Tax Credits and Parallel Currencies

When the Labour party in Britain was last in power, one of its aims was to reduce child poverty. The instrument it chose was tax credits, mainly going to families with children. (Well, they are called tax credits, but even if your income is too low to pay taxes, recipients get the money in transfers from the government, in which case tax credits should really be called a negative income tax.)

This had all kinds of good effects on the economy. It provided a decent minimum income for families, allowed workers to take on work at the minimum wage, knowing they would get supplemented, and it was a very good tool to fight inequality.

No wonder the current Conservative administration is against it, then. Chancellor Osborne believes it is too costly, has recently cut back on the level paid out, and wants to increase the minimum hourly wage over the next few years quite rapidly from £6.50 (Euro 9.20) now to £9 (Euro 12.70) by 2020. That means employers will have to pay higher wages. That will then lower the tax credit bill even further for the government.

But, it also means more unemployed, as it will now be cheaper for companies to substitute machines for labour, as the wage bill will rise with increasing minimum wages. Businessmen will already be making calculations, by how much wage bills will increase, if the UK government’s plans were followed through, and which machines they would buy, to substitute the workers. More unemployment will result from the cut to tax credits.

Greece has of course enough unemployed, so ultimately Greece should look at some tax credits, because, tax credits help people to find and keep jobs.

The Greek government definitely has not got any money left, even less that the Brits, who at a push have an independent central bank to help them out. Compare and contrast to Greece which has to rely on the ECB, which seems to be in the process of destroying Greece. So tax credits are out of the question. Unless, of course, they can be issued in another currency in Greece, a parallel currency perhaps.

Tax credits as currency are suggested for the following reason.

1) Just issuing money is not allowed by EU Lisbon Treaty – Art 128

That is a shame, as that is quite a useful way of financing public infrastructure, and the channel island of Guernsey has long used its own money to supplement the British money to finance infrastructure projects.

One of the most successful illustrations of a parallel currency today operates on the island of Guernsey in the English Channel with a dual exchange in British and Guernsey pounds. Guernsey began issuing interest free public credit money around 1816 in the amount of 6,000 pounds for various public works projects. Guernsey has continued the issuance of public credit money for roads, sea walls, public markets, churches and colleges, funding all of these projects with no debt accumulation. As recently as 1990 there was an issuance of 13 million pounds in State issued notes. Like the Colonies prior to the War of Independence, Guernsey has very low unemployment, a relatively high standard of living and low taxes. And as is the case with all parallel currencies they are not just lent into existence, but spent into existence as well, funding public works projects.

2) Tax credits do not count as loans

Greece could issue zero-coupon bearer bonds, IOUs, but these would need to be counted as part of the government debt. The level of Greek debt is high enough already, so a proposal to issue them is not being discussed here, we will only deal with tax credits.

3) Tax credits allow you to have a float of money available

Just imagine your £3,000 salary would be paid at the beginning of the month, rather than the end. You still have the same annual salary, but you effectively have £3000 more to spend, than if the salary had been paid at the end of the month..

Tax credits work on the same principle, they allow you to spend an advance, which has not to be paid back until much later.

4) Tax credits get their value from the fact that they will be accepted 1:1 at their nominal value for tax liabilities in the future.

So 1 Euro of tax credits will be pretty close in value to 1 Euro, if not exactly the same.

Now, there are 4 serious proposals that I can find having been discussed in the last months: 

If you have not read any of them, hopefully I can explain the salient features below. So only click on the details, if you want further information. You might want to go an get a cup of coffee, though, because this is a rather lengthy blog post.

1) Tax Credit Certificates (Bassone, Cattaneo)

A detailed overview, and an explanation. And the Italian website, with an English explanation.

2) The Future Tax Coin –  FT-Coin (Varoufakis)

A proposal from 2014 from the blogger Varoufakis’ website

3) The Tax Anticipation Notes (Parenteau, Andresen)

Two explanations from the Naked Capitalism website, here, and here by Parenteau, and one summary proposal by Andresen, here.

