Tag Archives: economics

Money pooling based on random tiered payout

This idea was created in response to the recession. The goal was to inject cash into the economy as rapidly as possible. A reaction to the “shovel ready” bureaucratic approach.

I subsequently found that this is not an altogether new idea. Perhaps the tiers and random elements are something new.
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Abstract
To accelerate the velocity of money flow for economic stimulus, a payout of a pool of money among contributors randomly placed in payout level tiers is advocated. The randomness of selection and increased frequency of payout creates a network effect that increases demand for goods and services. This will also have social benefits by increasing morale and unity of purpose, unlike present political inspired economic approaches.

Key words: Taxes, Economy, Unemployment

Reverse Taxes

Taxes are a necessary evil. One purpose of taxation is to fund social services that benefit all. For example, taxes pay for road maintenance. The street in front of my house gets repaired because my neighbors and I pay our taxes. However, if my own driveway needs maintenance, I have to fund that since only I own it and gain value (well, the bank owns it still, details). Yet, if I don’t maintain my driveway and it becomes a dangerous eyesore and attracts vermin, not only will my standard of living suffer, but eventually my neighbors will too: esteem, property values, and so forth. So, it behooves my neighbors to either drive me out with flaming torches and pitchforks or more civilly, encourage me to get with the program.

The problem is that families, especially in today’s economy, are not able to attend to many issues in a timely manner. They are cash strapped and, unfortunately, consumer fixated. Regardless of the reasons, there are personal as well as social-economic reasons for this. Even certain Wealth based religions and philosophies have a hand in making this situation worse.

A reverse tax is a tax that instead of going to a government agency, goes directly to private tax payers. These tax payers choose on their own what to do with it. Some will splurge, drink, or go further into debt. However, many will choose to act responsibly and improve their lives and immediate environment. Regardless of what they do, the funds will be quickly injected into the economy.

With Stochastic Reverse Taxation Subsidization (SRTS), funds can be made available that bypass the “public” route, where the individual directly chooses what needs to be funded. Since in each period those receiving payout are random (but everyone will get paid), the odds are that a portion of these people will buy goods and pay for services. This will increasingly stimulate demand with each period.

This is a direct application of changing one aspect of a system to influence the whole. In this case we are increasing the velocity of money. Instead of top-down approaches, a direct mid-level insertion is made. Thus, money is exchanged quicker, spread more rapidly without the red-tape and bureaucratic siphoning.

Implementation

Mathematics

Just how much would be available? There were 144,103,375 individual income tax returns in FY 2009. If we include the disenfranchised and those in the in the underground or shadow economy, the actual number of people who “could” file are actually much larger. Let’s just make it 200M. (the population of the USA is about 310,409,288 people). If we make the contribution $42, that is 13,037,190,096 about $13 Billion to stochastically redistribute. Choosing 42 weeks for a campaign, we will distribute $310 million dollars a week. This does not sound like a lot, but it is the quick “injection”; it is not waiting for “shovel-ready projects” that just fatten those in the loop.

If we create four payout tiers, then it is now a simple matter to determine the number of people and how much each be allocated per week. Can it be made no-loss, that is, no one would lose their $42? Probably not. We want there to be sizable distributions. Since we want some sizeable feedback back into the general system, the top tier will get a substantial return.
• Tier 1: X1 people would each get $1 million.
• Tier 2: x2 people would get thousands.
• Tier 3: x3 people would get hundreds
• Tier 4: x4 people would just get their $5 dollars back.

The randomness comes from assigning contributors to a tier. Each cycle will create a new random assignment but with algorithms to make sure every person gets to be in each tier after a few cycles. That is, the same person will not be in the same tier all the time.

Compare this to the recent tax breaks to spur the economy. What did the normal tax payer get $50? And that is a one-time year long break, I guess that would buy a few more take-out meals for lunch.

A mathematician/economist would have to create the algorithms for this process. Maybe it is not possible to do this and make it attractive for people to join in.

Note that this is different than the fixed payout algorithms or schedules like those used at eMoneyPool or Indian Chitty pools.

The problem with conventional pools is that the incentive is reduced the more people are part of the pool since the length of the ‘campaign’ is proportional to the desired payout level.

Administration

Using the existing Tax System?

The simplest approach is to just have a new checkbox on the tax form stating that one would like to participate in the Reverse Tax System. One possibility is to use a contribution value one, five, ten dollars. The payoff would be proportional. This would be the worse approach to use if we want to stimulate the economy. For that we would need a more accelerated schedule, perhaps monthly, optimally weekly. Using the Internal Revenue infrastructure is just convenient since the tax payer information is already available.

But, the tax schedule is yearly. We need a more aggressive schedule. Weekly! Not only would this be more effective in any stimulus effect, it would make the system more attractive, since there would be more ‘churn’.

Requirements and Limitations

Non-profit

This is a stimulus package for the middle class. Thus, the Wall Street crowd should not even know about it. 🙂

Not a lottery

This approach is similar to a multi-state lottery. Many differences however. Lotteries are for-profit and there are many losers (most!). The approach suggested here is not a payment, but a temporary allocation of funds. If the math is done correctly there is minimal loss other than normal inflationary devaluation of liquid assets within the payment schedule period and administrative costs.

Tax Free

Enough with the taxes. The payouts should be tax free. They should be totally reintroduced into the system so that demand is increased.

No competition

The effectiveness of this approach would be reduced if there are competing systems. Furthermore, it would be much easier for abuse if other systems were allowed.

