What tax, money, inflation and banks actually mean

Taxes and printing are not solutions. They are two ways of sending the bill for a loss that has already happened. The real solution is for the loss not to happen: the house that is built is used, the loan is repaid, the forest does not burn, the war is not started. Once the real thing is gone, every clever arrangement of money is only a decision about who goes without.

Some losses cannot be prevented. A drought comes, a virus comes. For those, the answer is a buffer built in the good years: the bank’s own capital, the state’s reserves, the family’s savings, the insurance paid before the fire. Somalia’s hagbad and Kenya’s chama are exactly this, built by people who knew nobody else would carry them.

One rule follows from it: whoever takes the risk must hold the loss. A bank that keeps its own skin in the loan lends carefully without being told. Go back to Model 2, set the bank’s own money to 15% and press A crisis: the same crisis becomes an expense.

Prevention has a price, and the price is that it is paid now, in full view, while the crisis it prevents stays invisible. Capital set aside is lending not done, growth not had, bonuses not paid and votes not won. In a boom, prevention looks like cowardice, and the people who insist on it are replaced by people who do not. That is why societies under-prevent almost everything, from banks to climate.

Careful is not the same as stingy. What prevents always looks like an unnecessary expense while nothing is wrong: maintaining the bridge, the reserve in the bank, the doctor who waits for the epidemic. Cut those to save money and you are building the next hole. The rule is not to spend less. It is to pay for what stops losses, and refuse what only moves money from one pocket to another.

And debt is not the enemy. A country where nobody borrows builds nothing. The loan for a port that pays for itself is wealth; the loan for consumption that disappears is the hole. Norway put its oil money into a fund instead of spending it. Botswana saved its diamond money and has never had a coup.

Why tax at all, if the state can create money? Because the state has no money of its own. It is not a rich person standing beside the households. It is the households, organised. Everything it spends comes from one of three pockets.

There is no fourth pocket. Seen this way, the tax that fills a bank hole is a repayment. The hole is money that was born with the loans and should have died when they were repaid. The borrower did not repay, so the taxpayers do it in his place. Skip that, and the money dies through prices instead. Let the bank fall, and it dies on the savers’ accounts. The cancelling always happens. The only choice is on whose account.

There is one way the public gets its money back. The state takes over the fallen bank, fills the hole, runs the bank until it is healthy, and sells it. Sweden did that in 1992 and got most of the money back. It only needs a state honest enough to own a bank for ten years without looting it.

Tax has always been a way to see and steer people, not only to pay for things. Africa knows this better than anyone. The colonial powers brought hut taxes and poll taxes that could be paid only in their money, and the only way to get that money was to work on their plantations and in their mines. The tax built nothing. It pushed free people into wage labour and onto a register. Sierra Leone rose against the hut tax in 1898.

But the grip runs both ways. A state that lives on tax needs its citizens. It has to explain itself, keep them working, and sooner or later ask them. That is where parliaments came from: no tax without our say. A state that does not need tax, because it lives on oil, aid or the printing press, does not need you either. Siad Barre’s Somalia lived on aid and the printing press, not on Somali taxes, and so never had to answer to Somalis. It is the Rule of One that the second half of the book is about.

Imagine a different system. The state builds the hospital by paying the builders with money it creates, pays the doctors and nurses the same way, and lets that money circulate. Banks no longer create money. They lend only what people have saved, on hard terms: pay it back, or no loan. The money stays alive instead of being born and killed with every loan. And because there is only one tap, with its figure published every year, everyone can see if someone opens it too wide.

This idea has a name. It was the Chicago Plan of 1933, later called sovereign money, or Vollgeld. Economists at the IMF worked it through in 2012 and found that it works on paper. Iceland’s government had it studied in 2015. Switzerland voted on it in 2018, and 75.7 per cent said no, mostly because the banks frightened people.

The hardest part is the first. If politicians decide how much money to create, they will create more before every election, and we are back at the printing press. So the tap must be held by someone who is not standing for election, under a rule written in advance. The system is exactly as good as the one who holds the tap. That is true today as well, but in this system it shows.