4) The G-Euro (by myself)

An quick explanation of the miracle currency from this blog.

I will not go into any technical discussion about any of them, they would all work. I will, however address the following issues:

1) Advantage for Greece: What are the main benefits for Greece

2) Addition to money supply: does the proposal add to the money in circulation, or substitute parallel currency for Euro?

3) Use for payments: Can you actually go into a shop and pay with these parallel currencies?

4) Drawbacks: What is not to like?

So, let us start the review:

1) Tax Credit Certificates – TCC (Bassone, Cattaneo)

Advantage for Greece: This proposal suggests that Greece issues Tax Credits Certificates (TCCs) of 10, 20 and 30bn in the first three years of introduction into the Greek economy which currently has a GDP of 180bn. The beneficiaries are workers and companies, roughly split half and half. Workers will get extra spending power, companies will be able to reduce prices, making them more competitive against imported goods, and helping exporters to make their products cheaper.

In terms of cash flow, the addition of the TCCs (minus their cancellations) will bring, over the first four years of introduction a net increase of billion 8bn, 16bn, 16bn, 8bn respectively into the economy. That is assuming a fiscal multiplier of 0.8.

That is about Euro 2,300, Euro 4,600, Euro 4,600, and Euro 2,300 per Greek worker (workforce 3.5 million) in the first four years of introduction, split half in subsidies to the companies per worker, and paid half to the workers as extra spending power. Then the benefits will peter out. So it will give Greek industry a four year window to become more competitive, by decreasing costs per worker for the companies. That will allow companies to increase their exports and substitute for imports. The workers will increase their spending power. All paid for by the issue of these tax credits.

Addition to money supply: The addition to the money supply is huge. Even if each additional Euro of TCC spending only creates an additional 80 cents of additional GDP (Bassone and Cattaneo’s conservative assumption: fiscal multiplier of 0.8), the GDP of Greece will increase from 180bn to 221bn over a 5 year time frame, based on the original 48bn spending in the economy over the first 3 years. (8 + 16 + 24).

If the fiscal multiplier were higher, at 1.3, then GDP will increase to 246bn, putting Greece back to where it was 5 years ago.

Use for payments in shops: No, the TCCs will have to be sold by the recipients at a discount (estimated 80% of face value) to buyers for Euro, wanting to obtain a discount for their taxes in two years time. It is estimated that 90% of TCCs are sold on by the recipients. The rest will be kept by the recipients to be used by themselves in 2 years time. Presumably easy government exchanges via computer websites would allow these deals to take place.


Some difficult political decisions have to be taken to do this. These TCCs have to be allocated to some members of society, instead of others. This is a huge subsidy for industry and their workers. Much is in the hands of oligarchic structures in Greece. Other members of society, not working for industry, the unemployed, the health sector, might lose out, depending how exactly it is structured. Arguably, if it is successful, it will be a way to build up a successful export industry and create a lot of competitive jobs for Greece.

The increase of spending power in the four years after introduction will lead to higher tax revenues now, and smaller ones later (as tax certificates are handed in, instead of taxes). There might be a shortfall, and additional adjustments can and should be made, say the authors, so that tax revenue is ensured. Given the good projected growth, that should be easy. So it probably takes a “Ministry of TCCs” to micro-manage the implementation and possible adverse outcomes.

The TCCs could be too successful, in a way. If the authors more positive scenario (1.3 multiplier) came to pass, the Greek economy would grow on average by 6.3% nominally. Whether all the goods and services to meet that Greek demand could be produced in Greece, or whether that would not create a huge demand for imports to Greece, despite the TCCs export-enhancing effect, remains to be seen.

The proposal of the two Italians is probably much better suited to Italy, for which, I presume, they have made a similar proposal in their book, La Soluzione per L’Euro,  which unfortunately is only available in Italian, which I cannot read. (But it says, create 200bn of spending, reduce taxes, and create demand for relaunching the economy.)

