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From Theorem to Reality: How Demarchy Eliminates Taxes to Unleash Infinite Growth

1. Introduction: The Invisible Handbrake That Is Stifling Our Economy

Have you ever felt that, no matter how hard you work or how brilliant your idea is, there's an invisible obstacle preventing you from taking off? For most entrepreneurs and creators, that obstacle has a name: taxes and bureaucracy.

Traditional tax systems, while designed to fund the common good, often penalize production and innovation at their source. They introduce friction, complexity, and costs that act as a drag on growth. For decades, economists have dreamed of a theoretical solution to minimize this harm—a principle that would allow for collecting the necessary revenue without stifling the productive engine. A new socioeconomic model called Planetary Demarchy not only implements this solution but takes it to its most radical and philosophical conclusion.

This article will explore, in a series of key points, how the Demarchy draws inspiration from a famous economic theorem not only to reform taxes, but to make them disappear completely, turning every human being into a partner and investor in the success of others through the formalization of a bond that has always existed: a planetary marriage.

2. Key Point 1: The Economists' Dream - Producing Without Chains (The Diamond-Mirrlees Theorem)

The principle of efficiency: Don't stress the gears, only the final product.

The Diamond-Mirrlees theorem is one of the most important results in modern economic theory. Its central idea is surprisingly simple: for an economy to be as efficient as possible, the government should not tax "intermediate goods." These are the components, raw materials, services, and any inputs that a firm uses to create something else. Taxing them is like putting sand in the gears of a machine: it creates a "cascade effect" that distorts production decisions, artificially inflates costs at every stage of the chain, and slows down the economy as a whole.

This idea is so powerful because it provides the theoretical justification for rejecting cumulative multi-stage taxes—those levied at every stage of production. It is the principle underlying systems like VAT, which attempt (with varying degrees of success) to tax only final consumption. Diamond-Mirrlees identified the problem: friction in the gears of production. His goal is clear: to let the productive machinery run without internal fiscal friction.

In a competitive economy with constant returns to scale, taxation of intermediate inputs is always unnecessary and normatively undesirable from the perspective of optimal taxation.

3. Key Point 2: The Quantum Leap of Demarchy - From "Lower Taxes" to "Zero Taxes"

The 50% Universal Partnership (AU50): You don't pay taxes, you share profits.

If Diamond-Mirrlees diagnosed the disease, Demarchy proposes the cure. But it does so not by lubricating the old machine, but by building a new one based on a completely different principle: organic association instead of mechanical extraction.

Demarchy takes the principle of "not hindering production" and pushes it to its logical extreme. Instead of seeking the "optimal" way to collect taxes, it eliminates the concept entirely and replaces it with the formalization of a planetary marriage : the 50/50 Universal Partnership (AU50 ) .

This is not a tax mechanism; it is an economic and existential bond that acknowledges a fundamental truth: you were never an isolated individual. Under AU50, 50% of all net value generated flows into a Common Fund (CF) that belongs to all of humanity, and the other 50% goes to the creator, free from any other burden. It is a paradigm shift that makes the invisible visible and the unjust just. The system does not extract wealth from you; it engages with you as the universal partner that provides the framework for your existence and prosperity.

The 50% that flows to the Common Fund is not a coercive tax, but the legitimate participation of the universal partner who capitalizes and supports you .

This difference between the cold extraction of taxes and the warm participation of society is crucial. In exchange for this "marriage," all other taxes are eliminated: VAT, personal income tax, corporate tax, and any other levy. Productive activity is 100% free from the tax burden, allowing creative energy to focus exclusively on generating value.

4. Key Point 3: The "Extra Twist" - Your Universal Partner is Also Your First Investor

The Common Fund doesn't just receive: it invests in you.

This is where Demarchy goes far beyond the Diamond-Mirrlees theorem. The Common Fund (CF) , which represents humanity as your universal partner, is not a passive entity. It acts as an automatic co-investor in any project, demonstrating its commitment to the "marriage."

The mechanism is revolutionary: if you have a business idea, the Common Fund commits to providing up to 50% of the necessary capital, acting as a partner that matches your investment. Access to this financing doesn't depend on bureaucratic approval, but rather on your verifiable reputation, measured by your Trust Capital (TC) . The process is incredibly fast, with fund transfers within 24-48 hours.

This mechanism eliminates the main obstacle to innovation: the lack of access to capital. The entrepreneur must secure their 50% (with savings, other investors, etc.), ensuring they also have a stake in the venture. But talent and a good idea no longer run up against the wall of pre-existing wealth. The logic of risk is reversed, transforming it into a shared effort between the individual and the community.

In current systems: You have an idea → You ask for money from banks → Bureaucracy + guarantees + abusive rates → 60% rejected.

In Demarquía with AU50: You have an idea → You calculate the budget → You secure your 50% → The system contributes the other 50% as a partner → Project starts.

5. Key Point 4: The End Effect - A Collaborative Economy

Enlightened Selfishness: Your neighbor's success is, literally, your income.

The AU50 design transforms human motivation at a fundamental level. Because 50% of all profits generated on the planet feed the Common Fund—distributed equally to everyone through a Planetary Dividend—the success of anyone, anywhere in the world, directly benefits you. You are wedded to everyone, "for richer or for poorer."

