To discuss fiscal policy, it is necessary to first clarify the role of the state. However, the concept of the state, which we have taken for granted as a given existence since birth, is a relatively new concept. The modern state generally refers to the nation-state.
The origin of the nation-state is said to lie in the American War of Independence and the French Revolution. It is a concept established in the seventeenth or eighteenth century, at most three hundred or two hundred years ago, and naturally, the concept of the nation was also established during the same period. Before that, sovereignty lay with the lords, and the subjects were vassals, servants, subjects, and serfs, not what we now call citizens. At that time, fiscal policy was the court treasury, which was entirely different in concept and purpose from the current fiscal and financial policies. However, even now, it is heavily influenced by the ideas before the establishment of the nation-state. Before the establishment of the nation-state, fiscal policy was mainly for military, security, court treasury, and diplomacy. In other words, it was the cost of ruling the country, and taxes and national bonds were merely means for the purpose of ruling the country.
The functions of the nation-state include:
- Legislation
- Judiciary
- National defense
- Security
- Disaster prevention: investment in firefighting and disaster prevention
- Diplomacy
- Education
- Redistribution of income
- Construction and maintenance of social capital
- Maintenance and management of the monetary system
- Promotion and enhancement of industries
- Economic stability
- Management and maintenance of markets
- Preservation of labor environment and protection of workers’ rights
- Management of family registers
- Social insurance, pensions, unemployment insurance
- Welfare, elderly care system, social assistance, disaster victim protection
- Establishment and maintenance of the medical system
- Environmental conservation: preservation of the living environment
- Management of national assets
Before the nation-state, functions other than legislation, judiciary, national defense, security, disaster prevention, and diplomacy were not emphasized.
The fiscal policy of the nation-state aims to protect the rights and duties of the citizens, the independence of the state, and the lives and property of the citizens, as the citizens are the sovereigns. Forgetting this leads to a disorganized fiscal policy without a master, which eventually collapses.
Citizens need to keep this in mind.
The roles of fiscal policy in a nation-state include:
- Collaborating with financial institutions to produce “money” and supply it to the market.
- Financially supporting the role of the state.
- Circulating and controlling “money” in the market.
- Redistributing income to correct income disparities and imbalances.
- Providing benefits to those who cannot work and thus cannot earn an income.
- Ensuring that all citizens can live.
- Correcting market distortions.
- Nurturing industries and stabilizing employment.
- Establishing systems for trade with foreign countries.
- Implementing economic measures and stabilizing prices.
- Securing essential resources for living and stockpiling them in preparation for disasters. Operating systems for the welfare of citizens.
- Directly supplying funds to work that cannot raise funds from consumers in the market. Strengthening social capital.
- Establishing systems to crack down on economic crimes, such as commercial law and securities regulation.
- Establishing systems for the redistribution of income.
The means to fulfill these roles are taxes, public investment, and administrative services.
In terms of fiscal policy, revenue includes not only taxes but also business income, loans, and deposits. The purpose of expenditure is to realize the founding principles of the nation, which are fundamentally based on the constitution. Expenditure items include grants, subsidies, public investment, and administrative expenses (including defense, education, research, police, disaster prevention, etc.).
Especially, the redistribution of income and the construction and maintenance of social capital are the foundations of the nation-state.
The monetary space formed its own space and field when money changed to fiat currency. In other words, the monetary space became independent from the physical space and formed a negative space.
Physical money was merely a medium of exchange, but with the separation and independence of the monetary space, money began to function as a virtual space.
The essence of taxes changed as all taxes were replaced by monetary payments. Taxes were separated from physical constraints and changed to economic functions.
Taxes also changed from the idea of a certain percentage of harvests, as in the era of tribute, to an evaluation based on work such as income, results, and working hours, and the taxable items changed accordingly. This made large-scale public investment possible. Also, the equipment of the military was greatly innovated.
The important thing is the redistribution of income, which is an indispensable function for achieving the goals of the state. In other words, it is about embodying how the lives of the citizens should be. The redistribution of income is determined by the way taxes and benefits are structured. The subjects of taxation, the use of taxes, and the method of benefits clarify the national ideology.
Taxes reflect the state of the citizens. Therefore, it is necessary to have a flexible system that can adapt to the environment in which the citizens are placed. The long-term plan for the nation and social capital must be planned based on the national vision. Public investment tends to become vested interests and privileges. However, if public investment becomes vested interests and privileges, it will rigidify the finances and the economy.
Tax collection incurs significant costs. Moreover, the effect of taxes varies greatly depending on how they are used.
What must not be forgotten is that the purpose of income redistribution is to correct distortions, biases, and inequalities in distribution. Simply changing the tax system with the aim of increasing tax revenue will instead distort the finances.
“All economic activities are converted into monetary terms and subjected to taxation. This is made possible by paper money as a representative currency.
It has become possible to tax not goods, but actions and activities.
The fiscal system has some financial functions. One of these is the redistribution of income and the social insurance system. This is one of the important functions of the fiscal system.