The Italian economy is different from Greece, much more industrialised, with huge food processing and car industry and lots of export orientated family owned SMEs. All of which Greece does not have, or only has to a limited extent. These Italian existing industries would become much more competitive with a similar plan for Italy. Greece, on the other hand, will never, say, build a car plant based on these proposals, although it would help a fledgling food processing industry.

Are Bassone and Cattaneo wrong to suggest it for Greece? No, not at all, it would make sense to try out an idea such as that in a country which is ultimately in worse shape than Italy. Italians are, of course, rightly worried that that crisis will spread to them. Only Greece has higher government debt than Italy.

These are good proposals, and anything which alleviates the crisis should be tried. TCCs is one of the options the Greeks should seriously consider to strengthen their industry and increase their GDP.

2) The Future Tax Coin: FT-Coin (Varoufakis)

Advantage for Greece: Basically, the idea here is that members of society who know that they will have to pay taxes in two years time, can already pre-pay them at a huge discount. Varoufakis suggested 33%. Only a limited amount of these FT coins would be available.

This was originally discussed by Varoufakis in his blog one year before he became finance minister. Since then he has not mentioned it, so it was never a policy proposal of the Syriza administration.

Arguably, it would make sense to offer these tax credit FT-Coins to tax payers whose tax bills to the Greek state are currently disputed. Rather than litigating against them, the Greek government could offer these FT-Coins as a settlement for outstanding, and not yet paid, tax liabilities, which allegedly run close to 80bn Euro in Greece.

Addition to money supply: No, it is just a pre-payment to the Greek state.

Use for payments in shops: No. They could be offered on government owned exchanges, though. If they were offered to everybody, that would allow the discount to be determined by an auction system. It would be much lower discount to nominal value than the 33% proposed by Varoufakis.

Drawbacks: Offering tax discounts now for future taxes later will produce a hole in tax receipts in later years. But it will give the Greek State money now to remedy problems now and to generate growth. That growth would result in increased tax receipts now.

3) The Tax Anticipation Notes – TANs (Parenteau, Andresen)

Advantage for Greece:

The proposal is to have a part of state expenditure paid in Tax Anticipation Notes (TANs) rather than Euro. TANs is a parallel currency which would only be available electronically. It would be paid instead of Euro to government employees, for government contracts and to transfer payment recipients. For this Greece would be issuing TANs from the Greek TAN depository (the Greek TAN Central Bank). Recipients of TANs would receive part of their Euro payments in TANs into a yet to be set up TAN account, which would be issued 1:1 with the euro.

TANs would trade at a discount to the Euro on the free market, the authors believe, but close to the value of the Euro. The government would accept TANs at any time in payment for taxes, at a value of 1:1, therefore underpinning the value of the TANs.

Addition to money supply: Not initially. Although if, say, 25% of government expenditure was now paid in TANs rather than Euro, the government would have 20bn of additional expenditure available to spend into the economy. So 25% of money will provide the money float to Greek’s budget system. That is a huge amount, amounting to a one off increase of GDP of around 14%.

The advantages of using TANs as government spending is that taxes paid in TANs could now be set against TAN expenditure. So all the Euro saved in expenditure could potentially be used to stimulate the economy. without creating additional holes in tax receipts.

Also Andresen proposes that loans could be given in a combination of Euro/TANs to potential borrowers, if the banks were to offer them. This is an important consideration if the banking sector denominated in Euro is having problems.

Use for payments: Andresen proposes a mainly mobile phone based payment system, which would allow buyers to use their TANs as part payment for purchases, as long as the supplier accepts these. Apparently, a system is envisaged, by which goods are partly priced in TANSs and partly in Euro.