This system transforms economic envy, inherent in a zero-sum model, into a powerful incentive for collaboration. Helping others, sharing knowledge, and celebrating the success of others becomes the smartest and most selfish strategy, because "the success of others literally becomes one's own benefit."

More profoundly, the AU50 structurally dissolves the "us versus them" mentality. When everyone is your economic partner, tribalism becomes illogical. Racism and xenophobia become economically suicidal acts, like sabotaging your own trading partners. Extreme nationalism is like deliberately damaging a portion of your own global investment portfolio. The other ceases to be your competitor; they are, quite literally, your spouse in this planetary marriage.

This change in mindset, from fierce competition to natural collaboration, is the final lubricant that allows the economy—now tax-free and with accessible capital—to grow exponentially, sustainably, and inclusively.

6. Conclusion: What if the secret to growth was to stop punishing him?

We have traced a path from a universal problem (taxes stifle production), through its theoretical diagnosis (the Diamond-Mirrlees theorem), to exploring how Demarchy not only implements this principle but radically transcends it. It does so by replacing tax extraction with 50% Universal Partnership .

This model is not simply an economic reform; it is a philosophical reorganization of our relationships. It uses the metaphor of a "planetary marriage" to formalize a truth that has always existed: we are interdependent. The AU50 does not create this connection; it simply recognizes it, makes it explicit, and transforms it into a fair and functional system that makes the collective an investment partner and aligns the interests of all humanity.

The AU50 doesn't force you into a new relationship; it formalizes the one that always existed.

Welcome to planetary marriage. You were already married; you just didn't know it.

The Nobel Prize-Winning Theory That Challenges Your Ideas About Taxes: 4 Key Revelations

If you've ever felt that tax systems are a confusing maze, you're not alone. Especially when it comes to corporate taxes, it often seems like the government taxes every screw, every service, and every transaction in the production chain. This complexity is not only frustrating, but, as we'll see, it can be profoundly inefficient.

But what if there were a simple, powerful rule to bring order to this chaos? There is. It comes from one of the most important ideas in modern public economics, developed by Nobel laureates Peter Diamond and James Mirrlees in two seminal 1971 papers. Their Diamond-Mirrlees theorem , also known as the productive efficiency lemma , offers striking clarity on how a smart tax system should work. Their proposition is radical: first, focus on making the economic "pie" as big as possible, and only then worry about how to divide it.

2. The 4 Most Impactful Ideas of the Diamond-Mirrlees Theorem

The theorem is not just an academic curiosity; it contains powerful, practical lessons for policy design. Here are its four most important revelations.

2.1. First Revelation: Productive Efficiency Is Not Up for Deal

This is the central and most counterintuitive idea of the theorem. It argues that even when a government needs to raise funds using taxes that inevitably distort the economy (such as those levied on consumption or labor), production must remain 100% efficient .

In practice, this means that the economy should always operate on its "production possibilities frontier" (i.e., generating the maximum possible combination of goods and services with the available resources and technology). The logic behind this is powerful: economists demonstrate that for any inefficient production system, there is always a way to reorganize resources to obtain a "surplus" of production. That surplus can be used to improve the well-being of at least one person without harming anyone else, demonstrating that the initial situation was never optimal. The brilliance of the principle is that it isolates the inevitable distortions of revenue at the margins (final consumption) without damaging the engine of the economy: its capacity to generate value.

2.2. Second Revelation: The Golden Rule is "Do Not Tax Inputs"

The first revelation has the most important practical implication: purely intermediate goods should not be taxed . These are the goods and services that companies buy from each other to produce something else, from steel for a car to software for a consulting firm. This is the key to ensuring that the economic pie is as big as possible.

The theorem demonstrates that any tax on these inputs can be replaced by an adjustment in taxes on final goods or factors of production (such as labor) to achieve the same revenue with greater social welfare. This directly contradicts so-called "cascading taxes ," which tax sales at each stage and penalize efficiency, such as the Gross Income Tax (IIBB) in Argentina, the B&O tax in Washington, the CAT tax in Ohio, or cumulative taxes in Brazil. Conversely, a well-designed VAT system with full input credits respects this principle.

As the theorem summarizes in its formal language:

For any purely intermediate good that does not enter into consumer utility, the optimal ad valorem tax rate is zero in a second-best equilibrium with efficient production.

(A "second-best" world is simply a realistic one, where the government cannot use perfect, non-distorting taxes, and therefore must choose the least harmful option among the imperfect ones.)

2.3. Third Revelation: First Maximize the Pie, Then Divide It

The theorem suggests a powerful principle of "separation" for public policy design, which can be summarized in a two-stage process:

First, organize production (both public and private) to be as efficient as possible. The goal is to maximize the size of the economic "pie," the total value that society can generate.
Second, use taxes on final consumption, labor income and capital, along with direct transfers, to divide that pie in the way that society considers fairest.

This approach prevents companies' decisions from being tainted by perverse tax incentives. It prevents, for example, the emergence of "industrial organization behaviors induced purely by the tax structure ," such as a company deciding to manufacture its own parts instead of buying them from a more efficient supplier simply to avoid a transaction tax. In short: first create the maximum possible value, then decide how to distribute it.

