When are payments to holders of the tax-credit by the state ever a useful policy?

Imagine a new democracy imposes taxes on itself; the tax-credit is then spent, taxed back, thus provisioning public goods in the process.

Not all spending is taxed back, thus the public has savings of tax-credits.

Why would it make sense to pay more tax-credits to those holding tax-credits?

If for any reason the public decided to pay tax-credit savers: At what point would it make sense to exchange tax-credits for another government instrument that paid its holders more tax-credits (“sovereign bonds”) and introduced a huge, massively complex financial ecosystem on top of the already hypercomplex task of organizing public goods, running a state?

There is no clear reason to pay tax-credit holders more tax-credits. Even less to create a completely gratuitous financial complex that does nothing to help a government to spend or the public to save.

International

A country or entities within it are selling some goods abroad, buying some goods abroad. At what point would it make sense to pay holders of the domestic tax-credit more tax-credits in order to increase the value of the currency abroad?

Yes this temporarily allows for more imports. It simultaneously reduces demand for exports. 1) Why would this be considered a sustainable solution? 2) Why would you want to add this additional extreme level of complication into this process?

The fundamental reason there is a desire for a country’s tax-credit abroad is to buy from within that currency area. Reducing that desire while attempting to buy more from abroad is not sustainable in the long run. This will rapidly become apparent in smaller economies with thinly traded currencies.

When laid out clearly, there are no answers to these straightforward questions in the literature. The massively complex econ literature on these topics starts from within the web of confusion created by these gratuitous practices, never questioning the true fundamentals.

One thought on “When are payments to holders of the tax-credit by the state ever a useful policy?

  1. I only mean the state paying interest on the tax credit (mainly saved as sov bonds).
    Bank regulation a different issue.

    I meant to mention also – not only is “the dual mandate” not something a CB can effectively carry out – developing countries in effect have a “threefold mandate” which is even more absurd – full employment, inflation, AND exchange rate. Absurd to think interest rates are the way to achieve any one of these, much less all three at once.

    Like

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