Redesigning Public Finance Through Government-Currency Credit Creation
— A Proposal for Abolishing Taxes and Establishing a Budgetary System Independent of New Government Bond Issuance —
Summary
Abstract
This paper proposes a redesign of public finance through a new system of government-currency credit creation. The central objective is to establish a fiscal framework that can replace taxation and operate without relying on the issuance of new government bonds to finance new budgets.
- Purpose of the Proposal
This proposal seeks to establish a new system of government-currency credit creation alongside the existing central-bank currency credit-creation system.
Its objective is to abolish taxes on citizens and replace them with a mechanism through which the government directly borrows, through credit creation, an amount equivalent to the taxes that would otherwise be imposed.
Furthermore, the proposal aims to establish a system for preparing new government budgets without relying on the issuance of new government bonds, together with a mechanism for restructuring existing government debt. - Central-Bank Currency and Government Currency
This proposal distinguishes between two credit-creation systems.
Item Central-Bank Currency Government Currency
System Existing central-bank currency system Newly established credit-creation system
Credit relationship Indirectly linked to government credit through government bonds and other mechanisms The government directly borrows from citizens through credit creation
Primary role Supports the existing monetary and financial system Provides a government financing mechanism intended to replace taxation
Under the current system, the government does not borrow directly from the central bank. Instead, it issues government bonds to raise funds in financial markets. This proposal retains the existing system while introducing a separate government-currency credit-creation system. - The Principle of Replacing Taxes with Government-Currency Credit Creation
The theoretical starting point of this proposal is the interpretation of existing taxes as a compulsory financial burden imposed on citizens without a corresponding right to repayment. On this basis, the proposal holds that such a burden can be replaced by borrowing through credit creation from citizens.
This is a theoretical premise for designing a new system, not the legal definition of taxation under current law.
The proposed accounting mechanism is as follows:
• Determine the amount equivalent to each citizen’s tax liability.
• At the same time, the government borrows an equal amount from citizens through credit creation.
• Offset the citizen’s tax liability against the government’s borrowing liability in the same amount.
• Through this offset, eliminate the corresponding tax burden in the accounting process.
For example, if the amount equivalent to a tax liability is JPY 1 million, the government borrows JPY 1 million from the citizen and offsets the citizen’s tax liability of JPY 1 million against the government’s borrowing liability of JPY 1 million.
This mechanism is positioned as a system in which taxation is abolished and replaced by direct borrowing from citizens through credit creation in an amount equivalent to the taxes that would otherwise be imposed.
However, it remains necessary to determine the legal relationship between the claims and liabilities and the applicable accounting treatment, including whether the government’s borrowing liability remains after the offset or whether both liabilities are extinguished. - Preparation of New Government Budgets
Under the proposed system, new government budgets would be prepared without relying on the issuance of new government bonds.
The government would finance its budget through a mechanism that borrows, through credit creation from citizens, an amount equivalent to the taxes that would otherwise have been collected.
The distinguishing feature of this system is that it does not merely reduce taxes or set tax rates to zero. Rather, it institutionally replaces tax-based financing with borrowing through credit creation from citizens.
Further analysis is required to determine how the budget size and the amount borrowed through credit creation would be aligned, and whether borrowing equivalent to the tax amount alone would be sufficient to finance the budget. - Reciprocal Bond Issuance by the Government and the Central Bank
This proposal examines a reciprocal mechanism under which the government and the central bank each issue their own bonds to facilitate the redemption of the other party’s existing bonds.
A distinctive feature of this proposed institutional arrangement is that the central bank itself would issue bonds.
The proposal further considers redeeming the government’s existing excess of liabilities over assets through central-bank bond issuance.
The objective is not merely to cover the government budget deficit, but to redesign the structure governing the redemption and refinancing of existing government debt.
However, government debt in excess of assets is different from the outstanding balance of government bonds. Accordingly, the actual redemption targets, the amount of central-bank bonds to be issued, and the methods for extinguishing liabilities must be examined for accounting consistency. - Summary of the Fundamental Principles
The proposal consists of the following principles:
• Maintain the existing central-bank currency credit-creation system while establishing a new government-currency credit-creation system.
• Design government currency as a mechanism through which the government directly borrows from citizens through credit creation.
• Abolish taxes on citizens and replace borrowing with credit creation from citizens for an amount equivalent to the taxes that would otherwise be imposed.
• Develop a tax-free accounting mechanism in which an amount equivalent to the tax liability is borrowed at the time the liability is determined, and the tax liability is offset against the borrowing liability.
• Prepare new government budgets without relying on the issuance of new government bonds.
• Design a system in which the government and the central bank issue bonds reciprocally and use them to redeem each other’s existing bonds.
• Consider redeeming the government’s existing excess of liabilities over assets through central-bank bond issuance.
Conclusion
The central objective of this proposal is not simply to reduce taxes. It is to abolish taxes on citizens, establish government currency through credit creation from citizens, and redesign the structure of government budgeting and existing debt redemption.
Rather than completely replacing the existing central-bank currency system, the proposal introduces a new government-currency credit-creation system and seeks to establish a new framework for national public finance that includes central-bank bond issuance.
The contents presented here constitute a conceptual institutional proposal. Further examination is required regarding the legal basis for credit creation, the accounting treatment of claims and liabilities, the circulation of government currency, the effects on prices, and the financial responsibilities of the central bank.