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No More Income Taxes!

Assume that the Federal Reserve had used its new Greenback-
issuing power to buy back the entire outstanding federal debt, and
that it had acquired enough bank branches (either by purchase or by
FDIC takeover in receivership) to service the depository and credit
needs of the public. What impact would those alterations have on the
federal income tax burden? To explore the possibilities, we™ll use U.S.
data for FY 2005 (the fiscal year ending September 2005), the last year
for which M3 was reported:
Total individual income taxes in FY 2005 came to $927 billion.
Taxpayers paid $352 billion in interest that year on the federal
debt. If the debt had been paid off, this interest could have been
cut from the national budget, reducing the tax burden by that sum.1
Total assets in the form of bank credit for all U.S. commercial banks
in FY 2005 were reported at $7.4 trillion.2 Assuming an average
collective interest rate on bank loans of about 5 percent,
approximately 370 billion dollars were thus paid in interest that
year. If roughly half this sum had gone to a newly-formed national
banking system -- for loans made at the federal funds rate to private
lending institutions, interest on credit card debt, loans to small
businesses, and so forth -- the government could have earned
around $185 billion in interest in FY 2005.
Adding these two adjustments together, the public tax bill might
have been reduced by around $537 billion in FY 2005. Deducting this
sum from $927 billion leaves $390 billion. This is the approximate
sum the government would have had to generate in new Greenbacks
to eliminate federal income taxes altogether in FY 2005.
What would adding $390 billion do to the money supply and
consumer prices? In 2005, M3 was $9.7 trillion. Adding $390 billion
would have expanded M3 by only 4 percent -- Milton Friedman™s
modest target rate, and far less than the money supply actually grew in
2006. That was the year the Fed quit reporting M3, but the figures
have been calculated privately by other sources. Economist John
Williams has a website called “Shadow Government Statistics,” which
exposes and analyzes the flaws in current U.S. government data and
reporting. He states that in July 2006, the annual growth in M3 was
over 9 percent.3 We™ve seen that this growth must have come from fiat
money created as loans by the Federal Reserve and the banks.4 Thus if
new debt-free Greenbacks had been issued by the Treasury instead,

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inflation of the money supply could actually have been reduced “ from
9 percent to a modest 4 percent “ without cutting government programs
or adding to a burgeoning federal debt.

Horn of Plenty: Avoiding Inflation
by Increasing Supply and Demand Together

New Greenbacks in the sum of $390 billion dollars would have
been enough to eliminate income taxes, but according to Keynes, the
government could have issued quite a bit more than that without
dangerously inflating prices. He said that if the funds were used to
put the unemployed to work making new goods and services, new
currency could safely be added up to the point of full employment
without creating price inflation. The gross domestic product (GDP)
would just increase by the value of the newly-made goods and services,
keeping supply and demand in balance.
How much is the U.S. work force under-employed today? In the
first half of 2006, the official unemployment rate was 4.6 percent; but
critics said the figure was low, because it included only people applying
for unemployment benefits. It did not include those who were no
longer eligible for benefits, those who had given up, or those whose
skills and education were under-utilized “ people working part-time
who wanted to work full-time, engineers working as taxi drivers,
computer programmers working as store clerks, and so forth.
According to Williams™ “Shadow Government Statistics” website, the
real U.S. unemployment figure in early 2006 was a full 12 percent.5
The reported GDP in 2005 was $12.5 trillion. If Williams™
unemployment figure is correct, $12.5 trillion represented only 88
percent of the country™s productive capacity in 2005. Extrapolating
upwards, 100 percent productive capacity would have generated a
GDP of $14.2 trillion, or $1.7 trillion more than was actually produced
in 2005. That means another $1.7 trillion in new Greenbacks could have
been spent into the economy for productive purposes in 2005 without
creating significant price inflation.
What could you do with $1.7 trillion ($1,700 billion)? According
to a United Nations report, in 1995 a mere $80 billion added to existing
resources would have been enough to cut world poverty and hunger
in half, achieve universal primary education and gender equality,
reduce under-five mortality by two-thirds and maternal mortality by
three-quarters, reverse the spread of HIV/AIDS, and halve the
proportion of people without access to safe water world-wide.6 For

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comparative purposes, here are some typical U.S. government outlays:
$76 billion went for education in FY 2005, $26.6 billion went for natural
resources and the environment, and $69.1 billion went for veteran™s
benefits. Under our projected scenario, these and other necessary
services could have been expanded and many others could have been
added, while at the same time eliminating federal income taxes and the
federal debt, without creating dangerous inflation.

