Monday, May 19, 2014

 A Vision of Government Functions 

This blog is dedicated to discussions on payment systems architecture worldwide. All payment system types are up for discussion, gross real time payments, deferred netting systems, payment vs. demand, small value, large value, internet currencies, hybrids, or galactic payment modules; soup to nuts.  

Payment system infrastructure and design by necessity brings out conspiracy theories and hate speech which have nothing to do with the mechanics of payment systems.  That being the case I though I would lay out where I see payment systems and government coexist. I start with my definition of government (which may be a wee to the left for some, but it gives context to my understanding of payment system architecture. What follows I hope will be an entertaining discussion.

Government must provide the following services to its people:

·         Creation and periodic removal of laws
·         Law enforcement
·         Universal healthcare
·         Housing for the homeless
·         Daycare for working childcare providers
·         Food for the hungry
·         Clothing for the ragged
·         Transportation if the situation warrants
·         Universal education
·         Defense
·         Treasury services
·         Foreign diplomatic services
·         Unbiased scientific evaluation of significant phenomena
·         Protection from pluralistic bias (equal protection under the law)
·         Independent self examination for corruption
·         Archival Services
·         Unbiased and independent judicial processes
·         Regulation of finance
·         A Central Bank (The Fed)
·         Regulation of environment
·         Regulation of industry making life and death decisions for its employees or the public
·         Full retirement funding
·         Infrastructure development
·         Disaster recovery services
·         Funding itself

All people within the borders of the Government will have the following universal right:

There will be no criminal penalties for willing adults participating in free commerce if the goods or services exchanged are not the product of theft or assault. Government however can regulate trading in  commerce affecting children, endangered species, or products resulting from harmful environmental techniques, the only exceptions to free commerce. Combined Government taxation of such commerce should never exceed 15% of the cost of the goods or services people and firms exchange.

Chapter 1 Taxes

A government must fund itself to provide the necessary functions of government.  As time progresses political administrations of changing times will adjust the priorities of funding and during emergencies may suspend funding of some functions all together. Except for emergencies, budgets include funding for all functions.

Types of Taxes

Worldwide government tax types include:

·         Sale of goods and services (VAT included)
·         Income
·         Inheritance
·         Employment
·         Fees for businesses
·         Fines from legal judgments
·         Property
·         Voting
·         Intellectual designs and creations
·         Use of property
·         Imports and exports
·         Seizure
·         Regulatory fees (licenses, excise, etc)

Without judging the merits of a particular tax, it is easy to see there are too many methods for taxation, creating redundant government administrators for the same function.

Judging the list provides targets for elimination. Regulatory fees, fines, and sale taxes survive.
Taxes need to cover the cost of all government functions, and depending on its administration, may create a rainy day jar.

Let C = Cost for functions; T=Taxes; P = GDP; then

T = (C/P) * P

For example given a $16 Trillion GDP and a government cost of $4 trillion then taxes need to be set at 25% of sales. because  4/16 * 16 = 4.

There exists a relationship between GDP and T such that as T decreases, sales increase (if T is a percentage of sales) and sales decrease as taxes increase.

So, taxes on sales are elastic, as shown in Figure 1.

Figure 1: Elasticity of Taxes

When a government outlaws an activity, or substance, it in this model drives the tax rate to 100% and so no tax revenue results. The actors providing outlawed goods and services in actuality treat their activity as not taxed so their incentive to sell and buy increases. The orange actual taxes line shows an estimated elasticity of lower or increased taxes.

When civilian actors trade across governmental boarders, a potential for unfair tax practices exists. When governments use import and export taxes instead of negotiating the sales tax receipt of international transactions, then governments introduce harmful inefficiencies into what should be a worldwide sales tax system. If large regional bodies such as the European Union, Russia, China, US, etc., can negotiate a 50/50 split of the worldwide tax rate then civilian actors do not discriminate about their operational regions. If a sales transaction occurs within one region that results in goods or services arriving in another region (or regions) then the civilian actors’ governments equally split the sales tax. Increased administration cost for such a system is minimal if taxes from transactions use an internationally recognized standard for clearing and settling. 