Drawbacks: Mr Andresen’s headline: “Summing up: Far better than the bleak alternatives”, seems to acknowledge there are some drawback. I would agree. Just to list a few:

a) TAN recipients are in the main state employees, contractors or welfare recipients, who are obliged to accept below value TANs instead of 100% value Euro in payment by the government. Recipients of TANs will feel, rightly, like second class citizens.

b) Retailers are expected to receive payments partly in TANs and partly in Euro for the same item. That makes a pricing structure virtually impossible. That could possibly mean 3 different prices for one item, depending whether the item is paid for in euro only, in Euro/TAN mixture, or TANs only

c) Andresen also mentions that wages in the private sector could be paid in TANs:

Employers and employees may negotiate the share of wages being paid in TANs, based on private portfolio preferences and speed of adoption of TANs. Workers that accept a larger share of TANs in their wages are likely to find it easier to get a job.

Really? Do we really think private sector employers will start employing people to be paid partly in Euro and partly in TANs? Or people will find a job more easily if they accept TANs, rather than Euro. I do not think so.

d) They would not be accepted that easily by importers, because importers do not have that many tax liabilities to pay, to be able to redeem their TANs. What is the solution? Andresen:

But there will also be a mechanism at work that is pushing in the right direction: when TAN use has reached a significant level for other consumer items, for instance food (where domestic input factors are significant), import-based firms can negotiate a larger wage share being paid in TANs and the rest in euros, hence allowing also such firms to accept a share of TANs in the items they sell.

I do not really understand that sentence, but I am not trying to. My point here is, that if it is that difficult to make the TANs work for an import based firm, the whole idea of TANs are dead on arrival. They will not work.

e) Or let us take another thing. Parenteau describes the TANs as a financing mechanism similar to the infamous MEFO bonds, which allowed Germany prior to World War 2 to artificially increase its money supply and finance its state expenditure. There might be similarities with the TANs to MEFO bonds, I personally see rather a lot of differences. The point is, that it is unlikely to be viewed favourably by the Greeks, to use a similar mechanism to Nazi Germany in financing their state expenditure.

f) At one stage Mr Parenteau says, “suppose the exchange rate is 1:4 Euro to TANs”. Now, this is never, ever going to happen, if used appropriately. So what is the point of undermining your own proposal?

e) Further, the whole idea smacks of desperation, a purely highly defensive move, to otherwise avert certain insolvency. When Parenteau says “Get a TAN, Yanis” it is a nice play on words, (and Mr Parenteau is actually very funny), but the situation is not as desperate as the advocates of the TAN make out. “Through the alternative financing mechanism of TANs, countries like Greece may be able to counter the threat of a cut off of financing by the Troika.” says Parenteau.

There is no need for Greece to have this supplementary currency of a TAN, if there is always the possibility of default. And the Greeks have since demonstrated, that they are happy to play that card when they did not pay the IMF at the end of June.

g) In the introduction of Andresen’s paper written on 20th May he said “The premise for the proposal to be presented in the following is that the Syriza has, at best, a breathing space of – say – three months to half a year before it must introduce a complementary (or “parallel”) electronic currency in order to achieve macroeconomic stabilization of the Greek economy” will set you up for failure straight away.

That would give Syriza until at the very latest 20th November to introduce this currency (or an alternative). That is not likely to happen, unless the Greek government is secretly working on it. So what now? Can we assume the TAN idea to be dead?

h) Finally, at no stage do the authors of this proposal say what could be done with the money available through the introduction of TANs. How much is Greece to spend in TANs and how much in Euro? 25%? Or 10%? Or 50%? We do not know, none of the papers by Andresen or Parenteau say. Let us presume 25%. What should Greece should do with the 20bn Euro it now has because it used 20bn TANs to pay for 25% of its annual expenditure?

Only a couple of sentences address that issue in Andresen’s paper: “The TAN tool allows the government to instigate emergency employment schemes by spreading its available euro spending flow also to the unemployed. ” And, further: “TAN-financed government spending, and private sector TAN circulation will directly and indirectly stimulate domestic production.” True, but a few more details would have been nice.