2.4. Fourth Revelation: A Robust Idea, Even Tested by Real Politics

A common criticism of economic theories is that they are fragile and only work in idealized models. However, the main recommendation of the Diamond-Mirrlees theorem is surprisingly robust.

Subsequent research, such as that by Acemoglu, Golosov, and Tsyvinski (2007, 2008) , has shown that the principle of not taxing intermediate goods holds firm even in models that incorporate the complexities of real-world political economy. For example, it remains the best policy even when governments exhibit a "lack of commitment " (the inability to credibly commit to future policies). This robustness strengthens the theorem's validity beyond the academic laboratory, making it a reliable guide for the real world.

3. Conclusion: A Simple Lesson for a Complex Problem

Amid the dense debate on taxation, the Diamond-Mirrlees theorem offers a lesson of astonishing clarity: the efficiency of an economy's productive engine is too valuable to sacrifice through poorly designed taxes. Distortions are sometimes a necessary evil for raising revenue and redistributing wealth, but they should be applied where they cause the least harm: to final consumption and income, not to the heart of production.

This leaves us with a final question: if one of the most solid and respected principles of modern fiscal economics tells us that taxing intermediate production is a bad idea, why do so many tax systems around the world continue to insist on doing so?

Mathematical Development of the Diamond-Mirrlees Theorem

The Diamond-Mirrlees theorem, also known as the productive efficiency lemma, is a central result of optimal taxation theory. It states that, under certain conditions, an optimal tax system should not distort the productive allocation of the economy. In practical terms, this implies that purely intermediate goods should not be taxed for revenue purposes and that the economy should operate on the efficient production possibilities frontier, even with distorting taxes on consumption and labor.

Mathematical modeling of the Diamond-Mirrlees Theorem

1. Basic structure of the model

Consider a static economy with:

Set of consumers h ∈ H with utilities uh ( ch ), where ch ∈R+ n is a consumption vector of n goods.
Set of productive activities y ∈ Y ⊂R n , where Y is a convex production set with constant returns to scale.
A numerical good or vector of factors such that all benefits are distributed to consumers or the government (there are no pure benefits in equilibrium).

The government chooses:

An aggregate production plan and ∈ Y .
A producer price vector q ∈R+ n .
A vector of ad valorem tax rates on consumer goods t ∈R n , which determines consumer prices p =(1+ t )∘ q (product component by component).

Each consumer h resolves:

ch max uh ( ch )sa p ⋅ ch ≤ mh ,

where mh is their monetary income (wages, rents and dividends plus net transfers) and p ⋅ ch =∑ ipich , i .

Aggregate feasibility requires:

h ∈ H ∑ ch ≤ y , y ∈ Y .

The public budget requires:

i ∑ tiqih ∑ ch , i ≥ G ,

where G is the government's net financing need (net government spending less other non-tax revenues).

The planner (government) maximizes a social welfare function W ({ uh }) subject to:

Aggregate resource constraint (∑ hch , y )∈R.
Government budget constraint.
Consumer behavior restrictions (maximum utility given p ).

2. Two-stage problem and productive efficiency

Diamond and Mirrlees show that the problem can be broken down into two stages:

Stage 1 (Production): choose y ∈ Y that maximizes the value of the output at shadow prices π :

y ∈ Y max π ⋅ y .

Stage 2 (Distribution/Taxes): given efficient y and π , choose taxes t and transfers to implement the desired allocation of consumption and raise G .

The Productive Efficiency Theorem states that, if the space of taxes on final goods and factors is sufficiently rich, the second-best optimum coincides with a productively efficient allocation, i.e., y ⋆ solves the problem of maximizing π ⋅ y subject to y ∈ Y.

Formally, in the optimum, producer prices q are proportional to shadow prices π that solve:

y ∈ Y max q ⋅ y

and satisfy the first-order conditions of productive efficiency (when Y is differentiated): if F ( y ) ≤ 0 describes the production set, with multiplier λ ,

∇ y ( q ⋅ y )= λ ∇ yF ( y ),

This implies that the marginal rates of transformation between goods are equal to the producer price ratios, as in a competitive equilibrium without taxes on the production side.

3. Variational argument: why inefficient production is not optimal

The central idea of the demonstration is an argument for marginal reform:

Suppose there exists a tax structure ( t , q ) and a production plan that solve the government problem, but where y is inefficient, i.e., it is inside Y and does not maximize q ⋅ y .
Then there exists a variation Δy such that y ′= y +Δy ∈ Y and :

q ⋅ y ′> q ⋅ y .

That is, at producer prices q , the value of output increases.

Under constant returns to scale and convexity, an infinitesimal reform of the production plan and taxes can be found that:

Increase available resources (greater than q ⋅ y ).
It keeps government revenue constant through an appropriate adjustment in t .
It does not worsen the utility of any consumer (and allows some to improve) thanks to the increase in resources.

Therefore, the original allocation cannot be Pareto optimal given the objective W : any allocation inside Y can be dominated by another on the production frontier.

He thus concludes that, in the second-best optimum, production must be efficient; that is, the economy operates on the Y frontier and producer prices reflect the true social marginal costs.

