Local taxes, local money

The fiscal problems that local authorities have under the existing system are well-known. Most of their funds come through central government and their power to raise taxes directly are heavily constrained. But I don't think the roots of the problem are generally recognised and there is a dimension to it (that I've never seen anyone else raise) which makes it doubly pernicious. (The first part of this post is largely reproduced from the Devolution section; the second part, which extends the idea, is new.)

The root of the problem, to my mind, lies in the convention that taxes must be paid in a fungible form (i.e. in money) rather than in labour. This has two pernicious effects: firstly, it makes it possible for taxes to be paid directly to central government (whose control of the legislative process allows them to take as much of it as they like); secondly, it makes taxpayers subservient to those who control the money supply (because it creates an obligation to obtain money from people who are under no obligation to part with it).

I've said more about the second aspect of this in the Rights and Duties section – https://constitutionuk.com/post/84773 – where I've proposed a constitutional right to pay taxes in a form which people have a natural capacity to supply: i.e. labour. This would be a huge change because it's only at the very local level that it's feasible for taxes to be collected in labour; for practical purposes, direct taxation of the individual by higher levels of government requires taxes to be collected in a fungible form.

I'm not, of course, suggesting that taxes must be paid in labour, and I don't imagine that most of it ever would be; most people will probably always find it more convenient to pay in money. But giving people a right to pay in labour would provide a dimension of democratic accountability that is currently lacking.

As I said in the Elections section – https://constitutionuk.com/post/83974 – a truly representative system should be capable of reflecting the fact that, just as our priorities shift in regard to which functions of government are more important, they also shift in regard to different levels of government. What I am proposing here is that individuals should be able to choose between paying their taxes in money to higher-tier authorities or paying them, in labour (or money), to their lowest-tier authority.

A reform of this kind would probably be unpopular with people in government (as every reform which constrains their power is). But it would give the public an additional method of demonstrating approval and disapproval of different levels of government; it would oblige different tiers of government to engage with each other on more equal terms; it would almost certainly hugely empower the lowest levels of government; and, as a consequence of that empowerment of local government, it would almost certainly revitalise local democracy.

Loosely related to this is a monetary issue: the propensity of money to flow out of local communities faster than it flows in. This problem is highlighted by the proliferation of  'complementary' local currencies of various kinds – Local Exchange Trading Schemes (LETS) are perhaps the best known, and there are also Time Bank schemes, as well as specific local currencies such as the Totnes, Lewes and Bristol pounds. Such initiatives find support where  people feel that our existing monetary system fails them, where there is supply and demand which are not being brought together because of a shortage of the medium of exchange.

I've analysed this in more depth in the Government section (since I regard it as a responsibility of government to ensure there is a stable medium of exchange) but here I'm concentrating on what powers and responsibilities local government should have in order to keep their local economies vibrant and to insulate them from the broader economy.

The viability of complementary currencies depends on a pool of people who are willing to use them voluntarily and, not surprisingly, most of the people who use them need some reassurance that they will hold their value. Without some guarantee – such as a commitment on the part of a local authority to accept them in payment of taxes – people are bound be wary of using them. For the most part, therefore, these complementary currencies struggle to make a significant contribution.

In order for local authorities to be able to stimulate their local economies, I propose that every local authority should have the power to create its own (time-limited) currency, based on the tax revenues it is owed. Expressing that more formally: local authorities should be empowered to issue time-limited transferable tax receipts (up to a limit consistent with the taxes that individuals have opted to pay to them) in payment for goods and services; and required to accept such tax receipts, when tendered, as a substitute for labour owed them.

(In my post in the Government section – https://constitutionuk.com/post/85294 – I explain why such a medium of exchange needs to be time-limited and I suggest how such currency creation by local authorities could be coordinated to create a stable nation-wide medium of exchange.)

edited on Feb 26, 2015 by Malcolm Ramsay
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