Ideas from Argus C. Zall

CHAPTER 9 OF BOOK “HOW I WOULD RUN THE COUNTRY IF I WERE DICTATOR” by Argus C. Zall

Chapter 9 ” The No-cash Society”

In this chapter i detail a completely electronic system of payments and receipts, and abolish the use of cash. This system, run by the Government would apply a “Transaction Tax” to every financial transaction, and would be come the only tax collected by any government in the country.

CHAPTER 9
Of Book

THE NO-CASH SOCIETY
(Copyright July 31 2006)

Once I get trade, the budget deficit, immigration, drugs, crime, the schools, and the military under control, I will turn my attention to reform of the way we manage the flow of money back and forth through the economy, and the way that the government gets the share that it needs to do what needs to be done.

Right now, we have the damnedest hodgepodge system imaginable, attempting to combine in one confabulation a mixture of swapping wampum beads (read “currency” or “medium of exchange”) with credit and electronic funds exchange, which for convenience employs the same units as the currency. The cash part of all this is basically a holdover of a system invented by the Sumerians 4000 years ago to replace barter in marketplace transactions. Credit is a more recent invention, originating in the “moneylenders” of biblical times, expanded in the Middle Ages to facilitate commerce by permitting the delivery of goods to be separated in time and place from the delivery of currency. Still more recent is the credit of convenience, the “charge account” affording similar privilege by an individual merchant to a known and trusted individual customer. The last half century has seen the flowering of this into the “credit card” system in which a factor organization verifies the creditworthiness of the cardholder, pays the merchant and subsequently collects from the customer. In its earliest days, of course, all of this credit flow was handled in the form of paper transactions: bills, checks, deposits, interbank drafts and credits. Since the advent of computerized banking, it has become even farther removed from the cash which it replaces, relying on electronic funds transfers between banks, all of the larger commercial enterprises, and increasingly, individuals as well. Electronic funds transfers, of course, are nothing more than data bits on a tape or disk. They are just a means of keeping the score instead of swapping piles of elaborately engraved green paper.

Until a few hundred years ago, all money was “commodity money”, in which the cash itself had a recognized value derived from the substance of which it was made. The invention of paper money replaced much of this with “credit money” in which the issuer guaranteed the value of the paper by offering to redeem it with commodity money. Today, virtually all cash is “fiat money”, having zero intrinsic value, and worth only what the issuer says its worth. Necessarily, the marketplace independently decides what the value of such money is, by adjusting prices as measured in the units of such currency.

Cash in our economy today is used for three things: first, as a medium of exchange in small transactions (buying a newspaper or a loaf of bread) in which the cost of processing the transaction through the credit system is greater than the value of the transaction; second, as the sole medium of exchange for the economic underclasses who are unable to qualify for charge accounts or credit cards; third, for every conceivable kind of illegal transaction, from tax-avoidance to drug-dealing.

Only the first of these has any redeeming social value. The poor are automatically stigmatized by not having credit cards. Illegal transactions fuel the shadow economy, deprive the government of much needed tax revenue, and are the life-blood of the drug trade. I will propose a system which does away with cash, eliminating the anti-social transactions, while preserving the ability to deal inexpensively with small transactions.

To begin with, I would interpose between the economy and the banking system an electronic transfer system run by my government. The only way funds enter or leave the banking system is through this electronic funds transfer system. Commercial enterprise A desiring to pay supplier enterprise B for goods enters a transfer draft through a government-owned and-operated terminal into a computer network (independent of the Internet, perhaps even the same as the ID-card network)) which debits a transfer account of enterprise A and credits a transfer account of enterprise B. Credits and debits between these transfer accounts and the accounts of enterprises A and B at their respective banks are then made in the form of electronic funds transfer by the banks. No cash changes hands.

All citizens in the country will also have transfer accounts in this network, registered under their personal social security numbers, accessed only by the previously-mentioned biometrically-identified ID cards. Cash registers of merchants will be replaced by point-of-sale terminals owned and operated by the government, linked to the network. To make a purchase, the customer must input the ID card, and submit to the biometric confirmation. The cashier inputs the transaction code and amount. The customer’s transfer account is immediately debited and the merchant’s account is credited; if there are insufficient funds available in the customer’s transfer account, the transaction is denied. The customer must maintain funds in the transfer account by electronic transfers from bank accounts, or other sources such as wage payments by employers.

As noted before, anyone using a stolen card with ID not confirmed biometrically will be automatically handcuffed and turned over to the police.