4. Intermediate goods and the non-tax rule

Let us now explicitly introduce intermediate goods and final goods. Let:

cF the vector of final consumptions.
z the vector of intermediate inputs used in production.
and the vector of gross outputs of the companies.

The added technology can be described by:

T ( y , z )≤0,

where z does not enter into the consumers' utility (it is purely intermediate).

Suppose the government applies an ad valorem tax τz on z , such that the producer price of z is qz and the price paid by firms is qz (1+ τz ). The Diamond-Mirrlees result shows that, given a scheme ( t , τz ) that maximizes W , there always exists an alternative scheme ( t ~, τ ~ z ) with:

τ ~ z =0 (do not tax intermediate inputs).
t ~ adjusted on final goods and/or primary factors to maintain the same revenue.
An efficient production allocation ( y ′, z ′) that dominates (or at least does not worsen) the original.

The argument can be outlined as follows:

If τz =0, the firms' decision resolves:

y , z max qy ⋅ y −(1+ τz ) qz ⋅ z s.a. T ( y , z )≤0.

This solution does not generally coincide with the maximum of:

y , z max qy ⋅ y − qz ⋅ z s.a. T ( y , z )≤0,

That is, it distorts the efficiency condition ∇ y ( qy ⋅ y − qz ⋅ z )= λ ∇ yT , ∇ z ( qy ⋅ y − qz ⋅ z )= λ ∇ zT .

By eliminating τz and adjusting the final goods taxes tF to maintain G , a vector ( y ⋆, z ⋆) can be implemented on the efficient frontier of T , with greater qy ⋅ y − qz ⋅ z .
The increase in production value allows for improved welfare or at least its maintenance, which shows that any optimal solution must satisfy τz = 0 for all purely intermediate goods.

In summary, the corollary of the theorem is:

For any purely intermediate good that does not enter into consumer utility, the optimal ad valorem tax rate is zero in a second-best equilibrium with efficient production.

This is the formal basis of the "no tax on intermediate goods" rule that justifies the theoretical preference for VAT-type systems with full credit on inputs, as opposed to multi-stage cascading taxes on sales volume or gross income.

5. Alternative representation via aggregate production function

A compact formulation, useful for connecting with other models in Planetary Demarchy, is to write the economy in terms of an aggregate production function:

Let F ( x ) ≤ 0 be the aggregate technological constraint, where x is a vector that collects both consumption and use of factors (and, if desired, indicators of sectoral structure).
The planner chooses a feasible allocation x and a set of shadow prices π that solve:

x max W ( u ( x ))sa F ( x )≤0.

Efficient production corresponds to solutions where there exists λ ≥0 such that:

∇ xW ( u ( x ))= λ ∇ xF ( x ),

And the decentralized decisions of firms and consumers, with optimally chosen taxes, reproduce these same gradients (marginal rates of substitution equal to marginal rates of transformation).

Under classical conditions (constant returns, perfect competition, tax-rich space), any second-best solution to the above problem must respect this first-order condition on the subset of production variables, which again implies the non-existence of optimal taxes on purely intermediate goods.

1. Historical context and motivation

The theorem was developed by Peter A. Diamond and James A. Mirrlees in a series of articles published in 1971 in the American Economic Review under the titles "Optimal Taxation and Public Production I: Production Efficiency" and "Optimal Taxation and Public Production II: Tax Rules." These works integrate the theory of indirect taxation, public production, and welfare economics into a unified framework, extending Ramsey's classical analysis to an economy with multiple consumers, public production, and a variety of tax instruments.

The central motivation is to answer a normative question: given that the government only has distortionary taxes at its disposal (it cannot use non-distortive lump-sum taxes), how should it design the tax structure on goods and factors to finance public spending and achieve some degree of redistribution without sacrificing efficiency more than strictly necessary? Diamond and Mirrlees' surprising result is that, even in this second-best scenario, production must remain efficient if taxes are optimally chosen.

2. Basic formulation of the model

Diamond-Mirrlees' analytical framework can be summarized schematically as follows.

There is a finite set of consumers with well-behaved preferences over consumption vectors, represented by continuous, strictly quasiconvex utility functions.
The economy has a set of production technologies with constant returns to scale and perfect competition in all private sectors (there is no market power).
The government can:
- To produce public goods using the same technologies as the private sector.
- Establish taxes (or subsidies) on consumer goods, on primary factors (e.g., labor, capital) and, in principle, on intermediate inputs.

The government's choice variable is a vector of tax rates and a public production plan that maximize a social welfare function subject to:

The economy's resource constraint (aggregate production possibilities set).
The public sector budget constraint (net revenue sufficient to finance spending and transfers).
Competitive equilibrium in the goods and factors markets, given the tax-induced consumer and producer price structure.

The problem can be formulated as a two-stage problem: first, the government chooses an efficient aggregate production plan; second, it designs taxes and producer/consumer prices that implement that plan in competitive equilibrium.

3. Statement of the Productive Efficiency Theorem

The key result, known as the Diamond-Mirrlees Productive Efficiency Theorem, can be stated informally as follows.

In an economy with constant returns to scale, perfect competition, and a sufficiently rich set of indirect taxes on final goods and primary factors, any optimal tax structure that maximizes social welfare subject to the resource constraint will imply an efficient productive allocation: the economy will operate on the frontier of the production set, and taxes will not distort the shadow prices relevant to production decisions.