With the transition of all taxes to monetary payments, a monetary space was formed, making it possible to convert economic activities into monetary terms. This led to a transformation of the economic base. The catalyst for this change was the issuance of paper money
By being able to convert all economic activities into monetary terms, it became possible for monetary value to measure all economic activities
When money, which was merely a means of exchange, forms its own space, its function begins to drive the economy. Consequently, taxes need to be designed based on the way money functions. For example, should the tax base be transactions, income, harvests, assets, consumption, goods and services, or people? This depends on the function of transactions and income.
It is important to remember that the objectives, principles, standards, and concepts for evaluating the economic effects of management differ fundamentally between public finance and private enterprises. They cannot be compared using the same criteria. This point must be fully considered when formulating fiscal policies.
Public finance is characterized by, first, a cash basis; second, an annual balance principle; and third, a legal budgeting principle. Private enterprises, on the other hand, are characterized by, first, an accounting basis (accrual basis); second, a long-term balance principle; and third, a profit principle.
The major difference between the accounting basis and the cash basis is that the cash basis records the repayment amount of debt, while the accounting basis does not.
Taxes are not directly linked to household consumption but are a consideration for work that benefits society as a whole. Accounting is a means of measuring the economic quantities of management.
Taxes are a means of distribution and have the nature of a public institution’s share. This is one of the reasons for tax collection. Some argue that if the government has the authority to issue currency, there is no need to collect taxes, but this is because they do not understand the relationship between taxes and currency. Currency and taxes are not merely means of distribution but also means of measuring and balancing economic activities.
The primary purpose of taxing income is income redistribution.
Taxes on sales are like taxing the harvest.
In the Edo period, taxes were in the form of annual tribute, where a certain percentage of the harvest was paid to the authorities. This was referred to as “four parts to the public, six parts to the people” or “five parts to the public, five parts to the people.” In modern terms, it would be like handing over 40% of sales. This system worked because it was paid in kind and because of the family-oriented system, which incurred no costs. As long as people were given enough to live on, they could survive. Tenant farmers were provided with housing, and if they needed money, they could work for the landlord or send their children into service. Sending children into service was a way to obtain some cash and reduce the number of mouths to feed. In rural areas at that time, cash was not much needed. However, when taxes were paid in cash, this was no longer the case. People needed cash and went out to work, which led to the impoverishment of rural areas. As a secondary reaction, the accounting system was introduced, and all economic activities were converted to monetary terms and became taxable. This enabled the national state to cover its enormous budget.
Taxes on profits are like dividends. Few people correctly understand what profits are. To correctly understand profits, it is necessary to understand the flow of cash and its relationship with income and expenditure. Some people mistakenly believe that capital and internal reserves mean there is a surplus of cash. Capital and internal reserves are nominal accounts and not assets. To understand the function of nominal accounts, it is necessary to correctly understand the relationship between liabilities, capital, and profits in connection with income and expenditure. If taxes are not levied with a correct understanding of the relationship between liabilities, capital, and profits, the financial foundation of industries will be destroyed.
This is exemplified by the Japanese economy after the bubble burst.
Consumption tax is like a share of the overall economic activity.
Neither land, cash, nor physical assets generate income just by being owned. If taxes are levied on such physical assets, people will use land as collateral to borrow money and invest to earn income equivalent to the tax. In other words, asset taxes stimulate investment activities, and if excessive, they create bubbles. Inheritance tax is also a type of asset tax.
Taxes on people have the effect of drawing out labor.
Economic activities and ethics have the same root.
The monetary space formed its own space and field when currency changed to fiat money. In other words, the monetary space became independent of the physical space and formed a negative space.
With the transition of all taxes to payment in fiat money, the monetary space was formed, making it possible to convert economic activities into monetary terms. This transformed the economic base, and the issuance of currency was the catalyst.
Physical currency was merely a medium of exchange, but with the separation and independence of the monetary space, currency began to function as a virtual space. The ability to convert all economic activities into monetary terms made it possible to measure the value of currency in all economic activities.
The essence of taxes changed with the transition to payment in fiat money. Taxes were separated from physical constraints and became economic functions.
When currency, which was merely a means of exchange, forms its own space, the function of currency begins to drive the economy. This necessitates designing tax targets and systems based on the function of currency. For example, whether to tax transactions, income, harvests, assets, consumption, goods and services, or people depends on the function of transactions and income.
Taxes are no longer thought of as a percentage of the harvest, as in the era of in-kind payments. They have transformed into evaluations based on functions such as profits, results, and working hours, and the tax targets have changed accordingly. This has enabled large-scale public investment and significant innovations in military equipment.
The proportion of military expenditure in the gross national product, which is not directly linked to household consumption, needs to be carefully monitored. Excessive military spending can burden the lives of citizens and ultimately make the nation more belligerent. Military superpowers eventually collapse under the weight of their own military expenditures.
This is also shown by God.
The military tends to self-propagate and is deeply intertwined with industry, posing the risk of becoming entrenched interests and vested rights. Therefore, military personnel are required to have a noble sense of mission and ethics. This is because the foundation of a nation’s establishment and existence lies in national defense.