Questions About Funding Government solely with Money Creation

About a month ago I posted some comments about the platform of the Libertarian Party of Canada. (http://gordonfeil.blogspot.ca/2016/11/normal-0-false-false-false-en-ca-x-none.html). I received a well-considered response asking me to answer a couple of questions.

The reader wrote:

Your suggestion is very interesting. 

As I understand it you are basically proposing a tax reduction (money printing still creates a claim on resources in society - hence it is a tax). You also are proposing a switch from income tax towards a form of consumption tax. While you propose elimination of the GST with all its idiosyncrasies consumers would basically still be paying a consumption tax that would be driven by the elasticity of demand for various products, the impacts of supply based on assumed market growth in response to reduced taxation levels and the impact of specific government purchases on labour and goods availability. 

Your proposal would diminish the government's role in income (and wealth) redistribution in society unless there were specific subsidies to replace the progressive nature of the tax system and targeted tax write-offs (guaranteed minimum national income for everyone?). 

Your proposal would, I'm guessing, eliminate corporate taxes - which makes total sense ("artificial persons" don't pay taxes - they pass them on to real people) - but most people don't understand that (politically difficult - as I'm sure you are aware).

Philosophically I like the shift to consumption taxes as people get taxed on what they take out of the economy rather than what they contribute to the economy. 

A couple of questions I would have about your idea:

(1) It sounds like your proposal would restrict money creation to the amount of approved government expenditures

- i.e., a balanced budget (something abhorrent to most politicians!)? Since the Libertarian idea is really driving at reducing the role of government in society how does the legislated monetary expansion get set and the objectives of debt reduction and less government spending happen procedurally?

(2) How do you prevent provinces from moving in to take up the taxation room left open by the federal government?

I do not have clear answers. I don’t know everything.  Not even most things (see the second paragraph of http://gordonfeil.blogspot.ca/2016/11/what-is-reality.html). But I don’t think we should shy away from the ideas I presented merely for want of clear answers to these questions. 

I think that the first question is an issue of the federal government being clear about what it should and should not do, then pricing the Do activities, and then creating the money to pay for those. After that, they need to stick to the budget. The Libertarian approach is that government only do what is best done by government, and to allow the market (the collective result of individuals acting freely on their own decisions) the freedom to determine outcomes that the government currently tries to control. In the end, there are some things government ought to do.  For example, enforcement of rights of person and property. By the way, I don’t think incarceration is an effective methodology of carrying this out. It IS an expensive one though.

Once the government has its budget, it should only create enough money to execute it. What if some essential activity is under-budgeted? Then it waits until the next go round. Nothing to say that budgets must be done annually. Perhaps quarterly is better. That way, if a major error was made in the budgeting, it could be rectified 3 months later.

As to the second question (about the Provinces), the constitution does give the Provinces the right to directly tax, and until there are libertarian governments running the Provinces, there would be no way to curb such taxation other than people voting. Perhaps with their feet. Such voting is expensive though, and if some Provinces had absence of taxes, the Provinces who did not would likely find voters favoring the non-tax party in a subsequent election.

But how would provincial governments gain the revenue to carry out their newly limited functions? It seems to me that they could either issue a currency that was spendable within their province, or they would have to be subsidized by the federal money creation. This would make the Provinces dependant on the federal system, not a perfect solution, but perhaps there is a way to have such a system function outside of political parties.