This result has two important consequences:

Marginal transformation rates between goods in all sectors (public and private) must be equal: firms, facing adequate producer prices, choose production plans on the efficient frontier.
Any combination of taxes that implies inefficient production (i.e., an allocation within the production set) can be improved by moving the economy towards the frontier and adjusting taxes on final goods and factors to maintain revenue and improve (or at least not reduce) the welfare of all agents.

Diamond and Mirrlees show that, as long as consumer demand and production functions are continuous and technology exhibits constant returns, there is always a small variation in taxes that allows production to shift towards a more efficient allocation without leaving the production possibility set, demonstrating that any interior situation cannot be optimal.

4. Fundamental technical assumptions

The theorem rests on a set of assumptions that should be made explicit, given that its empirical validity is the subject of debate and subsequent extensions.

Constant returns to scale across all production technologies and absence of pure equilibrium profits (profits are distributed to consumers as dividends or appropriated by the public sector).
Perfect competition in all goods and factor markets, so that prices equal marginal costs and there is no market power or endogenous monopolistic markups.
The possibility of directly taxing final goods and primary factors, in a sufficiently flexible manner, even if in practice only linear taxes in the Ramsey style are used (not necessarily non-linear taxes like Mirrlees).
The government's ability to control public production and set producer prices separately from consumer prices, allowing for the implementation of any efficient combination through appropriate taxes and subsidies.

Under these conditions, the productive side of the economy can be treated as independent of the redistributive problem, provided that the necessary revenue is obtained exclusively through taxes on final goods and wages/income, without distorting production decisions.

5. Central proposition: do not tax intermediate goods

One of the most influential normative implications of the theorem is that purely intermediate goods should not be taxed for revenue purposes.

A good is considered purely intermediate when:

It is not intended for final consumption in any state (it is only used as an input in the production of other goods).
Its tax burden is only passed on through higher prices of final goods and/or lower returns on factors, without providing any additional advantage over directly taxing those final goods or factors.

Diamond and Mirrlees show that, given a revenue and redistribution objective, any scheme that includes taxes on a purely intermediate good can be replaced by an alternative scheme that:

Eliminate the intermediate tax.
Adjust taxes on final goods and/or primary factors so that total revenue remains constant.
Increase (or at least do not reduce) social welfare by restoring productive efficiency.

Consequently, in a competitive economy with constant returns to scale, the taxation of intermediate inputs is always unnecessary and normatively undesirable from the perspective of optimal taxation. This reinforces the theoretical argument in favor of VAT-type structures or sales taxes with full credit for inputs, and against cascading taxes on gross income, which precisely violate the productive neutrality sanctioned by the theorem.

6. Relationship with the imposition of Ramsey and Mirrlees (1971)

The Diamond-Mirrlees theorem fits naturally into the tradition of optimal imposition initiated by Ramsey and continued by Mirrlees.

In the Ramsey model, the government chooses tax rates on final goods to minimize welfare loss subject to a revenue target, leading to the inverse elasticities rule: taxing relatively more those goods with less elastic demand.
Diamond and Mirrlees extend this approach to an economy with multiple consumers, goods, public production, and a rich set of taxing instruments, and demonstrate that, even in this environment, productive allocation must remain efficient at the optimum.

On the other hand, Mirrlees' (1971) model of optimal income taxation under asymmetric information focuses on the design of nonlinear tax structures on labor income, where incentive constraints limit the state's redistributive capacity. More recent work has shown that, under certain conditions, the optimal tax rate formulas derived within the Mirrlees framework and the implications of the Diamond-Mirrlees theorem can be seen as particular cases of the same family of optimal taxation rules in general equilibrium.

Overall, the coherent normative message is that production should be kept efficient (Diamond-Mirrlees), while the tax distortions necessary to finance spending and redistribute should be concentrated on consumption and labor/income margins, designed according to Ramsey-Mirrlees-type principles.

7. Criticisms, extensions and limits of the theorem

Since the 1970s, a large body of literature has examined the robustness of the theorem under various more realistic assumptions.

7.1 Imperfect competition and increasing returns

In the presence of imperfect competition, monopoly margins, and increasing returns, the condition of productive efficiency may cease to be globally optimal: some authors have found contexts where sectoral taxes or subsidies, even on intermediate inputs, can serve as correctives for pre-existing distortions (for example, to counteract market power or network externalities).
Myles (1989) and others show that the recommendation not to tax intermediate inputs depends critically on the absence of pure benefits and the competitive structure; when these assumptions are relaxed, “second-best” configurations can emerge in which some intermediate taxation is part of a conditionally optimal design.

7.2 Intermediate public goods and financing

In models where certain government-produced goods act as intermediate public goods (e.g., infrastructure, R&D, regulatory services), the rule of not taxing intermediate goods may come into tension with the need to finance such goods, especially if the menu of available taxes is limited.
Some studies show how the financing of these goods can lead to combinations where total productive efficiency is no longer achievable, and the optimum involves accepting a certain degree of productive inefficiency in exchange for benefits in terms of the provision of public goods.