Salary or other income to any individual would also enter the banking system through the electronic transfer network, credited by the employer or other payor. The individual could arrange through his bank for transfer account balances in excess of a defined amount to be automatically “siphoned” to bank accounts, and for transfer account balances less than another defined amount to be “pumped” by transfers from bank accounts. Interest and dividends would also be credited to the individual through the transfer account. An individual making a major purchase, such as a car, would arrange financing in advance, have the purchase price credited to his transfer account and complete the transaction at the merchant’s terminal, all with no cash changing hands.

Small purchases will be dealt with by having a “cash track” on the ID card. An individual could obtain “cash” at an ATM-type machine, debiting his transfer account for an amount less than say $100, and crediting the cash track on the card with the amount. Purchases of less than ten dollars could be made by inserting the card into a point-of-sale terminal. This terminal would read the cash track, debit it by the amount of the purchase and rewrite it, and credit the transfer account of the merchant. It should also deliver a printed receipt to the customer including the remaining balance on the card. No ID confirmation would be required for such transactions.

The whole transfer network would operate in real time in a “debit card” mode. Purchaser’s transfer accounts would be debited immediately; merchants’ transfer accounts would be credited immediately. There would be substantial cost savings over the present method: extending credit by the merchant, billing the credit card company which pays the merchant and accumulates charges for one month to bill the customer who then writes a check to the credit card company which in turn makes a deposit to its bank which passes the charge through to be debited against the customer’s own bank account. All of this roundabout technique involves the credit card company twice, plus three banks, to accomplish a transfer of data bits from the disk file of the customer’s bank account to the disk file of the merchant’s bank account. It is financed by a fee of several percent levied on the merchant plus a usurious interest charge levied on late-paying customers by the credit card company.

The real-time data network I propose accomplishes this transfer immediately, without any intermediaries, and at far lower cost. The “revolving credit” aspect of the current method would be handled by arrangement between customer and the bank through which he maintains the necessary balances in his transfer account, at suitable interest, of course.

Funds transfer between individuals, or for mail-order, telephone-order, or internet transactions would be accomplished through ATM-like machines. In making such a purchase, payor receives from payee a payee ID number, transaction number, and amount. Payor proceeds to a nearby transaction machine, and accesses his own account through his ID card. Payor then enters payee’s ID number, transaction number, and amount, effecting the transfer. The machine prints out a verification copy of the transfer for the payor, and sends an electronic notice to the payee.

I am sure you are wondering why I am insisting that a cashless network like this, an expanded version of what the banking industry does now, has to be owned and operated by the government independent of the banks. Wouldn’t it be just a costly overlay on top of what is fast becoming an automatic system anyway?

The answer is simple. I want to run the system in order to use it to collect taxes. As soon as I get it up and running, with every transaction going through my fingers and recorded in data bits, I am going to abolish the hodgepodge collection of income taxes, excise taxes, sales taxes, property taxes, intangible property taxes and what have you with a single unitary tax: a transfer tax. Every single transfer of funds that goes through this network is going to be taxed, and there will be no other taxes collected by any government entity anywhere in the US. And since my network will be the only way for anybody to pay anybody else for anything, there will be no “shadow economy” cash transactions escaping my notice.

Only transfers of funds within the network between different accounts will be taxed. Transfers from an individual bank account into a network transfer account under the same social security number will not be taxed. Thus “siphoning” or “pumping” from bank accounts to transfer accounts to maintain balances would not suffer any tax. No bank would be able, however, to transfer funds within the banking system itself from an account under one social security number to another under a different social security number bypassing the transfer account network. All transfers from one account number to another have to be made through the transfer network, and will be taxed. Transfer from the account of one spouse to another of amounts less than say, $20,000 per year will not be taxed, to facilitate household management. Transfers from accounts of parents to accounts of minor children of amounts less than $500 per year will not be taxed, to help parents educate their children in the wise and frugal management of finances.

The simplicity of the transfer network tax will result in enormous savings in tax administration. The IRS will no longer need armies of clerks to process tax returns. It will no longer need an army of Talmudic scholars to write and interpret the most complicated tax code ever conceived in the civilized world. The taxpayers will no longer need a legion of experts searching out every loophole and trying to avoid the minefield of traps for the unwary. The Treasury will no longer have to borrow in anticipation of tax receipts to keep the government running between the quarterly payments of estimated taxes. The government will get its money in absolute real time, every minute of every day. Not only that, it will have a minute-by-minute reading of the health of the economy, from the volume of the transaction taxes it collects. No need to wait a quarter for the Commerce Department to read its tea leaves and publish statistics that are already three months out of date, preliminary, usually wrong, and revised a month later. There will be no more endless jockeying for advantage by platoons of lobbyists attempting to get their own special interest deductions or exemptions written into the tax code by Congress.

