The consumed income tax structure imposes costs on currency balances; dated money pricks the bubble of underground currency at the end of each dated period (by which time all currency must be returned from whence it came, the trackable banking system).
The underground cash economy imposes externalities (higher taxes); here, market forces are being enlisted to impose reciprocal (or internalising) costs.
RL
----- Original Message -----
From: "Pat Gunning" <[log in to unmask]>
To: [log in to unmask]
Sent: Wednesday, 29 September, 2010 12:28:49 AM
Subject: Re: [SHOE] Dated currency
Robert, thanks for the explanation. I think I understand now but
permit me to rephrase the policy goal that a dated currency policy
proposal aims to achieve.
There are two kinds of money: transferable bank deposits and currency.
The total money balance of each individual consists of two parts: a
deposit balance and a currency balance. By withdrawing currency from a
bank, an individual can increase her currency balance at the expense of
her deposit balance. And vice versa.
The government can more easily track deposit balances than currency
balances. Therefore, it can more easily enforce a sales tax or an income
tax on the money income earned by retailers and producers if individuals
transfer deposit when they exchange than if they transfer currency.
Given these assumptions, sellers of goods, in anticipation of a higher
tax on bank-recorded deposit transfers than on exchanges of currency,
tend to offer lower prices on currency transactions than on deposit
transactions. In order to take advantage of the lower prices, buyers of
such goods tend to withdraw more currency than they would in the absence
of a tax or in the absence of more easily traceable deposit transactions.
Underground economic activity consists of buying and selling consumer
goods and factors of production for currency in order to avoid the sales
or income tax.
The POLICY GOAL is to reduce the amount of this underground,
tax-avoidance economic activity.
Assuming that all currency consists of paper notes, dated currency
refers to currency which, at a date and time specified on the face of
the paper note, will become worthless as legal tender. This means that
after the date on the face of the note, no judge will enforce a contract
that is stated in terms of the dated currency and the government will
not accept the currency in payment of taxes. Banks may be ordered by
regulators to stop accepting deposits of the dated currency. The
government also does not offer to exchange the dated currency for
anything of value.
The literature you have in mind proposes that dated currency, as defined
here, could achieve the above-stated policy goal.
Is all this an accurate and fair interpretation of your implicit
assumptions and definitions?
If these are the correct assumptions, my analysis was not directed at
the policy proposal you implicitly had in mind. The policy would not
cause the use of money to die; it would cause the use of currency will die.
However, could not the effect of eliminating the use of currency in
exchange be achieved more simply by outlawing all currency transactions
after a certain date?
My earlier analysis would be correct only in a pure currency economy.
On 9/28/2010 9:01 AM, Robert Leeson wrote:
> The consumed income tax structure is a (witholding) tax on money balances (earning income ceases to be a taxable event). This increases the incentive to economise on the holding of currency; dated money imposes costs on the underground cash economy.
>
> Robert Leeson
> [log in to unmask]
>
>
> ----- Original Message -----
> From: "Pat Gunning"<[log in to unmask]>
> To: [log in to unmask]
> Sent: Tuesday, 28 September, 2010 10:33:29 AM
> Subject: Re: [SHOE] Dated currency
>
> I wish this thread made sense to me. Perhaps someone can clue me in?
>
> Why on earth would someone want to hold money that is destined to die?
> If I were a speculator in such a system, I would short sell all of the
> nation's money today. That is, I would borrow money from everyone and
> then use it to buy their durable assets, promising to repay the money
> the instant before it is scheduled to die. At that time, I could buy the
> money back for a song and repay my money debts. Ultimately, I would gain
> a bunch of real assets in exchange for my song.
>
> Anyone who lent me money to buy goods would surely not be a shrewd operator.
>
> Is it not true that money that is due to die tomorrow would, in a world
> of reasonably astute people, die today? How can an item be acceptable in
> exchange by shrewd operators today if they know it will not be accepted
> in exchange tomorrow?
>
>
> On 9/26/2010 4:23 AM, Robert Leeson wrote:
>> Is there any literature on dated currency (currency that has an expiry date as legal tender) as an assault on the underground economy?
>>
>> Robert Leeson
>> [log in to unmask]
>>
>>
>
--
Pat Gunning
Professor of Economics
Groton, Connecticut
http://www.nomadpress.com/gunning/welcome.htm
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