No new bureaucracy

Taxes, are unavoidable, but they are also a giant spigot that feeds a growing never satiated beast. Bureaucracies grow. And grow. And become less effective, so they sprout new growths, that grow. And grow.

No debt generation

There is the possibility for a family to receive a guaranteed amount within a certain time period. So, institutions and businesses would be happy to capitalize on that. For example, offering various loans or “deals”. A great example of this are pay date loan companies. These should all be disallowed. An easy way to assure this is to not preannounce or make a big deal about it. It’s not that many large payments would be optimal anyway.

How to incorporate compound interest and investment?

Traditional “chits” or money pools are for short term financial of poor or modest groups. The modern banking and financial industry is used for more long term goals. If pools are used, money that should go into interest generating investments will suffer.

History

Something I posted on my blog on December 5, 2011, with the title “Demand Stimulation By Stochastic Reverse Taxation”. I came up with the idea for a massive “chit fund” that could pay out more often in a random schedule and people would get a payout based on a tiered system.

A few years ago I had a crazy idea. What if people pooled part of their money together and then redistributed it among the pool participants? Yes, not a new idea. A form of this even appears in “Stranger in a Strange Land” by Robert Heinlein. but what I was thinking was doing this on a massive scale, very massive. What if this massive “office chit pool” guaranteed that at each distribution at least hundreds of people would get a million bucks, others would get thousands, and the rest just a few hundred?

I abandoned the idea. It would not work, for one thing, you would need a lot of people, and the more people the longer it would be for each to be in line for the big payout. Would anyone wait years putting money into the pool just so one year they can get a substantial payout just to buy some needed item? No. It would probably be more advantages to just invest the money, at least there would be an accumulating interest payment.

Another try

Ideas, sometimes even bad ones, keep coming back. See this graph: They keep coming back

On July 19, 2010, I had another thought, what if instead of a rotation, one uses a random distribution into a payment hierarchy.

One pays into the pool, and at each distribution period one is randomly placed into a payout tier and the income distributed. In subsequent draws one is not placed into the same tier as the prior draws. When everyone has participated in each tier, the cycle could be repeated.

This is more reasonable. Using randomization, payout tiers, and shorter cycles would make this more acceptable. It would be like an income co-op.

Revisiting The Idea

Months later I revisited the idea. Could this be useful as some kind of economic stimulus? A “for the people” stimulus? Something to boost employment, increase opportunity, increased morale, and motivation? Probably not, there are no Silver Bullets. But, could it help?

Further reading
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The greatest good for the greatest number over the longest run

This quote by Gifford Pinchot could be used as the root control rule for spaceship Earth.

A non-political measurable goal. Not the right to pursue happiness, that is inherently self-defeating, but rather the right to maintain happiness. Big difference.

References

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Is the emphasis on STEM careers misplaced?

Of course, all countries need to generate more people skilled in these careers. However, I was listening to Marketplace radio on NPR and this story came up about a new research paper, “The great reversal in the demand for skill and cognitive tasks”, that makes one reexamine this idea.

I don’t know how sound the research is, but, it certainly is an interesting analysis. One of the points is that high tech demand leveled off in the year 2000 and it has not bounced back, hence the highly educated (to fill that imaginary demand) wind up in lower level jobs, which cascades down.

If true, the STEM* emphasis, and the alleged skills shortage (and call for Visa expansion) would be suspect.

One thing the paper does not mention is this mobile temporary work force. Also, what about the future? Robots are coming, it is just taking longer than some thought. Will the global work force, robots, and increasingly powerful non-human digital intelligence create widespread unemployment? Will we need PHDs to flip burghers at quaint old-style restaurants?

What new political-economic theory deals with the real world as it unfolds?

Links
It’s crowded at the top: Freakonomics Radio
The great reversal in the demand for skill and cognitive tasks

*STEM: Science, Technology, Engineering, and Math.

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Open sourcing of business?

Just had a  thought.  What if like the software industry we open source business?  That is, instead of gov, private, or public we “open” it?  I don’t mean all of them of course, that would be even dumber.

Public companies are owned by the stockholders, but how many stockholders know how these companies work much less what they plan.  Not the teaming mass who own them by some institution or mutual fund.   Every so often you get some proxy request to vote for somebody to continue to be chairman of something, yet you don’t really know what to do, do you?

Just open all the records up, have voting systems for grading plans and allocations and so forth.  A kind of ‘slashbus’ .  Where a culture of meritocracy is fostered.

Well, you get the picture.   I know silly.  It was a just a thought.

Tangential Links

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999 should be 6789

The Cain 999 tax simplification is attracting attention. Well, it should. In this political climate the major candidates have not been proposing anything bold, just the same phrases, party lines, and lack of answers to specific questions.

But, perhaps the 9-9-9 plan is too bold and as some critics are writing, lays the burden disproportionally on the 99%.

My counter proposal is just as simple, 6789:

  • 6% – income on the 99%
  • 7% – sales tax
  • 8% – corporate tax
  • 9% – income on the 1% rich

That is more equitable. Of course, economists and mathematicians can tweak the numbers. Most importantly, these numbers should be part of a feedback system. Why is everything “fixed” when the world is dynamic?

Based on economic performance and quality measures, the whole sliding scale could be shifted up or down. For example, in an overheated economy it could be shifted up, and in a difficult period, like now, it could be shifted down, such as, 5-6-7-8, etc.

Further Reading

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