As a further simplification, no brigades of clerks will be needed by American business to process withholding of wages for taxes. The savings that result from the elimination of all the people now carrying out these non-productive tasks will more than pay the cost of operating and maintaining such a system.

The taxes collected by the Federal Government through this network will be divided in some reasonable way between the Federal Government itself, the States, and the municipalities within those states, at least partially based on the volume of transaction taxes collected within their respective jurisdictions. Consequently, states and municipalities will be spared the present enormous financial burden of maintaining their own tax-collecting organizations. As I have already mentioned, the funding of the public education apparatus will be Federal, reducing the burden on States and municipalities.

It is not possible at this writing to determine what the tax rate of the transaction tax will be. Nobody knows what the volume of transactions is. All that’s known is the gross domestic product, $12 trillion, and the total Federal, State, and local tax take, about $3.7 trillion (2005 data). (SATUS 2006 Tables 424 and 429) However, GDP doesn’t count the shadow and illegal economies, and there are multiple transactions involved in most entities counted in the GDP. I would get the system up and running for a year or so without the tax feature. Then once I knew what the volume of transactions was, set the rate to yield the tax revenue needed by Federal, State, and local government. If there five transactions involved for every item comprising the GDP, the tax rate would be about six percent.

What about the people on the lower rungs of the economic ladder who don’t have bank accounts and who don’t have credit cards, and many of whom are receiving public assistance? They would still have social security numbers, biometrically-verified ID cards, and would have transfer accounts. They would apply to the network for internal identification as “low-income citizens”. Provided they met the qualifications, their accounts would be so coded; any transfers from any source into the account would be free of transfer tax. Purchases debited against these accounts for necessities would be free of transfer tax. If these low-income citizens were receiving unemployment compensation or welfare payments, transfers from the appropriate agency account would be periodically made into their accounts. There would be no identification on the ID card itself that these were low income citizens. Consequently, they would be much more fully integrated into the mainstream economy than they are now.

Because this will be a national network, garnishing of wages under court order for child support will be a trivial exercise. A court-ordered tag will be placed in the transfer account file of the parent obligated to provide child support. If this worthy leaves town and goes to work somewhere else, it doesn’t matter. Any transfers into the account will still be garnished, with appropriate sums transferred to the account of the parent receiving child support. No action on the part of any employer is needed; it happens automatically. This one change will enormously reduce the cost of Aid to Dependent Children. The vast majority of this public assistance is required because a father splits and leaves mom to raise the kids with no means of support. All mom needs to know is his social security number.

Aliens legally entering the country will deposit funds into a temporary transfer account and use their biometrically-identified visa card as a temporary ID. They will be able to handle all transactions within the country in the same fashion as citizens. However, these transfer accounts and ID cards will be strictly temporary. They will expire when the term of the visa expires. When they expire, the alien must either leave the country, apply for an extension, or starve. Moreover, unless the alien has a work permit, no wages or other funds may be transferred into the temporary accounts.

Illegal aliens will have no way of receiving or spending any money at all. They can exist in the country only on the sufferance of citizens or legal aliens handling their wages and purchases for them. The network would be programmed to flag any account receiving wages from several employers simultaneously; probably some of these are wages for illegals surreptitiously laundered through a legal account. The inability to hide and still collect wages and eat without the computer knowing what’s going on will make illegal aliens much easier to find and send back where they came from. The much higher probability of detection will make employers more careful about being sure that prospective employees have valid ID cards. The combination will make the US a much less attractive haven for illegal immigrants of all nationalities.

There are a couple of problems with the transaction tax system which result from the nature of the distribution system in the marketplace. Some organizations are vertically-integrated, others are not. Consider, for example, the typical neighborhood hardware store. It buys goods from a wholesaler (paying a transaction tax) who buys goods from a manufacturer (paying a transaction tax). The hardware department at Sears, however, gets its goods internally from Sears, which acts as its own wholesaler, buying directly from the manufacturer. The transfer of goods from the wholesaling part of Sears to the retail store takes place entirely within Sears, and the financial part of the transaction is merely a book-keeping entry that doesn’t pass through my transfer network.

