Mason Gaffney asks to be provided with "an alternative to regaining prosperity".

The answer lies in setting up an alternative - and non-interruptible -
channel from savings into (socially productive) investment.  It may
not be possible to entirely bypass the blockage-prone financial
sector; but rules can constrain much of the dislocation-creating
discretion.

1. Replace the income tax with a Fisher-style consumed income tax
(Y-S).  We already have a quasi-consumed income tax system (lots of
tax-privileged savings vehicles).  By twisting marginal tax rates on
higher levels of C, a % rate of national savings can be targeted (e.g.
S* = Y/10)

2. Pre-tax savings can be collected through the tax system and
deposited into Individual Savings Accounts (ISA).

3. Just as budget deficits are auctioned to the financial sector
(bonds), so national savings can be auctioned to the financial sector
- on a contractual basis.  Every auctioned $ must be lent by the
"winning" financial intermediary for (socially productive)
capital-formation purposes. Thus a bank would contact their client
base before making a bid (at x%) and - following a successful bid -
would loan the funds at x + y%  (where y is subject to intense
competitive market pressure).

4. The interest rate paid by the intermediary (x%) would be deposited
into the ISAs.  These ISA funds would be accessible to the saver as
income at any time (with a time-related discount on the tax charged).

Post-tax dollars might still be attracted to bubbles – but an
uninterruptible pre-tax savings into capital flow protects the
economic system from much of the social harm caused.

This proposal has lots of interesting consequences: such as rendering
monetary policy largely impotent and nullifying the simple Keynesian
multiplier (the multiplier associated with a $ of consumption must be
compared to the multiplier of a $ of investment).  It has a lot of
attractive political implications: parties of the right tend to favour
a shift away from income tax; parties of the left would welcome the
opportunity to balance the budget by increasing marginal rate on high
consumers; green voters favour a tax on resource use (in contrast,
income-generation and savings typically add to the economic system).
In August 2005, this analysis was used to predict that the U.S.
housing bubble would be followed by “a synchronized downturn in many
affected countries … financial and economic meltdown”.
Leeson, R Assessing the effect of taxes on the economy: deflate
housing bubble with targeted taxes. San Francisco Chronicle 19 August,
2005: http://www.sfgate.com/cgi
bin/article.cgi?file=/chronicle/archive/2005/08/19/EDGNTE9DBR1.DTL

I am keen to receive critical feedback on these proposals (which I
will be presenting at various North American universities and Federal
Reserve regional branches this fall).

Robert Leeson
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