7.3 Political constraints and political economy

Acemoglu, Golosov, and Tsyvinski (2007, 2008) generalize the theorem to an environment where tax policies are chosen by politicians with their own objectives and without the capacity for intertemporal commitment (“lack of commitment ”).
Notably, they show that, even under these political economy constraints, in a wide range of circumstances it remains optimal not to tax sectors that produce purely intermediate goods, thus preserving a robust version of the principle of productive efficiency.

In summary, although there are specific contexts where the theorem may not apply literally, the standard position in public finance theory remains that broadly taxing intermediate inputs is normatively inferior to taxing only final consumption and primary factors.

8. Connection with cascading taxes and VAT-type systems

The Diamond-Mirrlees theorem provides the theoretical basis for criticizing cascading taxes on gross income and cumulative taxation of intermediate inputs.

A well-designed VAT/IGV/GST system fully offloads intermediate inputs through the tax credit mechanism, ensuring that the tax falls only on final consumption, in line with the theorem's recommendation against taxing intermediate goods.
In contrast, taxes on sales volume or gross income, which generate a cascading effect and fiscal pyramiding, directly violate the principle of productive efficiency: they repeatedly tax the same base throughout the chain, artificially increase the cost of market integration compared to vertical integration, and distort the industrial structure, as documented in the case of the Washington B&O tax, the Ohio CAT tax, the Argentine IIBB tax, or cumulative taxes in Brazil.

From the perspective of Planetary Demarchy, the Diamond-Mirrlees theorem can be seen as a strong normative criterion against any tax design that places the burden of revenue on intermediate production instead of concentrating it on the final consumption stage, especially when fiscal and information technologies are already available that allow for the implementation of a broad and neutral VAT.

9. Regulatory and institutional design implications

At the level of economic policy design, the theorem suggests several high-level orientations:

Separation between production and redistribution: first, organize production efficiently (including public production) by maximizing the value of aggregate output; then, use consumption and factor taxes, and transfers, to achieve the desired redistribution.
Avoid cumulative taxes on inputs: eliminate or minimize taxes on intermediate goods and on B2B transactions, replacing them with a neutral VAT or taxes on final consumption, except in very specific contexts where there are previous distortions that need to be corrected and there are no other instruments available.
Transparency and sectoral neutrality: designing taxes that do not artificially favor vertical integration, do not discriminate between sectors with different lengths of production chains, and do not disproportionately penalize SMEs and exporters, thus avoiding industrial organization behaviors induced purely by the tax structure.

These recommendations are consistent with the broader critique of cumulative multi-stage taxes developed in the article "Comprehensive Analysis of the Cumulative Tax Impact: Cascade Effect, Structural Distortions and Economic Policy Design," where the Diamond-Mirrlees Theorem is explicitly cited as a theoretical basis for rejecting cascading taxes on intermediate production.

10. Integration in Demarchy of the Diamond-Mirrlee Theorem

Demarchy not only integrates the efficiency principles of the Diamond-Mirrlees Theorem , but surpasses them by eliminating the need for a coercive tax system, replacing it with a model of co-ownership and corporate participation from the outset. While the theorem is a tool for optimizing the tax burden within an extractive system, demarchy redesigns the financial architecture so that productive efficiency is an intrinsic property of the system.

The following explains how this integration and overcoming occurs:

10.1. Integration: The radical application of Productive Efficiency

The Diamond-Mirrlees theorem, or lemma of productive efficiency, states that an optimal tax system should not tax intermediate goods so as not to distort the productive allocation of the economy. Demarchy integrates this logic as follows:

Principle of Final Consumption: Just as the theorem justifies VAT-type systems to avoid penalizing production, the Royalty for Use of Common Assets (RUAC) of the demarchy applies exclusively to private final consumption .
Eliminating the Cascade Effect: The theorem aims to prevent taxes from accumulating at each stage of the value chain (the cascade effect). Demarchy achieves this by registering the "potential RUAC" (Tax on the Common Vault) at each stage of product transformation using tokens , but without collecting it until the product leaves the production chain and reaches the final consumer.
Productive Neutrality: Since there are no taxes on labor (personal income tax), corporations or intermediate inputs, companies in the demarchy always operate on the efficient production possibilities frontier , fulfilling the optimal condition that Diamond and Mirrlees postulated mathematically.

10.2. Overcoming: From Redistribution to Predistribution

The Diamond-Mirrlees theorem assumes that the government must still choose distortionary taxes on final goods and labor to finance public spending and redistribution. Demarchy overcomes this premise through three structural mechanisms:

Universal 50% Partnership (AU50) : Instead of taxing profits retroactively (which generates resistance and evasion), humanity automatically becomes a 50% partner in every venture. This transforms the "tax revenue" into a legitimate return on investment for the use of infrastructure, knowledge, and the common market.
End of the "Hidden Tax" on Interest: The Diamond-Mirrlees theorem does not address compound interest , which demarchy identifies as a "systemic cancer" that adds between 20% and 40% to the cost of all products. By abolishing interest and replacing it with Selective Oxidation , demarchy eliminates a massive productive distortion that the traditional system ignores.
Massive Structural Deflation: Eliminating cascading taxes, interest, and private insurance (replaced by the FSR ) reduces the real cost of production by 80% to 95% . This allows the Planetary Dividend to have purchasing power unattainable for any Basic Income financed by the tax model that the Diamond-Mirrlees theorem attempts to optimize.

