 

Main effects: the case of Italy

 

 

Forecast				Without	With		Sensitivity -multiplier
Multiplier		1,30		TCC	TCC		0,70
Average real GDP growth rate, 2016-2020				1,1%	3,8%		2,4%
Unemployment, 2020				12,5%	5,5%		9,0%
Average public deficit (-) / surplus (+), 2016-2020 - % GDP				-0,9%	1,8%		-0,9%
Public debt 2020 - % GDP				127,6%	91,9%		111,1%
Average current account surplus, 2016-2020				3,9%	1,9%		3,5%

 

 

Based on a 1,30 multiplier (GDP real growth caused by TCCs issuances) the outcome is:

 

Strong GDP recovery.

Unemployment back to pre-2008 crisis levels.

Strong improvement in public deficit / public debt.

 

The 1,30 multiplier estimate is consistent with recent findings (including from Olivier Blanchard, former IMF chief economist) and is likely to be conservative, as the multiplier is usually higher when demand recovers from depressions.

 

Even a much lower (0,70) multiplier would anyway result in a significant GDP / employment recovery and in a lower public debt ratio to GDP (public deficit being unchanged).

Safeguard clauses

 

 

The EU requires Eurozone members to offset, mainly by raising taxes and/or cutting public expenditures, any shortfall vis-a-vis public deficit targets.

 

 

But in a demand-depressed environment, such actions are procyclical, deteriorate the economy and fail to improve public finances status.

 

 

A TCC program could contemplate a set of safeguard clauses much more flexible and effective:

 

 

Instead of cutting expenditures, replace certain euro expenses with TCC-funded expenses.

Instead of only increasing taxes, compensate higher levies by granting TCC to taxpayers (ie compulsory euro-for-TCC swaps).

Issuing longer term TCC (tax-backed bonds) to reduce euro debt.

Offer, on a voluntary basis, to TCC holders (upon expiration) to postpone using them, in exchange for a face value increase (ie an interest “paid” in “tax money”).

 

 

This allows to constantly achieve, without any procyclical effect on the economy:

===> A zero balance between euro outflows and euro inflows, in each year.

===> A steady fall in the public debt / GDP ratio, to attain the Fiscal Compact 60% target.