Investigating the effect of tax on money on macroeconomic variables in a closed economy using the agent-based general equilibrium model

Purpose: One of the most important Islamic taxes is zakat, and one type of that is “zakat on cash”. Some contemporary jurists believe that what is meant by “Naqdein” in Islamic taxes is the common currency. Therefore, zakat also includes fiat money. Considering that “zakat on fiat money” and “prohibition of usury” are two important indicators of the Islamic monetary system, this study presents a monetary system to replace the current system. The economic consequences of this system are analyzed in a general equilibrium model. In this system, a tax is collected from the monetary balances of individuals in each period and distributed among the lower classes of the society. This tax plays the role of interest rate in the current monetary systems and motivates the owners of cash to lend their surplus money. Therefore, in the proposed monetary system, financing of companies is done by banks based on interest-free loans. It is also assumed that, by imposing regulatory taxes, the government will prevent people's excess money from flowing into the asset market.
Methodology: Due to the lack of documented experience of implementing the proposed system, the only way to investigate the economic effects of the proposed system is to use economic models. The model used in this research is an agent-based model (ABM) that simulates a closed economy. A computer simulation model of a real economy is provided, and experiments are designed and implemented to understand the behavior of the system or to evaluate various strategies related to the system. This model is implemented by the netlogo software. Through running the model in 2000 periods and reaching a stable state in the current monetary system, the model changes and operates based on the institutional relations of the proposed monetary system. In this case, it will continue for 3000 periods. The output of the model is graphs related to macroeconomic variables such as GDP, total consumption, investment, Gini coefficient, welfare, etc. This shows the change process of these variables in the two modes of the conventional monetary system and the proposed monetary system.
Findings and Discussion: The outputs of the model are shown in the table below. As the model outputs show, 1) the level of production increased and unemployment decreased, 2) the price of capital goods increased significantly, 3) income inequality and wealth inequality decreased, 4) economic welfare improved based on Sen’s welfare function, 5) poverty in the lower classes of the society disappeared, 6) a prosperous class emerged in the society, 7) economic stability improved, and the range of economic fluctuations decreased, 8) the speed of money circulation increased, and the need for liquidity decreased, 9) the number of bankrupt companies decreased in each period, and companies experienced more stability, and 10) due to the increase in the stability of the companies, the resources allocation in the companies was more optimal; then, the need for investment decreased.
The analysis of these results shows that 1) the redistributive effects of the money tax serve as an automatic demand-stimulating mechanism and lead to an increase in the level of production, reduction of unemployment and elimination of poverty, 2) this redistribution system also acts as a self-regulating stabilization mechanism; by transferring money from the producer side to the consumer side in recession conditions, it will stimulate demand and lead to economic prosperity, and 3) due to the decrease in the cost of investment (interest-free loans) and the increase in the income of the companies due to more production, the profits of the companies have increased, which has led to the creation of a prosperous class of capitalists.
Conclusions and Policy Implications: The results of the model show that taxing on money balances and redistributing it among the lower classes of the society can be an alternative for the current monetary system. This monetary system is more compatible with Islamic principles and has higher economic efficiency. Also, since most of the money in the current economy is in the form of bank credit, tax collection and distribution of costs cannot be done easily. On the other hand, it seems that Islamic banking based on interest-free loans is possible only on the condition of changing the monetary system in the way discussed above.