Tax on Cash Lowers Welfare

Ryan, Willem Buiter is not alone in favorably considering a tax on cash. Greg Mankiw had a blog in 2009 on it. It’s an old idea of Gesell.

If people are induced to spend currency or cash by means such as this, the total quantity of cash doesn’t disappear. It’s transferred to other holders. Hence, there is a very real tax levied on cash. As people attempt to get rid of the hot potato or find a seat when the music stops, they spend. This produces higher measured spending but lower welfare, since everyone has been induced to depart from their preferred positions of chosen goods, assets, labor supply and leisure. The mix of these is distorted from preferred levels. Processes that preceded the tax are not allowed to proceed. Adjustments that may have been called for or were ongoing are thwarted. That too reduces welfare.

Meanwhile, after this round of spending, there is no encore. Some people who bought long-lived goods and assets will have excessive inventories. That reduces welfare. Entrepreneurs can’t count on a repeat performance. What will their new plans be? Uncertainty is bound to rise. That reduces welfare. If the cash is simply destroyed, this is simply destruction of wealth. That reduces welfare too.

People can be forced by economic schemes or by threats or brute force to do a lot of things, including spending and working more. The question is whether or not they become better off by being made to do so. Although it should be obvious that they are not made better off by a Gesell tax on cash, even if measured spending and levels of seemingly economic activity rise, this eludes economists like Buiter. The activity is actually uneconomic when it involves being forced or induced by taxation to depart from preferred positions of supplying labor, saving, spending and leisure.

If an economy has excessive unemployed resources, including the labor force which is often termed involuntary unemployment, taxes won’t solve the problem because they do not discover the root causes of the problem and then attack those causes to resolve them.

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7:54 am on April 17, 2015

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