Civilian actors can negotiate who pays the tax on a given transaction and the payers move those funds into an independent stream for settlement.  For example, I buy a $60,000 Porsche Boxster; then either the dealer, me, or both of us pay the combined local, super local, or federal tax which say is a combined rate of 25%. In this instance $15,000 separates from the original transaction and goes to a separate clearing house with a result of $7500 going to either Germany or the European Union; and $7500 going the taxing parties in the US, split correctly according to agreements from the different regional entities.

At the Federal level, sales tax rates can be set on a daily basis by the central bank. Regional governments can do the same thing and those rates transmitted at any periodicity to the tax-clearing exchange.

In the case of my Porsche, my county, Fairfax, would receive 5% of the transaction ($3,000), VA would receive 4% of the transaction ($2400) and the US would receive the remainder ($2,100). If I purchased a Corvette instead of a Porsche then combined tax rate would apply but the US might change the chain of receipts and receive $7,500 instead of $2100 (and then divide that among the other authorities with a right to a tax payment).

If governments cannot criminalize commercial behaviors then the need for anonymous cash transactions disappears and the use of cash (potentially tax-free transactions) becomes minimal and may not be necessary at all in the future.

Dreams aside, whatever the regulatory conditions, a basic architectural model for a publicly provided payment network exists, however not tuned for small value payments. If central banks within the Group of 20 provided a small value gross real time payment system (SVGRTP) then banking domination of a critical public infrastructure, which creates huge costs to the detriment of all but the payment system industry,  functions correctly, and does not tax the small small firms and individuals unfairly because of monopolistic practices.

Chapter 2: A Small Value Gross Real Time Payment System

What is it?

Functionally a small value gross real time payment system (SVRTP) works the same as any gross real-time payment systems such as Fedwire, however the design optimizes cost effectiveness for small values. Commercial banks use the central bank (CB) to move small values to accounts registered with the central bank.  A user from the public creates the registration directly with the CB and the CB maps the registered account to commercial bank accounts with deposits at the CB.  Diagram 1 shows the operational processes once registrations become ubiquitous.

Diagram 1: Operational SVGRTP

Although the central bank moves funds, the private payment system industry will thrive. The CB authorizes or licenses auditors for payment applications. The costs for payment applications will be borne by the payers.  Actual use of the SVGRTP needs to stay free; operations funded from other sources. Funding comes from fees for payment industry certifying new devices or new software for devices. Further funding, if needed, will be CB fees to their account holders, transferable to their customers using the SVGRTP.

International Requirements

The System must have interoperability within the Group of Twenty. Enhancing small trade commerce is the goal of the SVGRTP. Users making small payments seamlessly across international borders will measurably increase the viability of micro, small, medium, and large firms worldwide.


There are many vested interests aligned against a public provided payment network, The current network providers, card manufacturers, point of sale providers, key management firms, issuing banks, acquirers, forwarders, gateway providers, deferred netting providers, and other function providers necessarily would disappear or adapt to a publicly provided worldwide payment system.

Governments too will have concerns about such a structure, particularly with payment access to contraband and potential for tax evasion.


Payment transactions cost become much lower. Security becomes exponentially greater. Trade increases.

Benefits for Governments

Tax modules instantly move funds from transaction to multiple tax accounts defined by legitimate regional, federal, and local governments. Diagram 2 shows the tax modules with the operational SVGRTP.

Diagram 2: Operational SVGRTP with Tax Modules

Some local governments would be too small to have accounts with a CB, however they will always have a relationship with a government that will have an account.

Immediate access to tax funds will be a strong selling point for the SVGRTP. Further with the right treaties in place to cooperatively assign jurisdictions for prosecution of criminal cases arising from the use of the SVGRTP, most objections will be from those lobbied to protect the profits of the status quo firms. 

Next Blog: Either a feed back loop for the SVGRTP connected to a government treasury, or, a generic payment hub for less.

No comments:

Post a Comment