Therefore, there are only two transaction taxes burdened on the goods the customer buys from Sears: the one the consumer paid, and the one Sears paid to the manufacturer. When the customer buys the same item from the neighborhood hardware store, there are three: the one the customer pays, the one the retailer pays, and the one the wholesaler pays. Since, in the final analysis, all these taxes will be reflected in the price paid by the ultimate consumer, the item purchased from the neighborhood hardware store would be higher in price by at least the amount of the extra tax imposed by the extra layer in the distribution system. Sears is vertically integrated, the neighborhood hardware store is not. Thus, a pure transaction tax system will be a heavy burden on small businesses, which provide more than half the jobs in our economy.

I will handle this by decreeing that whenever goods are physically moved from one place to another (eg from factory to warehouse, from warehouse to retail store), a transaction will be deemed to have taken place, and a sale and purchase entry must be made through a transaction terminal. The selling price will have to be computed in exactly the same way as if it were an “arm’s length” transaction between unrelated parties.. The fact that the debited transfer account and the credited transfer account might be the same is irrelevant; the transaction tax would still be collected. Their more efficient mode of doing business would still give highly-integrated retailers a commercial advantage over the conventional chain of wholesalers, distributors, retailers, etc., but they would not have a tax advantage.

The network will have to have significant memory and distributed computing power, as well as communication linkages. This, however, does not require any new technology. Banks presently operate ATM networks over wide geographical regions, which accept customer cards and process transactions through banks which are geographically remote from the ATM. Credit card systems operate with networks of electronic-verification terminals to guarantee purchases for cards which a customer may use thousands of miles from home. The main problem to establishing this cashless economy is the investment cost of the hardware, the cost of programming and training, and a period of dislocations in the transition. The return on the investment will come in the reduced cost of collecting taxes and the higher taxes collected by the tapping of what has hitherto been a shadow economy.

The present banking and credit card system uses the eminently-hackable Internet network to process its transactions, and has recently been subject to massive disclosures of private information that could lead to identity theft on a hitherto-unprecedented scale. My system will use the same independent secure network used for the national-ID-card previously described. The same card will be used for both purposes; the cashless-transaction system is merely an extension of the ID-card verification network.

For every account, all transactions will be recorded in a rolling 30-day memory. This will be periodically reported to the account holder: as a print-out mailed to a home address for an individual, as an electronic data transfer for businesses. This is similar to what you now get from the major credit cards: a print-out that itemizes date of purchase, where purchased, what was purchased, and the amount.

This account information will be accessible to law-enforcement officials, under a court-ordered search warrant. Thus an individual or company subject to a criminal investigation would have a tag placed on the account which would result in automatic transfer of all the information to the investigating authorities at whatever intervals were specified in the search warrant. There would be no requirement of notification to the account holder that a court-ordered search of the account files was in process.

I have mentioned that the IRS would no longer have a need for regiments of clerks to process tax returns; they could all become supermarket cashiers. But I would greatly increase the investigative staff, to be able to analyze and interpret the vast amount of data available to track illegal transactions. I do not pretend that the cashless system will eliminate the illegal drug trade, or the money-laundering industry. It will just make it easier to get information that will stand up in court. The network computers will be programmed to identify deviations from norms in transactions of various businesses. If a laundry processes sales of a thousand five-dollar shirt-washings every day, but doesn’t have purchases of soap and hot water to match a national norm for laundries, the computer will conclude that something other than shirts is being washed. A computer flag will alert the IRS to investigate the establishment. I would have enough IRS agents to investigate every flag turned up by the network computers. Significant deviations from several norms for either individuals or business establishments will be sufficient reason to suspect wrongdoing to obtain a court-ordered search warrant. Then all transactions in the account will be forwarded to the IRS for study. Verification of a pattern of suspicious transactions would result in the case being turned over to the district attorney for on-site surveillance and investigation.

Another capability of my transaction network would be the ability to follow the “cash tracks”. Normally, the customer identity in a cash track would be ignored by the point of sale terminal; however, the card still has the individual social security information recorded on it. For an establishment under suspicion as a purveyor of illegal substances, under court order the reading of social security numbers on all cash track transactions presented to the point-of-sale terminals would be surreptitiously “toggled on”, so that these numbers were transmitted to the network along with the amount of the cash sale. To continue the laundry example, this would undoubtedly turn up social security numbers of individuals who were so squeaky-clean they had four or five shirts washed every day. These individuals would become themselves subject to investigation.