10.3. The Identity M ≡ Q as a Guarantee of Stability

The Diamond-Mirrlees theorem operates in fiat economies where the money supply and real value are independent, allowing for inflation by issuance. Demarchy overcomes this vulnerability through the identity M ≡ Q.

Mathematical Identity: The monetary mass (M) is exactly equal to the tokenized real productive value (Q).
Impossibility of Inflation: Since it is impossible to create "phantom money" without underlying value, the system naturally self-balances. This eliminates the need for central bank intervention to "correct" the economy, allowing for absolute productive efficiency that is not dependent on volatile monetary policies.

Comparative Summary

Feature	Diamond-Mirrlees Theorem	Demarchic Economy
Intermediate Goods	They should not be taxed (theory).	Zero production costs (by design).
Financing	Taxes on final goods and labor.	Co-ownership dividends (AU50, RUAC).
Intermediation	The State as an external tax collector.	Humanity as an investment partner .
Effect on Prices	It seeks to optimize the tax burden.	It causes massive structural deflation .
Stability	Vulnerable to inflation and cycles.	Architecturally stable (M ≡ Q).

In conclusion, demarchy takes Diamond and Mirrlees's central intuition about productive efficiency and frees it from the constraints of the nation-state and the debt system. By socializing wealth at its source and eliminating financial tolls, it transforms "second-best" efficiency into first-order structural prosperity .

Analogy: The Diamond-Mirrlees theorem is like a manual for making a private toll road as inconvenient as possible, recommending against charging supply trucks to keep prices down. Demarchy is like demolishing the toll road and turning the highway into a shared teleportation system , where travel is free because everyone owns the infrastructure and the benefit comes not from charging for passage, but from the wealth generated when everyone reaches their destination faster.

11. Key works and recommended readings

Diamond, P.A., & Mirrlees, J.A. (1971). "Optimal Taxation and Public Production I: Production Efficiency", American Economic Review , 61(1), 8-27.
Diamond, P.A., & Mirrlees, J.A. (1971). "Optimal Taxation and Public Production II: Tax Rules", American Economic Review , 61(3), 261-278.
Ahlberg, J. (2006). “Optimal Taxation of Intermediate Goods in the Presence of…”, thesis and literature review on the taxation of intermediate goods.
Myles, G. D. (1989). "Imperfect Competition and the Taxation of Intermediate Goods", Warwick Economic Research Papers.
Acemoglu, D., Golosov, M., & Tsyvinski, A. (2007, 2008). “Political Economy of Intermediate Goods Taxation,” JEeA and related working papers.
Hammond, P. (2010). “Reassessing the Diamond/Mirrlees Efficiency Theorem”, conceptual review note.

These references allow for a deeper understanding of the formal proofs, the technical conditions for the existence of an optimum, and the many extensions and critiques that have enriched the understanding of the theorem in the contemporary context of public finance.

Explore the Demarchy in Greater Depth

Philosophical Foundations

Understand why Demarchy is necessary and how it is based:

Prologue to Demarchy - What does Planetary Demarchy offer you?
Classical Athens - The inspiration for Planetary Demarchy
Theoretical Foundations - Theoretical Foundations of Planetary Demarchy
Systemic change strategy - A gradual, peaceful, and organic transformation process
Green Ribbon - A strategic tool for social transformation
Glossary of Key Terms - Terms regularly used in Demarchy
History of the demarchy - A journey through the history of the demarchy to the present day
The world as one nation - The End of nation-states
Foundations for Building the Administration of the Commons (AdC)
PHILOSOPHY / Operational Principles of Demarchy Inspired by Minimal Action
Planetary Demarchy Constitution - Draft of the constitutional text for the establishment of Demarchy throughout the planet.

Diagnosis of the Current System

Crisis of representative democracy - Diagnosis of the present
Bullshit Jobs - Useless or harmful jobs for society and the individual
Quantifying the Waste of Global Resources Resulting from the Existence of "Bullshit Jobs"
The Problem: Convergence between Power and Technology - Tools that allow manipulation on a global scale
Foundations for Building the Administration of the Commons (AdC)
Wealth Disparity in Europe: A Comprehensive Analysis of Wealth Distribution
The Illusion of Infinite Accumulation: Why Perpetual Compound Interest Clashes with Historical Reality
Marxist Influence on Social Policy and Contemporary Neo-Feudal Regression
Social Influence: An Analysis of Experimental Paradigms and Their Evolution in the Digital Age
Structural Cost Reduction in Planetary Demarchy
Technofeudalism vs Planetary Demarchy: Two Futures for Digital Civilization
A Structural Critique of Basic Income as an Instrument of Control against the Demarchy Dividend

Analysis of the Conditioned Individual

Homo Debitum - Who we are today
Engine of Fear - Motivational system that drives Homo Debitum
Collective PTSD - Systemic psychological trauma in today's society
The Cancer of Education, a Tool of Domestication - How to unleash the potential of our minds from a young age.
Learned Helplessness - Psychological state of learned helplessness
Existential Blackmail - How the system coerces us
Cognitive Dissonance - A mechanism that turns victims into defenders of the system
Pluralist Ignorance as a Systemic Failure
Social Influence: An Analysis of Experimental Paradigms and Their Evolution in the Digital Age
The New Slavery: Political and Psychosocial Anatomy of Wage Labor
A History of Wage Employment, Abolition, and the Genesis of Rent-Out Slavery through Existential Blackmail

