Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity breeds austerity and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

As you read this article, remember this equation. It’s a fundamental equation in economics: Gross DOMESTIC Product = Federal Spending + Private Investment and Consumption + Net exports. This formula tells you a domestic economy (GDP) cannot grow unless the domestic money supply grows. That’s simple math.

New York Times
Italy Tries Raising the Social Stigma on Tax Evaders
By Rachel Donadio and Elisabetta Povoledo

ROME — On a recent morning, Maurizio Compagnone, an employee of Italy’s internal revenue service, stood before a classroom of middle school students in a leafy neighborhood here, preaching the virtues of paying taxes.
Mr. Compagnone is one soldier in a battle — often uphill — to persuade Italy’s famously tax-evading citizens to pay up. Such efforts, along with a new blitz of public service announcements trying to raise the social stigma on tax evasion, have become crucial as Italy struggles to reduce its $2.5 trillion public debt and fend off speculative attacks.

The tax authorities say Italy loses an estimated $150 billion a year in undeclared revenues, while the national statistics authority places the underground economy to be about 17.5 percent of gross domestic product — the third highest in Western Europe after Malta and Greece but before Spain. Other experts place the percentage much higher.

To tackle the issue, Prime Minister Mario Monti’s new $40 billion austerity package, which received final approval on Thursday in the Senate, includes tougher measures that will allow tax officials to peer into Italians’ bank accounts to check declared income against bank deposits — not to mention yacht, car and home ownership — under a new cross-referencing initiative.

Italy is a monetarily non-sovereign nation. It uses the euro, over which it has no control. The statement, “Italy loses an estimated $150 billion a year in undeclared revenues. . .,” is incorrect. When Italians pay taxes, euros flow from the private sector to the public sector. But Italy, as a nation, neither gains nor loses euros.

Remember, Italy’s GDP = Federal Spending + Private Investment and Consumption + Net exports. To grow the economy, it is necessary to increase overall spending, which requires adding to the money supply. Sending money from the private sector to the public sector does not increase GDP.

A Monetarily Sovereign nation easily is able to increase GDP, i.e. increase overall spending, via increases in government deficit spending, which increases the supply of its sovereign currency. Italy (and indeed all monetarily non-sovereign governments) has no way to increase its supply of currency other than by increasing exports.

Increasing government tax collections may temporarily help solve government debt problems, but it impoverishes the private sector. Austerity = poverty.

Many Italians approach tax evasion with true delight, taking pride in outsmarting the system, aided by books sold online and by Italy’s 113,000 tax accountants. Many Italians say rule-breaking is a question of survival. “When I first opened my restaurant, my accountant sat me down and told me that if I wanted to pay all my taxes, I might as well close up shop immediately,” said Giuseppe, a restaurant owner in Rome who said he was a basically honest person who had been “forced to evade taxes” because of Italy’s costly fiscal system.

The above is a succinct statement of the problem for monetarily non-sovereign governments. They cannot survive long term without having money come in from outside their borders or by impoverishing their own citizens.

Business associations have urged the (Italian) government to reduce the tax burden for companies and workers and raise it on assets. This month, the governor of the Bank of Italy, Ignazio Visco, said that Italy’s tax burden had risen to 45 percent over all and called for urgent reforms to help lower it.

Visualize a group of starving people locked in a room with 1 lb. of food. The Italian “solution” is to move the food from one side of the room to the other. No matter how many times they move the food, there still isn’t enough food. Collect more taxes and there still won’t be enough euros in Italy.

Massimiliano D’Angeli, a criminal defense lawyer, said he believed that if more services like those provided by lawyers, plumbers and electricians were tax deductible rather than subject to the nation’s 23 percent value-added tax, people would have an incentive to ask for receipts. Instead, many workers and professionals offer a “VAT (Value Added Tax) discount” for payment under the table.

In spite of Mr. Monti’s approval ratings, there is widespread skepticism that the anti-evasion measures will work. Asked why Italy had had so much trouble cracking down on evasion, Bruno Tinti, a former prosecutor turned journalist specializing in the black economy, had a simple answer: “Tax evaders vote, that’s the problem.”

VAT is a government’s desperate effort to collect take money out of the private sector, with the least appearance of a tax increase. Like most taxes, it hits the lower income classes heaviest, because they spend proportionately more on taxable goods and services, while the upper classes spend more on investment products.

The euro nations’ problem is not that of tax collection. It is a very simple truth: GDP growth requires money growth, and taxing does not grow the domestic money supply. Period.

There are but two methods for growing the money supply:

1. Be a net exporter, which all nations cannot do, simultaneously
2. Central government deficit spending, which monetarily non-sovereign nations are unable to do for very long.

This is a lesson the deficit-cutters in America have not yet learned. GDP growth requires domestic money growth, which requires federal deficit spending. If you don’t grow the domestic money supply, it mathematically is not possible to grow GDP.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports