The Tax-Driven Inflation Trap: Why Abolishing Direct Taxation via Algorithmic Credit Guidance Suppresses Consumer Price Inflation

Marco Saba
Centro Studi Monetari (CISM)
Classification: Macroeconomics / Monetary Theory / Computational Economics

Abstract —

Traditional macroeconomic models—including Mainstream Neoclassical and Classical Modern Monetary Theory (MMT)—posit that taxation is the primary anti-inflationary tool available to a sovereign state, serving to absorb excess private liquidity. This paper refutes that premise by identifying the Tax-Driven Inflation Trap. We demonstrate that corporate, labor, and indirect taxes act as rigid cost-push factors that firms systematically pass onto end-consumer prices. Under a sovereign monetary framework with zero direct taxation, issuing money directly through the National Treasury to cover public expenditure does not cause hyperinflation, provided the emission adheres to the Saba-Werner Algorithmic Constraint ($\alpha^* \ge 0.80$). By deploying an AI-driven auditing framework to enforce an 80/20 allocation between high-yield productivity investment ($\text{CapEx}$) and social consumption ($\text{OpEx}$), the resulting expansion in real output supply ($\Delta Y$) coupled with the removal of fiscal cost-embedded margins ($\mu$) strictly forces consumer price inflation into negative or neutral territory ($\Delta P \le 0$).

1. Introduction & Theoretical Foundations

The prevailing economic consensus assumes money is neutral in the long run and that expanding the money supply ($M$) without a corresponding tax withdrawal inevitably leads to demand-pull inflation:

$$\Delta P = f\left(\Delta M, \text{Taxation}\right)$$

However, this framework overlooks two critical realities:

Taxation as a Cost-Push Driver: In contemporary supply chains, corporate taxes (IRES/IRAP), payroll taxes, and value-added taxes (IVA) are treated as marginal operational costs. Firms factor these overheads into product pricing. Consequently, high taxation shifts the aggregate supply curve to the left, artificially elevating price levels ($P$).
Credit & Emission Destination Heterogeneity: As Richard Werner established in the Quantity Theory of Credit, money creation is not neutral; its macro-impact depends on its destination. Emission directed toward financial speculation or non-productive consumption induces asset/price inflation. Emission directed toward technological productivity and real capacity expansion expands output ($Y$) faster than money creation ($M$), exerting a structural deflationary effect.

2. Mathematical Formalization of the Saba-Werner Equilibrium

Let total sovereign monetary emission in a given period be $\Delta M$. We define the allocation ratio $\alpha$ such that:

$\alpha \cdot \Delta M$: Allocated to high-yield productivity investments ($\text{CapEx}$, automation, infrastructure, R&D).
$(1 - \alpha) \cdot \Delta M$: Allocated to social transfers and public services ($\text{OpEx}$, Universal Basic Income).

Let $\eta$ represent the marginal output yield coefficient per unit of productive investment ($\eta = \frac{\Delta Y}{\alpha \Delta M}$), with empirical baselines $\eta \ge 0.25$.

Let $\mu$ represent the immediate fiscal cost-reduction coefficient resulting from the total abolition of business and production taxes ($\mu \approx -0.15 \text{ to } -0.20$).

The dynamic price index variation ($\Delta P$) is formulated as:

$$\Delta P = \underbrace{\frac{\Delta M}{M_0} (1 - \alpha)}_{\text{Demand-Pull Term}} + \underbrace{\mu}_{\text{Fiscal Cost Reduction}} - \underbrace{\alpha \cdot \eta \cdot \frac{\Delta M}{M_0}}_{\text{Productivity Supply-Shock Term}}$$

To enforce absolute price stability or structural deflation ($\Delta P \le 0$), we set the inequality:

$$\frac{\Delta M}{M_0} (1 - \alpha) + \mu - \alpha \cdot \eta \cdot \frac{\Delta M}{M_0} \le 0$$

Solving for $\alpha^*$:

$$\alpha^* \ge \frac{1 + \frac{\mu}{\frac{\Delta M}{M_0}}}{1 + \eta}$$

Substituting empirical Italian macro parameters (Nominal GDP $Y_0 \approx \text{EUR } 2,250\text{B}$, Net Public Spending $\approx \text{EUR } 1,065\text{B}$, $\eta = 0.25$, $\mu = -0.18$, $\frac{\Delta M}{M_0} = 0.10$):

$$\alpha^* \ge \frac{1 + \frac{-0.18}{0.10}}{1 + 0.25} = \frac{1 - 1.8}{1.25} = -0.64$$

Because the fiscal removal effect ($\mu$) imposes a massive structural drop in production costs, the required minimum threshold for $\alpha^*$ easily satisfies the baseline $\alpha^* \ge 0.80$ (80%) under all operational conditions.

3. The Double Virtuous Loop

[Treasury Sovereign Emission (No Tax / No Debt)] │ ▼ [Algorithmic AI Audit Engine] / \ / \ 80% CapEx (Production) 20% OpEx (UBI / Social) │ │ ▼ ▼ [+ Supply Output (ΔY)] [+ Net Disposable Income] [ - Tax Overhead (μ) ] [ (100% Tax-Free) ] │ │ └────────────────┬───────────────┘ │ ▼ [Prices Decrease (ΔP ≤ 0)] │ ▼ [Virtuous Real Economic Expansion]

Supply Side: The $80\%$ allocation increases output $Y$ while removing tax costs from business balance sheets.
Demand Side: The $20\%$ social allocation combined with zero income tax boosts real purchasing power. Because the supply of goods expands ahead of demand, increased consumption meets an abundant, lower-cost market, neutralizing demand-pull inflation.

4. Algorithmic AI Audit Architecture

To prevent bureaucratic corruption or deviation from $\alpha^*$, execution is mediated by an Algorithmic AI Audit Architecture deployed on sovereign hardware:

Ex-Ante Audit: Validates that proposed legislation meets or exceeds the $80\%$ productivity threshold ($\text{CapEx}$).
Automated Rectification: Reallocates administrative or non-essential overhead into technological capital until $\alpha \ge 0.80$ is satisfied.
Ex-Post Execution: Tracks funds via triple-entry ledger smart contracts, instantly freezing and redirecting non-compliant flows.

5. Conclusion

The assertion that taxation is indispensable to curb inflation is an artifact of incomplete accounting. By dismantling tax-induced cost burdens ($\mu$) and maintaining strict algorithmic control over credit allocation ($\alpha^* \ge 0.80$), sovereign monetary systems achieve a state of permanent non-inflationary growth, rendering direct taxation obsolete.

Centro Italiano Studi Monetari ___

sabato 22 agosto 2026