Foundations of Individual Liberation

Homo Socius - Who can we be?
Engine of Illusion - Motivational system that drives Homo Socius
Independent thinking - Overcoming conditioning
Cognitive sovereignty - The right not to be mentally subjugated
Enlightened Egoism - Self-interest leading to cooperation
Zero-Sum vs. Positive-Sum - Paradigms of Social Interaction

Mathematical and Architectural Principles

Foundations for Building the Administration of the Commons (AdC)
PHILOSOPHY / Operational Principles of Demarchy Inspired by Minimal Action
Antifragile Architecture in Demarchy
Smart Incentive Architecture in Demarchy
Constructive Aggregation - A radical method for collective deliberation
Principle of Least Action - The fundamental law of design
Arrow's Impossibility Theorem and Demarchy - Limitations of voting systems
Condorcet's Jury Theorem and Demarchy - The Power of Collective Intelligence
Wisdom of Multitudes and Demarchy - Accurate Predictions from Large Groups
Game Theory in Demarchy - Rules that align incentives with the common good
Prisoner's Dilemma
Myerson-Satterthwaite Theorem and Planetary Demarchy
Mechanism Design: Smart Incentive Architecture
Diversity Overcomes Ability: From Mathematical Theorem to Political Theory

Solutions for the AGI/ASI Challenge

Understand why Demarchy is Necessary to Face the Future:

Economic System

Architecture that aligns individual prosperity with collective well-being:

Universal Planetary Co-ownership (UPC) - Foundation of ownership
Common Heritage of Humanity
Royalty for Use of Common Assets (RUAC) - Royalties for using common resources
Return on Social Benefit (RABS)
Planetary Dividend - Your income as a co-owner
50/50 Universal Partnership - How every venture benefits everyone
Selective Oxidation - Incentives that make capital flow
Universal Value Unit (UVU) - Economic unit of measurement anchored to real value
Total Planetary Value (TPV)
Tokenized Economy - Nervous System of the Demarchy
Total Tokenization - Money that reflects reality
High Tide Effect
Mutual Interdependence in Demarchy
Tax-Free Economy - Automatic and Transparent Contribution
Tax-Free Income System
CdC Capital of Trust - Reputation and Integrity Metric
Osmotic Balance - Automatic alignment of incentives with sustainability
MIR Real Investment Market - Platform for productive investment
Free Market and Competition in the Demarchy - Competition transformed into collective excellence
Common Fund (CF)
FSR Solidarity Risk Fund - Sharing honest losses collectively

Governance

How collective decisions are organized without permanent elites:

Demarchic Governance - Complete System Structure
Citizen Assemblies - Democracy by lottery
Independent Auditors - Comprehensive and Technical Supervision
Professional Managers - Supervised professional managers
Separation of Powers in Demarchy - Redesign to prevent concentration
Anti-Capture Design - Structures that prevent corruption
Total Transparency and Verifiability - An Antidote to Corruption and Fraud
Artificial Intelligence in Governance - Impartial assistance in decision-making and control of the Administration.
MI Information Markets - Objective monitoring and amplification of collective intelligence
Multidimensional Voting and Demarchy - Decision-making that preserves complexity
Pillars of Demarchy - The Nine Foundations
Super Citizen Jury - Ethical Court of the Administration by the Citizens

Technology and Infrastructure

The tools that make the system possible:

Common Vault - Digital Sovereignty and Radical Transparency
Principle of Citizen Sovereignty over Data - Citizen Monopoly over Personal Information (formerly Principle of Citizen Monopoly of Information)
Total Tokenization - Digital Representation of Value
Artificial General Intelligence - AGI as a public assistant
ASI-AdC - Superintelligence in common management
Blockchain and Demarchy - The Digital Nervous System of Civilization
Common Health Fund (CHF) - Biotechnology management of health
AI Guardian Angel - Protection of individual and collective sovereignty
Longevity Revolution - Abolition of disease and aging

Law and Justice

The legal framework that protects sovereignty:

Planetary Demarchy Constitution - Draft of the constitutional text for the establishment of Demarchy throughout the planet.
Natural Law and Demarchy - Ethical Anchoring of the System
Axiomatic Law - A legal system structured like mathematics
Judicial System in the Demarchy - Autonomous body subordinate to the citizenry
Separation of Powers in Demarchy - Redesign to prevent concentration
System of Legal Responsibilities in Demarchy - Restorative and Preventive Justice
Pharmaceutical Drug Regulation: Axiomatic Foundation in Demarchy and the Collapse of Organized Crime - Focus on Evidence and Public Health

Draft regulations for the RUAC - Example draft regulations on how to apply the RUAC

Culture and Society

Human transformation in the post-scarcity era:

Post-Scarcity Evolution in Demarchy - Towards a Society of Abundance
Demarchic culture - Creative explosion and diversity
Vision 2070 - The projected future of the Demarchy
Work in the New Post-Labor Era - Liberation from Forced Labor

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