Now, surely there is no point of panning an actually quite good idea, unless you have an idea on how to overcome its main drawback. That main disadvantage of TANs, as I see it, and as it is proposed here, is that government payees, retailers, employees, banks are all to issue bills, pay-slips, loan arrangements in a combination of Euro and TANs. That is never going to work, in my view. Just the accounting for that would be too difficult. Moving from double entry book-keeping to quadruple entry book-keeping! And there is that stigma attached to the TANs, that it is somehow second best, and only the poor people getting money from the obviously insolvent government are paid in TANs. Not great for lifting the mood of depressed Greeks.

Having said all that, if all these issues can be overcome, the TAN idea is not too bad. And the authors have promoted the idea of TANs, so that they are actually being discussed – which is more than can be said for my proposal.

So, before we move to my proposal, just a quick reminder what makes, at least emotionally, a successful currency. You could have something like the Pound Sterling, around for centuries, and never having defaulted, even tough they had higher debt after WW2 than Greece has now, as a percentage of GDP. Well over 200%!

The British took, of course, the right choice of not trading their currency in for the Euro, when they had the chance, and they thank their lucky stars that they are out, rather than in the Eurozone. They would possibly be seen as one of the problem countries now.

Or you could have something like the Deutsche Mark. The success of which is viewed as synonymous with the growth of a devastated economy after WW2 to the economic power-house of Europe today. The economic miracle can be traced back to one day. The 20th June 1948: that was the day when everybody in Germany received 40 Deutsche Mark to start off with. Everybody received the same amount. That is how a successful currency was started. And a few years later, Germany had the biggest economy in Europe. No wonder the Germans liked the Deutsche Mark.

So, now to the final parallel currency under review:

4) The G-Euro (my idea)

Advantage for Greece: The aim of the G-euro is to get 566,000 into employment. The G-Euro would do help to do that as follows.

(1) It would create a very small minimum income for each citizen of Greece in G-Euro, a purely electronic currency which would be issued by the G-Euro Bank at 30 G-Euro a month. Everybody receives the same amount. That would create GDP growth of 4.4%. That would be sufficient to create about 66,000 jobs in the private sector. (The Greek government assumes each 1% of GDP growth will create 15,000 jobs.)

(2) Once G-Euro was universally accepted, the Greek government could create an employer of last resort programme for 500,000 of the unemployed. They would all be paid in G-Euro.
Retailers would all accept G-Euro at the value of 1:1 for the Euro.

G-Euro would be accepted in payment of taxes from retailers and other businesses only, not from individuals.

G-Euro could not be used to be paid in taxes in the year of issue, but only in the year following issue

The G-Euro’s value would be guaranteed to non-taxpayers by the government. The government would offer to buy G-Euro from non-taxpayers (importers) at 90 Euro cent per G-Euro. The government would then sell these G-Euro to Greek parties having Greek tax liabilities at 95 Euro cent for each 1 G-Euro worth. In effect allowing Greek taxpayers a 5% discount on their Euro tax liabilities, while making 5% for the G-Eurobank itself.

So the Government sets the lowest market value of the G-Euro, setting in effect a floor. In practice other businesses will offer to take G-Euro off non-taxpayers at automated exchanges at a value very much closer to nominal value.

Euro could always be moved into the G-Euro account of an individual, but G-Euro transfers to Euro accounts would, of course, not be allowed.

(The G-Euro could be used only until Greece has recovered from the slump, or it could get evolve the G-Euro to allow it to be used for specific purposes. Money just to spend on solar panels, or further education, for example. It could also be used to cancel debts.)

But: The G-Euro would not interfere with the existing economy, It would leave that to the Euro. All the G-Euro would effectively do is provide additional economic growth and more jobs, to kick-start the Greek economy.

Addition to money supply: Only about 7bn G-Euro would be issued (only about 4% of GDP), but a mulitplier of 2 would mean a one off GDP growth of 8%.

Use for payments in shops: The G-Euro would be issued 1:1 with the Euro. It would always have the same value and would be accepted at that value by retailers voluntarily, although it is not legal tender. Universal issuance to everybody would lead to universal acceptance.

Payment would be through a unique payment account at the G-Euro Central Bank. It would work just like a bank account but could only make payments to other G-euro accounts at the central bank. The unique account would be linked to the ID card of a Greek citizen. In fact, that ID card would be the only item needed to make a payment. The retailer could verify the transfer of funds by mobile phone, webpage, or phone, if required. The customer would need to verify with a PIN number.

For the retailer, the only thing he needs to do is set up an account at the “G-Euro Central Bank” into which the funds could be transferred.

So if an item was on sale in a shop, it could be sold for either

Euro 20 cash, or
Euro 20 in a credit card transaction (two options which exist already) or
G-Euro 20 in a G-Euro bank transaction,

depending on the customer’s wishes.

Drawbacks: The G- Euro makes the assumption that 7bn of one off spending would, through a multiplier of 2 create 8% one off GDP growth. It also assumes that it would be tax neutral, that is pay for itself, assuming that taxes make up 50% of GDP.

If we assume, that only 44% of GDP is recovered in taxes (that figure is used in the proposal for TCC above) then there is a need to find another 1bn in taxes to finance the shortfall. But an additional 8bn of GDP will have been created, so finding 1bn of taxes should prove easy..

So the final summary, and then we are done:

1) Tax Credit Certificates (Bassone, Cattaneo)

Issues a total of 48bn into the economy over 4 years, mainly trying to help businesses and their employees. That will be an increase of over 20% over current GDP. This will allow for a lengthy 4 year strengthening of export (and import substitution) businesses, giving them great cost advantages over its European neighbours. After the four years they better be competitive. If we assume that the Greek government’s assumption is correct, that 1% increase in GDP creates 15,000 jobs, the proposal could in fact create up to 350,000 jobs.

2) The Future Tax Coin –  FT-Coin (Varoufakis)

This is simply a means of capturing future tax revenue early. Useful if the government is really short of money, or for settling outstanding disputed tax claims.

3) The Tax Anticipation Notes (Parenteau, Andresen)

This is a proposal to pay Greek government expenditure as a percentage in TANs instead of Euro. We do not not how high the percentage should be. We have, after introduction apparently everything denominated partly in Euro and partly in TANs (government salaries, prices, bills, private sector salaries, loans) – a system which will never work. Further it discriminates against the recipients of TANs who are unlucky enough to work for the government or get transfers from them, in a perceived second rate currency, the TAN. I think this proposal still needs some work.

4) The G-Euro (by myself)

The final proposal produces the highest number of jobs for the lowest amount of spending. It is a much needed job recovery program. For only 7bn G-Euro spending, created out of nothing from the G-Euro Bank, this proposal allows for more than half a million of jobs in one year. Admittedly, there are only about 66,000 private sector jobs which could be created from the creation of the 30 G-Euro monthly spending power, a very small minimum income. A further 500,000 would be employer-of-last-resort jobs. However, it would provide an important signal, that Greece is on the way up quite quickly, and other private sector jobs could and would follow.

It would also create a neat payment system, controlled entirely by the government, and completely outside the capture of potentially insolvent Greek banks. A useful thing to have in your armour, just in case the ECB wants to shut your banking system down.

Something to remember from this:

All the proposals above have some good features, and a combination of the proposals would make a new parallel currency a very powerful weapon for Greece to relaunch its economy.

At the same time, Greece could stay as much as possible committed to the austerity agreement imposed by the Troika. And firmly in the Euro.

So tax credits and job-creation seem to go hand-in-hand. Something we also said at the beginning of this marathon blog post – if you can still remember!

(The next post will be shorter, promise!)


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