sabato 16 maggio 2015

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



TCCs issuances – bln
TCCs uses



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
To enterprises


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



Sensitivity -multiplier
Average real GDP growth rate, 2016-2020
Unemployment, 2020
Average public deficit (-) / surplus (+), 2016-2020 - % GDP
Public debt 2020 - % GDP
Average current account surplus, 2016-2020



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.

9 commenti:

  1. Are TCCs a promise to pay tax? If so, every promise is debt. Also, tccs are legal tender because issued by a legal Government. And finally they'll become a currency because of the money market, at least for a brief period of time.

    1. They are legal tender (after the two year initial delay period) in the issuing state, and just for obligation toward public administrations. They are not legal tender in other Eurozone countries: so they do not conflict with the ECB monopoly status to issue euro (ie money which is legal tender in the whole of Eurozone).
      They are not debt as there is no obligation to reimburse them.

    2. Every promise is a debt. Just because you don't have the obligation to reimburse them doesn't mean "tccs" is not a debt. You don't have to pay interest but you gotta to sustain tccs on the money markets anyway. There is no difference for your balance sheet. There is no free lunch in this world pals. So long.

    3. It is a commitment, not a debt, as there is no reimbursement obligation.
      No need to sustain it: it's valuable as you can use it for future tax payments.
      And it's not a free lunch: additional value is created as TCCs implies more purchasing power, then more demand, which puts to work resources (including people) currently idle.

    4. A commitment or a promise are the same thing.

    5. Sure they are. But they are not necessarily a debt.

    6. Every promise is a debt since the mists of time.

    7. TCCs are not a debt you can be forced to default on.

    8. If the State is not forced to default, people will be. And if people is forced to default by the State, people will be looking for another kind of State above it and much more democratic. As they did in the past.