And tax does not disappear. The amount of money is a sum, but the state’s spending is a flow: salaries, pensions and schools, every month. If the state created all of that new every month, the money would grow by the whole budget each year. In Sweden that is about half of everything the country produces: not two per cent a year, but fifty, and hyperinflation within a few years. Tax is the return lane. The state pays the nurse, the nurse pays tax, the state pays the nurse again. The same money goes round, and the sum stays still. Remove the return lane and the circle becomes a spiral.

Can a growing Africa invest before it has saved, without inflation? Yes, exactly as long as there are idle hands and unused materials. Money created to put unemployed young people to work building a road of local stone buys something that would otherwise not exist. Nobody lost anything, so no price has to rise. Keynes saw this in 1936, and it is the whole secret of creating money. Africa has more idle hands than any place on earth.

So plan, but plan in real things, not in money. The list is a list of hands, materials and skills: do we have the masons, the cement, the nurses? If yes, create the money and build. If no, the money only raises the price of what we already had.

And every list has two columns. A state can create shillings. It cannot create dollars. Machines, medicines, steel and lorries from abroad are paid for with dollars, and only exports earn them. Ethiopia built dams and railways this way and got inflation of twenty to thirty per cent and empty dollar reserves, because the list was full of imports. China did the same and succeeded, because it made its own cement, steel and machines, and earned its dollars by exporting. Same plan, opposite result. The difference was which column the things stood in.

A plan handles the big, visible things: hospitals, roads, power stations. It cannot handle the millions of small ones: the tailor, the lorry owner, the woman with two cows. No planner knows what they need. Loans and savings circles have to discover that. The Soviet Union tried to plan it all and got queues and empty shelves.

And tax shrinks, but it stays. It is what makes room for the state’s purchases, and it is what makes the state have to ask you.

A well-run country like Sweden is close to the model already. The state’s own purse is in order: public debt is around a third of GDP, among the lowest in Europe, and a surplus rule forces saving in good years. Banks must hold their own capital against their loans, among the toughest requirements in Europe. Since 2022 they pay into a fund meant to take the next hole before taxpayers do. A homeowner still owes the rest if the house sells at a loss. And the bank rescue of 1992 cost in the end only a fraction of a year’s budget, because the state sold the banks again.

The weaknesses are elsewhere, and they are concrete.

So Sweden’s problem is not a state that wastes or prints. It is that the hole is built privately, with the state’s help, while what would have prevented losses was cut to make the budget look good. And who pays for it? The one with a wage and no loan, in four ways. In advance, through the interest deduction, paid from everyone’s taxes, renters included. Continuously, because the property fee is capped, so a house worth ten million pays about the same as one worth two, while wages are taxed from the first krona. Afterwards, because if the hole becomes large, the state stands behind the banks. And in silence, if you rent: cheap loans push up home prices, rents follow, and there is no deduction for rent.

This is not an accident. It is how the rules are drawn, and they are hard to change because those who gain from them are more than half of the voters.

Should the rich carry more? Start with a correction: the tax is not split evenly. It is split in two different ways.

On work, Sweden is one of the most progressive countries in the world: municipal tax on everything, and above roughly 53,000 kronor a month a further 20 per cent to the state, so a high earner pays over half at the top. On wealth it is almost the reverse. The wealth tax was abolished in 2007, the inheritance tax in 2004, the property tax in 2008. Capital income is taxed at a flat 30 per cent, the same for ten thousand in the account as for a billion, and in the investment savings account (ISK) lower still. That is why the very richest, counted on their whole income, can pay a smaller share than a nurse. Sweden has low income inequality and one of Europe’s highest wealth inequalities.

The rich can contribute more: houses taxed by value, inheritances, capital income on a rising scale, and there are economists who argue for exactly that. The price is the risk that capital leaves and that homeowners punish whoever tries. Which price is worth paying is a political choice, and you must weigh it yourself. But the tax today is not split evenly.