Public Digital Payments Platform

Progressive Agenda for Europe > The European New Deal > Public Digital Payments Platform
by Yanis Varoufakis, DIEM25 – March 2017
(Introduction)
DiEM25 proposes the setting up of a PDPP (public digital payments platform) in every European country. Technically, its creation is very simple: A reserve account for each taxpayer is created automatically (one per tax file number) on the tax office’s web interface. Tax file number holders are then to be provided with a PIN that allows them to transfer credits from their reserve account to the state (in lieu of tax payments) or to any other tax file number reserve account. The purpose of this payments’ system is to:
  • Allow for multilateral cancellation of arrears between the state and the private sector using the tax office’s existing web-based payments platform
  • Introduce a low cost alternative for digital payments to the existing private bank network, especially once payments using that system can be effected via smart phone apps and debit/ID cards issued by the state
  • Permit states to borrow directly from citizens by allowing them to purchase credits from the tax office’s web interface, using their normal bank accounts, and to add them to their reserve account. These, digitally time-coded, credits could be used after, say, one year to extinguish future taxes at a significant discount (e.g. 10%)
  • Reduce the redenomination costs in case of either bank closures effected by the ECB (in the case of Eurozone member-states) or in the case of the euro’s disintegration.
Appendix 2 presents DiEM25’s PDPP proposal in considerable detail. In summary, the proposed public payments’ platform affords national governments more fiscal space, allows for the multilateral cancellation of debts, enables states to borrow directly from citizens (without going through the bond markets), has the potential of creating new sources of investment funding, reduces the power of the ECB over Eurozone member-states (thus boosting national sovereignty) and, lastly, acts as an insurance policy in the case the Eurozone is dismantled. Politically speaking, the proposed PDPP constitutes a new version of an old idea: public payments’ systems used for public purpose. In addition, this particular proposal, utilises digital technologies to re-politicise money creation, offer commercial banks a worthy competitor and give Europeans a radical opportunity to take back the direction of their economies from the ‘independent’ central banks and the large private banks that presently dominate European economic life – and whose malpractice is a fundamental cause of the European crisis.
Appendix 2 – An outline of the Public Digital Payments Platform
Step 1: A multilateral digital payments platform employing existing a Tax Office’s existing online services
At present, European citizens can get online to transfer funds from their bank account to the state in lieu of taxes owed. This system can be extended easily to allowing taxpayers to hold reserves in an ‘account’ they are automatically granted on the Tax Office’s website. These reserves can be created by the state when the state owes citizens sums (e.g. monies owed to suppliers of state companies, lump sum pensions) or when citizens buy credits from the state by transferring funds from their commercial bank accounts. Tax Office accounts with positive reserves can then be used by their holders both to pay state taxes but, equally importantly, also to settle debts between citizens. E.g. Company A is owed €1m by the state and owes €30,000 to an Employee plus another €500,000 to Company B that provided goods and services to Company B. Moreover the Employee and Company B also owe taxes to the state. In this case, the extended Tax Office system allows for multilateral extinguishment of debts, plus some residual gvt debt that remains within these reserve accounts. That residual can then be sold for ECB-backed euros as the reserves will be freely transferable.
This is a first step toward the parallel payments’ platform proposed here. Steps 2&3 take the above idea further.
Step 2: Introducing an incentive for citizens (including foreigners who do not pay domestic taxes) voluntarily to buy this new form of government debt by offering them the opportunity to invest in future tax credits.
Purchased tax credits will be date stamped so that, if kept for more than 12 months on one’s Tax Office reserve account, they can be used to extinguish taxes X% (e.g. 5% or 10%) more than their face value. In effect, the state will have borrowed central bank money from the citizen in exchange of a discount on next year’s taxes – new form of government debt which bypasses traditional T-bill and bond markets and allowed citizens to lend directly to the state at zero transaction cost and for whatever quantity (even microlending). The result should be an increase in government liquidity which could, under the right circumstances, be used for developmental purposes.
Step 3: Employ blockchain technologies to generate trust in the integrity of the system and remove the suspicion that the government will ‘print’ more of these future tax credits than is consistent with long-term fiscal sustainability.

In what follows Steps 2&3 are outlined in greater detail:
The calculus of Future Tax Credits (FTCs)
FTCs defined: A marketable asset, denominated in euros or sterling etc., that offers the bearer the right to extinguish taxes or government charges of a value (1+ρ) times greater than its face value (ρ<1). If not used within a year, FTCs are rolled over automatically (with the possibility, see below, that their face value grows at a rate reflecting the growth in the economy’s tax base).