A Non-inflationary National Dividend
or Basic Income Guarantee?

Other theorists have gone further than Keynes. Richard Cook is a
retired federal analyst who served at the U.S. Treasury Department
and now writes and lectures on monetary policy. He notes that in
2006, the U.S. Gross Domestic Product came to $12.98 trillion, while
the total national income came to only $10.23 trillion; and at least 10
percent of that income was reinvested rather than spent on goods
and services. Total available purchasing power was thus only about
$9.21 trillion, or $3.77 trillion less than the collective price of goods
and services sold. Where did consumers get the extra $3.77 trillion?
They had to borrow it, and they borrowed it from banks that created it
with accounting entries. If the government were to replace this bank-
created money with debt-free Greenbacks, the total money supply
would remain unchanged. That means a whopping $3.77 trillion in
new government-issued money might be fed into the economy without
increasing the inflation rate.7
This opens another rainbow-hued dimension of possibilities. What
could the government do with $3.77 trillion? In a 1924 book called
Social Credit, C. H. Douglas suggested that government-issued money
could be used to pay a guaranteed basic income for all. Richard Cook
proposes a national dividend of $10,000 per adult and $5,000 per
dependent child annually.8 The U.S. population was about 303 million
in 2007, of whom 27.4 percent were under age 20. That works out to
$2,200 billion for adults and $415 billion for children, or $2,615 billion
($2.615 trillion) to provide a basic security blanket for everyone. If
$3.77 trillion in Greenback dollars were issued to fill the gap between
GDP and purchasing power, and $2.615 trillion of this money were
distributed among the population, the government would still have $1.55
trillion left over -- ample to satisfy its budgetary needs.
The concept of a national dividend is interesting but controversial.
On the one hand, the result could be a class of drones willing to live at
subsistence level to avoid work. On the other hand, a national

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dividend would be a boon to artists and inventors willing to live
frugally in order to explore their art. During the culturally rich
Renaissance, art, literature and science were furthered by a leisure
class favored by inheritance. A national dividend would give that
birthright to all. Meanwhile, most people desire a lifestyle beyond
mere subsistence and would no doubt be willing to pursue productive
employment to acquire it.
Another proposal favored by a number of economists is a basic
income guarantee, a sum of money sufficient to assure that no citizen™s
income falls below some minimum level. The difference, says Cook, is
that a national dividend would be tied to national production and
consumption data and might vary from year to year. A guaranteed
minimum income would be a fixed figure, paid without complicated
paperwork or qualifying tests.
However Congress decides to spend the money, the important
point here is that the government might be able to issue and spend as
much as $3.77 trillion into the economy without creating
hyperinflation -- perhaps not all at once, but at least over time. The
money would merely make up for the shortfall between GDP and
purchasing power, gradually replacing the debt-money created as
loans by private banks. As unemployed and under-employed people
acquired incomes they could live on, they would no longer need to
take out loans at exorbitant interest rates to pay their bills. Home
buyers with money to spare would pay down their mortgages, and
fewer “sub-prime” borrowers would be induced to acquire new debt,
since aggressive lending tactics would have disappeared along with
the fractional reserve banking system that made them profitable.
Meanwhile, a tax imposed on derivatives could put a brake on the
exploding derivatives bubble and its accompanying debt burden; and
if the big derivative banks were put into FDIC receivership, the
derivative Ponzi scheme might be carefully unwound, liquidating large
amounts of “virtual” debt with it. As these sources of debt-money
shrank, there would be increasing room for expanding the money
supply by funding public projects with newly-issued Greenbacks.

A Solution to the Housing Crisis?

