Inequivalence Theorem: Should I Stay or Should I Go?

Ricardian Equivalence

When governments fund their visions by issuing debt insturments (as opposed to using collected taxes), there is an expectation that this debt will be repaid via higher taxes at some point in the future.

Rational taxpayers will therefore reduce their own consumption to increase their savings in anticipation. At least, that was the hypothesis behind the Ricardian equivalence proposition, a theory based on the work of David Ricardo (later popularized by Robert Barro in the 1970s).

Though even Ricardo acknowledged that taxpayers are anything but rational.

While reality failed to validate this claim, the reasoning behind the idea was sound. At a time when mobility was limited and the consequences very real for non-payment of taxes, subjects had reason to be concerned about the state of their governments' finances. As ultimately, the burden would be shared.

Fast forward to the present day where things have certainly changed. Migration is commonplace and a growing number of people have a growing number of options.

No longer can governments think of their skilled populations as a jurisdictionally-captured stream of future tax revenue.

“If there is an escape, that escape will be used.” —Christine Lagarde

The Inequivalence Theorem

When taxation becomes burdensome without a realistic end in sight, individuals with the capacity to permanently exit a jurisdiction can be expected to.

“In the Information Age… the rational person will not respond to the prospect of higher taxes to fund deficits… Sovereign individuals and other rational people will flee jurisdictions with large unfunded liabilities.” The Sovereign Individual

As Davidson and Rees-Mogg predicted more than two decades ago, the rise of the sovereign individual is taking shape thanks to a number of innovations that can be traced back to the birth of the microprocessor.

As communication, knowledge, and capital began a trajectory of ever-increasing velocity and reach, the leverage of the individual would grow at the expense of the state.

The structure of the modern nation-state is rooted in an analog era and is on track to be tested as both talent and capital become truly mobile. Talent in the sense that jurisdictional arbitrage naturally results in countries competing with one another to lure the skilled and productive, offering incentives and reduced bureaucracy. Capital in the sense that countries also compete for foreign investment.

The Death of Seigniorage

By now you've likely already connected the dots as to how bitcoin fits into this picture. It not only represents a major advancement in the mobility of capital (as the world's first truly censorship-resistant value network) but as an entirely new form of capital completely removed from the moral hazard inherent in government (enabled by central banking).

They cannot inflate that which they did not create.