In essence, the purchaser of FTCs will be pre-paying taxes and, in return, will be receiving a discount equal to ρ. This is equivalent to saying that citizens, who know they will be paying taxes domestically, are offered an investment asset bearing an interest rate equal to ρ. As long as ρ is larger than the commercial interest rates offered on 12-month term deposits, FTCs will be a highly valued instrument for saving. From the government’s point of view, as long as its social rate of return r from other investments exceeds ρ, FTC issues will yield a positive return (see below).
Let us now take a closer look at the financing of the FTC program:
Period t
Government collects €X from members of the public and issues FTCs with a €X face value. Of this €X, a part comes from residents interested in extinguishing future taxes at a discount and another part comes from speculators who hope to be able to sell these FTCs at a higher than face value (as tax payers who had not purchased FTCs on time, may want to buy some at a premium just before paying their taxes – since FTCs extinguish €(1+ρ) for every €1 of face value). The larger the proportion of sales to speculators, the greater the probability that some of the FTCs issued in period t will be rolled over at the end of period t+1 (i.e. not used to extinguish period t+1 taxes).
  • Government revenues = Xt
  • Government losses = 0
Period t+1
Suppose that proportion α of FTCs issued at t are used to extinguish taxes while 1-α are rolled over.
  • Government revenues = rXt
  • Government losses = ραXt
(where ρ is the discount on taxes given to FTC holders)
Net benefits to government over (t,t+1) = rXt – ραXt = Xt(r – ρα)
For this scheme to be attractive to the government, r ≥ ρα or ρ ≤ r/α.
Alternatively, for the government to enjoy a minimum return of μ,
ρ = (r-μ)/α (1)
So, if α=1, i.e. all FTCs issued at t are used/redeemed at t+1, then the government’s investments must yield a rate of return (r) that is higher (by μ) than the tax discount (ρ) FTCs grant to their bearer.
The steady-state supply of FTCs
How many FTCs should the government issue in every period?
In each period t, proportion α of circulating FTCs are extinguished (i.e. used to pay taxes and government fees). To keep the stock of FTCs (say Xt) constant, the government should issue xt+1 fresh FTCs at t+1 where xt+1 is at least equal to αXt, i.e. the stock of FTCs that was depleted (having been used). We say “at least” because if the economy is growing, so is the tax base. Therefore, if gt+1 is the growth rate of the state’s tax base in period t+1, then we should have
xt+1 = αXt + (1+gt+1)(1-α)Xt = Xt [α+(1+gt+1)(1-α)] (2)
That way, the stock of FTCs at t+1 is given by (3) below
Xt+1 = Xt – αXt + αXt +(1+gt+1)(1-α)Xt = Xt +(1+gt+1)(1-α)Xt (3)
and the growth rate of FTCs by (4) below
θ = (Xt+1-Xt)/Xt = (1+g)(1-α) (4)
In short, if α=1 (i.e. there are no roll overs) then the stock of FTCs remains constant whatever the tax base’s growth rate while, if α<1, the stock of FTCs in the economy grows in proportion to the tax base’s growth rate. E.g. if 20% of FTCs are rolled over (α=0.8), and the tax base increases by 3% annually, then FTCs grow by 0.2X1.03= 0.206 or 20.6% p.a.
Motivating FTCs holders to roll them over
From (1) it is clear that the government has an incentive to motivate FTC holders to delay its use; to roll over their FTCs. The lower α is, the greater the tax discount ρ the government can offer FTCs holders (thus making them more attractive) and/or the larger its own return μ be.
So, how can FTC-holders be motivated to roll them over? There are two ways to do this. First, to reward them with more FTCs when they roll over unspent ones (i.e. a form of FTC interest). Secondly, if FTCs can receive special treatment in shops as a form of payment. Let us concentrate on the former here, leaving the latter for later.
Suppose that every time an FTC-holder rolls over FTCs with a face value of €X, they receive FTCs with a face value of €(1+m)X (i.e. FTCs receive an effective interest rate of m). A simple mechanism would be to set
m=θ (5)
i.e. allocate all new FTCs to those who roll over their previous ones.
The above three equations (1), (4) and (5) define a revenue-neutral scheme. Here they are again in summary form:
Tax discount for FTEG holders (ρ) = (r-μ)/α (1)
FTC growth rate (θ) = (1+g)(1-α) (4)
FTC roll over return rate (m) = (1+g)(1-α) (5)
The positive feedback effect
At the outset, say t=1, FTCs will be purchased solely for the purposes of reducing one’s tax bill and, therefore, the rollover proportion (1-α) will be close to zero. Still, government has an incentive to issue them as long as r>ρ, i.e. as long as it can gain a premium or spread μ=r-ρ. Taxpayers who buy theses FTCs at t=1 will also benefit by ρ during the next period, t=2 (i.e. government and taxpayers enjoy a mutual benefit even in this ‘plain vanilla’ situation)
In summary t=1, 1-α=0, ρ = r-μ
Moving on, as t=1 is coming to an end, the price of FTCs in the secondary market will exceed their face value (since non-owners of FTCs will want to buy them at a premium in order to save some tax). The anticipation of such end-of-period effects will bring into the FTC markets non-taxpayers (e.g. those who buy FTCs in quantities greater than their tax liabilities) who wish to take advantage of an asset whose value will rise reliably.
This means that the demand for FTCs in the next period may rise to the extent that the increase in their price happens early on in period t+1. The fact that these FTCs can be rolled over will further strengthen their price and also reduce α, as FTC-holders recognize potential benefits from not redeeming them at the end of a period. But, as α falls, it is clear from (1) that the government can now offer a lower ρ, making these FTCs even more valuable to new FTC-holders. This boosts demand and, naturally, FTC prices in the secondary markets.
Additionally, by increasing the supply of FTCs and offering an interest rate (paid for by these fresh FTCs) on rolled over FTCs (see above), with θ equal to the growth rate of the tax base (due to normal economics growth) times the portion of total FTCs that are rolled over (1-α) – see equation (4) – the demand for FTCs rises even further.
In summary t=2,3,…, (1-α)↑, ρ = (r-μ)/α↓, and θ=m=(1+g)(1-α)↑
Thus, FTCs grow significantly in number and, much more so, in value.
Turn FTCs into a fully digital, decentralised asset using blockchain technologies
One of the major problems with such a scheme concerns the potential for lack of trust. Many may fear that the government will exploit its privilege to print more FTCs than equation (4) renders sustainable. Even though if the government has a good track record for keeping to its own rules, a blockchain ledger-checking Internet-based system for issuing, distributing and exchanging FTCs has at least two significant advantages.
  • It solves the problem of trust by turning over the ledger of FTCs to the community of its users – indeed to anyone who wants to check how many FTCs are circulating at any point in time
  • It makes FTC transactions straightforward and allows the government to tap into existing bitcoin-like technologies in order to sidestep the banks, their large fees, and their monopolisation of the payments’ system
Turning FTCs into a parallel legal tender as well as into a social policy tool
The process described above can be magnified further by creating a new source of transactions’ demand for FTCs. For example, once FTCs have been established, government and private business can agree to allow for FTCs (whose face value is denominated, in any case, in euros) to be legal tender – to be exchangeable for goods and services in shops and various businesses at hefty discounts that reflect the higher than face value prices of FTCs, as well as their no fee transactions cost (e.g. when compared to VISA and Mastercard fees).
Lastly, nothing stops government from giving preferential treatment to certain groups when it comes to the ρ it offers. For instance, small businesses may be offered preferential ρ rates or, another example, some of the new FTCs issued yearly may be given away to disadvantaged families as a form of social security payments.
Summing up: The welfare effects of FTCs
Benefits to the government
  • Net gains (equal to r-ρ=μ) from receiving extra liquidity as part of a system that pays for itself
  • The creation of a third government financial asset that helps money markets mature further
  • A source of additional (foreign) demand for domestic currency, as foreigners gain an incentive to invest in FTCs
  • Greater growth potential for the domestic economy as the effective reduction in intertemporal tax rates has a positive multiplier effect on domestic consumption, investment and, therefore, GDP growth
  • A potential welfare improvement if FTC issues are calibrated with a view to assisting small business and the less well off
  • The ease with which such a system, once fully developed, could be redenominated in a new currency, if the Eurozone begins to fragment.
Benefits to businesses
  • Combined with the suggested blockchain and digital wallets, business can take advantage of FTCs in order to reduce the economic rents they lose to VISA, Mastercard and Apple Pay
  • New demand for vendors due to the rise in the value of FTCs over and above their face value
Benefits to citizens
  • Substantial reduction to their tax bill, from using FTCs to extinguish government fees and taxes
  • Higher discounts in the marketplace that accept FTCs as payment, at large discounts
  • Potential benefits to poorer families and small business if the government chooses to calibrate FTC issues in their favour.

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