Among other possible uses for this $3.77 trillion in new-found
capital might be to salvage the distressed housing market. Estimates
are that the current subprime debacle and ARM resets could throw
mortgages valued at $1 trillion into default, either because the
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borrowers can™t afford the payments or because they have no incentive
to keep paying on homes worth less than is owed on them.9 One
proposed solution is to slow foreclosures by imposing a freeze on
interest rates, keeping ARM rates from going higher. But that would
violate the “sanctity of contracts,” forcing unwary buyers of mortgage-
backed securities to bear the loss on investments that had been stamped
“triple-A” by bank-funded rating agencies. By rights, the banks
devising these dubious investment vehicles to get loans off their books
should be held liable; but the banks are already in serious financial
trouble and would be hard-pressed to find an extra trillion to
compensate the victims. If the securities holders sue the banks for
restitution, even the hardiest banks could go bankrupt.10
Where, then, can a deep pocket be found to set things right? Today
the world™s central banks are extending billions of dollars in computer-
generated money to bail out their cronies, but these loans are just
buying time, without restoring homeowners to their homes or
preventing abandoned neighborhoods from deteriorating.11 So who is
left to save the day? If Congress were to issue $3.77 trillion to fill the
gap between purchasing power and GDP, it could use one quarter of
this money to buy defaulting mortgages from MBS holders, and it
would still have plenty left over to meet its budget without levying
income taxes. Adding a potential $1.7 trillion or more from a tax on
derivatives would provide ample money for other programs as well.
After reimbursing the defrauded MBS holders, Congress could dispose
of the distressed properties however it deemed fair. To avoid either
giving defaulting homeowners a windfall or turning them out into
the streets, one possibility might be to rent the homes to their current
occupants at affordable prices, at least until some other equitable
solution could be found. The rents could then be cycled back to the
government, helping to drain excess liquidity from the money supply.

How to Keep the Economic Bathtub from Overflowing

That segues into another way of viewing the inflation problem:
the government could create all the new money it needed or wanted,
if it had ways to drain the economic bathtub by recycling the funds
back to itself. Instead of issuing new money the next time around, it
could just spend these recycled funds, keeping the money supply stable.
The usual way to draw money back to the Treasury is through taxes.
Indeed, it has been argued that governments must tax in order to
siphon excess money out of the system. But the Pennsylvania
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experience showed that inflation would not result if the government
lent new money into the economy, since the money would be drawn
back out when the debt was repaid; and new money spent into the
economy could be recycled back to the government in the form of
interest due on loans and fees for other public services.
A more equitable and satisfying solution than taxing the people
would be for the government to invest in productive industries that
returned income to the public purse. Affordable public housing that
generated rents would be one possibility. The development of
sustainable energy solutions (wind, solar, ocean wave, geothermal)
are other obvious examples. Unlike scarce oil resources that are non-
renewable and come from a plot of ground someone owns, these natural
forces are inexhaustible and belong to everyone; and once the necessary
infrastructure is set up, no further investment is necessary beyond
maintenance to keep these energy generators going. They are perpetual
motion machines, powered by the moon, the tides and the weather.
Wind farms could be set up on publicly-owned lands across the
country. Denmark, the leading wind power nation in the world, today
satisfies 20 percent of its electricity needs with clean energy produced
at Danish wind farms. Wave energy can average 65 megawatts per
mile of coastline in favorable locations, and the West Coast of the
United States is more than 1,000 miles long. The government could
charge a reasonable fee to users for this harnessed energy.
Those are all possibilities for recycling excess liquidity out of the
economy, but today the focus is on getting liquidity into the financial
system. Major deflationary forces are now threatening to shrink the
money supply into a major depression, unless the federal government
turns on the liquidity spigots and pumps new money in. We™ve seen
that the money supply could contract by $1.7 trillion or more just
from the next correction in the housing market; and when the
derivatives bubble collapses, substantially more debt-money will
disappear. The Federal Reserve reports that the fastest-growing portion
of the U.S. debt burden is in the “financial sector” (meaning mainly
the banking sector), which was responsible in 2005 for $12.5 trillion in
debt. This explosive growth is attributed largely to speculation in
derivatives, which are highly leveraged. The buyer of a derivative
might, for example, put up 5 percent while a bank loan provides the
rest. The debt ratio of the financial sector zoomed from a mere 5 percent
of the economy™s national income in 1957 to 126 percent in 2005, a
growth rate 23 times greater than general economic growth.12 In 2006,
only 5 major U.S. banks held 97 percent of derivatives, including the
“zombie” banks that were already bankrupt and were being propped
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