Also subject to particular scrutiny would be accounts that resulted in international transfers. International transfer account data is needed to verify prepayment for goods to be admitted into the country, and to prevent illegal drug money from leaving the country. When an international transfer was input into the network, it would not be immediately processed, but rather would be directed to the terminal of an investigator. The transfer data would have to include information to track the shipping and customs papers for the goods or services being paid for. The investigator would have to call up a facsimile of these papers for verification before the transaction was processed. Again suspicious transactions would be flagged for more detailed examination.

We note that these international electronic transfers now happen under the purview of the banking system. Unfortunately, this system has every incentive to process what it knows or suspects are illegal transactions (for a substantial commission, of course), as well as the means to hide them under a variety of blankets. I will take this function out of the banking network and assign it to my network. The investigators assigned to verify the legitimacy of all international fund transfers will be well paid to insulate them from temptation. Their own transfer accounts will be subject to permanent scrutiny to detect any surreptitious input transactions which might be payment for processing transfers without the required supporting data.

This will, of course, delay the processing of international transfers somewhat. The amount of delay will be dependent in part on how many process agents are available; I would tend to be generous in staffing to minimize delay. It will also depend on the degree to which the transferor has provided the necessary tracking information and verified that the required documentation was already in the network before input of the transaction to be processed.

More mundane software requirements of the network will be to identify “offsetting transactions” between separate organizations. Company A sells computer systems; among its clients is Company B, which provides auditing and accounting services to Company A. Company A and B agree to a semi-barter transaction in which the cost of the computer sold by A is offset by the cost of service rendered by B, and only the net difference is input to the transaction network, and the tax collected is only on the net. I’m greedy. I want the tax to be collected on each transaction, not the net. The network software will have to recognize such offsets and flag them for the IRS to identify. Bartering of services will be more difficult to recognize, and probably can best be done by comparison of transaction volumes and amounts of services for organizations in particular businesses versus national norms for such businesses. To prevent barter transactions of all kinds from serving as a tax-avoidance loophole, I will have to make barter of any kind a criminal offense. All transactions have to be reflected in dollars going through the transfer network, where they are accessible to tax. No payments in kind, nor employee discounts!

A by-product of the operation of this nation-wide cash-free electronic medium-of-exchange network to process all transactions will be vastly improved statistics of the economic status of the Nation, available in real time. I have already mentioned that the transaction volume data could be available minute by minute. Similarly current data on international accounts is available in real time. Moreover, the network could accumulate data on auto sales, appliance sales, indeed every dimension of the economy, all in real time. Broad categories of information would be publicly disseminated. More detailed breakouts, eg how many putty knives were sold in zip-code 12345 in the month of July 2006, could be made available for a fee, through Internet information networks.

Thus an individual seeking to open a fast food restaurant in Podunk could have up-to-date information on the sales of burgers, fried chicken, pizzas, etc, and their relation to the national norms for consumption of these items by the population. He could then observe that there was no room in the market for another burger restaurant, because there were already too many, but that the local consumption of tacos was far below that of the region in general. Thus market opportunities and lack of opportunities could be identified immediately based on current data from the transfer network. Not only will this greatly improve the chances of success of new businesses, but my government can make a modest profit on the collection and sale of slices through the cumulative data base.

Upon incarceration, a convicted criminal would have his ID card confiscated. If he attempted escape, he would not be able to buy anything to eat. The account of a criminal released on parole would be flagged: his whereabouts, as recorded from the locations where he made purchases, would be forwarded continuously to a parole officer. This would permit easy implementation of “house- arrest” incarceration of non-violent criminals, for example. The ease of garnishing receipts in a transfer account would make it practical to place first-time burglars or muggers on house arrest, with freedom to work at paying jobs. Their wages could be garnished to satisfy the restitution requirements of my criminal justice system. If they strayed from the defined territory, or attempted to make purchases at proscribed types of establishments, they would be handcuffed and apprehended for incarceration in more-restrictive environments.

Mind you, I don’t underestimate the ability of the criminal element among us to try to find other media of exchange, particularly for international transfers in financing the drug trade. Diamonds and other jewels, computer chips, objets ‘d arte and other articles having a high value per unit of bulk or weight would be the easiest to use for smuggling, as well as for shadow-economy transactions within the country. Legitimate purveyors of such goods would be especially carefully monitored by my transfer system to make sure that they were not in the process of converting data bits into a currency that bypassed my tax collection.

I think it will take the better part of a decade to get this system fully implemented and to track down and stamp out most of the attempts to bypass it. Once it is in place, it will be so much easier and so much less costly than the cash-credit-“check is in the mail” method we now use that we will wonder how we ever got along without it.