Re: the problem of the IRS and taxes

[Richard Moore]

Bcc: Michael Richardson

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Dear Mr. Moore,

I have been discussing local currency with Lincoln Justice for quite some time, so he forwarded this information to me.

I started a local currency back in the early 80's, and had early success, but discovered the problems with local currency when the IRS got involved.

How do we resolve the following problem?

If the community creates, for example, $20,000 worth of local currency and it changes hands 20 times in one year. The IRS will require that $400,000 be reported as gross income. If the IRS allows that only 25% of that ($100,000) is net income, and income taxes are at roughly 30% ($30,000), did the community not just trade 30,000 universal Federal Reserve Notes for 20,000 limited local notes? If the community then has to create 30,000 more local dollars just to compensate for the loss of national currency, the loss will be even greater after taxes are paid again the subsequent year. 50,000 local dollars x 20 = 1,000,000 gross income x .25 = 250,000 net income x .3 taxes = $75,000. We can see where this is going. Over time, the local community will be awash in local currency but depleted of national currency with which to pay the taxes, and necessary imported goods.

As long as the IRS wants to treat local currency like Federal Reserve Notes for calculating taxes, but is unwilling to accept local currency for paying taxes, this problem will exist.

Ithaca, NY is a prime example of this problem. They have had local currency since 1991, yet in 2007 they had the lowest per household income of the 8 cities in New York, I surveyed, and was well below both the state and national average.

If you can show me a way around this problem I will be very impressed, and the world will be in your debt.

Thank you in advance for your response.

Sincerely,

Michael Richardson

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Hi Mike,

Many thanks! I've been waiting for someone to bring up this problem. I wanted to wait until I was happy with the model before worrying about it, but I knew there'd be a problem.

I think I may have the germ of a solution, but I'm thinking as I write, so please let me know what you think. This solution employs the same kind of development logic as the Credit Bank model, and the same formula for public participation, but it accepts the fact that the IRS cannot be tricked out of its taxes. 

We forget about a separate currency. Instead of a Credit Bank, we set up a for-profit Community Development Corporation. The investors are the initial stockholders in the Corp. They invest by buying class A shares at $1 each, which are not transferrable, and they sit on the Corp's board. Class A shares are to be repurchased by the Corp eventually, yielding a fixed total profit of $1 to each investor. Investors are obligated to sell their shares back whenever the Corp chooses to buy them.

In addition, we set up a Community Investment Cooperative, which is represented on the Corp board. Local residents can join the Co-op for $1, which makes them proportional owners of the Co-op. The Co-op uses those dollars to purchase Class B shares in the Corp at $1 a share. Class A and B shares have equal voting rights on the board. When all the class A shares have been repurchased, then the Co-Op owns the Corp. The Co-op sets its policies according to an advisory process, using Creative Insight Councils and open meetings of its members. 

The Corp sets up subsidiary enterprises, the same as in the Credit Bank model. The subsidiaries retain enough of their revenues to pay their costs and to re-invest in growth. The rest is transferred back to Corp central on a weekly basis.

In the case of for-profit enterprises, they are eventually sold to their workers for $1, on the following basis: 

The sale does not occur until the enterprise is on a firm profitable basis, the returned revenues have covered the start-up costs, and the workers wish to make the purchase. At the time of the sale, we look at the profit/revenue ratio of the enterprise. Based on this ratio, as a condition of sale, the enterprise agrees to pay a fixed percentage of its revenues in perpetuity to the Corp. The ratio is important so that high-overhead enterprises are not penalized in comparison to low-overhead enterprises. The percentage of revenues is not high enough to hurt the enterprise, but it makes up for the fact that the Corp cannot simply print new money the way the Credit Bank could have. 

You might say the payment stream to the Corp is a Holy Tithe to the enterprise's Creator, paid for the benefit of the community :)

In the case of utility enterprises, they remain subsidiaries of the Corp. The Corp makes either a profit or loss from them, depending on how they were set up. A child-care utility, for example, might always run at a loss so that low-cost child care can be provided to the community. An energy utility might make an ongoing profit, since it must set its prices high enough so that people don't use energy at unsustainable levels. 

The Corp never shows a profit at the end of a quarter, because it uses all its revenues either to start up or subsidize subsidiaries, or else is distributed as dividends on its outstanding class B shares. Class A shares are not entitled to dividends. 

As the Co-op begins to take in dividend revenues from the Corp, it distributes those as dividends to its local-resident owners. This is the equivalent of issuing new credits to residents in the Credit Bank model. The Co-op never makes a profit, but the owners to, and they pay either income taxes or capital gains, depending on what the law says.

thoughts?

richard

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Current documentation:

http://groups.google.com/group/credit-bank-model/files

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