Minneapolis Fed Advocates for Bitcoin Ban or Tax to Control Deficits

In order to control ongoing primary deficits, countries should either outlaw Bitcoin or tax it, according to a recent report from the Federal Reserve Bank of Minneapolis. Researchers Amol Amol and Erzo G.J. Luttmer contend in their working paper that Bitcoin presents a threat to government spending plans and fiscal policy, as was reported on October 17.

Bitcoin and the “Balanced Budget Trap”

In their research, the authors describe Bitcoin as a “balanced budget trap,” an obstacle for governments aiming to maintain continuous primary deficits. Primary deficits occur when governments spend more than they collect in taxes, and adding “permanent” indicates an intention to maintain this spending pattern over time. The Fed’s concern stems from Bitcoin’s decentralized nature, which they claim complicates the implementation of fiscal policies, particularly in economies reliant on nominal debt.

The report states, “A legal prohibition against bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on bitcoin at the rate.” The paper asserts that without intervention, governments may be forced to balance their budgets due to Bitcoin’s structure, which could limit policy flexibility.

The 40-page paper suggests two potential solutions: a legal ban on Bitcoin or the introduction of a tax on Bitcoin transactions. The researchers point out that Bitcoin functions as a fixed-supply “private-sector security” that does not have any “real resource claims.” This, they argue, makes it a financial asset that can interfere with government fiscal plans, especially for those aiming to manage debt levels through long-term deficit spending.

This recommendation comes at a time when governments are increasingly evaluating how decentralized financial systems like Bitcoin can impact traditional economic models. However, proposals like these are expected to generate debate around the balance between innovation in financial systems and government control over fiscal policy.