Perspective on ‘A Basic Income for Everyone is Not Affordable’ – Part 2

This blog-post is a continuation to the posts


Top Economist says: “Universal Basic Income is Not Affordable”
Perspective on ‘A Basic Income for Everyone is Not Affordable’ – Part 1

Read them first for context.


In this blog I’d like to conduct the thought experiment of playing out the assumption that a basic income can be provided to everyone unconditionally – to then see what possible problems might occur and assess: if it is affordable – is it do-able?

First point to consider here is that to organize such a money stream – you’ll quite likely have to use income taxes as a source of funding. And that’s where I foresee possible problems. Income taxes today are a touchy subject, because everyone feels they have earned their income. If part of it is let go of and allocated towards ‘the common good’ – that’s cool, so long as people feel that it is justified. Considering the basic income as one of the expenses, where a person will now receive this income regardless of how much they work – you’ll most probably run into resistance and if it were to be established – resentment towards those who choose to simply live off a basic income. Sure – everyone will receive it, so even if one works and part of one’s salary goes towards funding a universal income, one will equally be paid out a basic income. For some that may mean receiving back more than what one paid in taxes. But for others, it will square out or they’ll still pay more taxes than the basic income amount. Inevitably this will lead to resentment, because we’ve for decades lived within the paradigm that money is something you should earn. So – for some to pay for others’ income entirely – no strings attached – may be easier in theory than in practice. So – yes, the numbers may work out, but that doesn’t mean you’ll receive the approval of the majority and get a green light to manifest a universal basic income system.

When it comes to income taxes and resentment, consider the current state of the welfare state – the complicated rules, the intricate web of conditions to qualify – the conditions set to ensure a person ‘deserves’ the support given. This complexity didn’t come falling out of the sky – it exists because people demanded it to be so. Although the ideas of unconditionally giving money to everyone and of giving up a part of one’s income to realize such a situation are noble ones – it’s worth asking the question if we as a society live up to that nobility. Herein a follow-up question could be: and if we do provide an unconditional basic income funded through income taxes – what is to say we will not end up right where we started, with ever increasing demands placed on those who do not ‘contribute’ to society in the conventional way of taking up employment and in one way or another being part of the national economy?

Apart from resentment, we have to also consider the dimension of what effect funding an unconditional universal basic income will have on employment. Herein I’m not referring to what effect it will have to create a support structure within which anyone will be guaranteed an income regardless of work efforts and whether that will induce people to simply stop working. Rather – I’m looking at the ‘message’ that is sent out by taxing the incomes of those who work, from the perspective of it being interpreted or having the same effect as punitive measures. For instance, in basic income experiments, the effect on unemployment was negligible or only significant in relation to certain individuals, such as youngsters, students and mothers – where it can be argued that this is not such a bad thing – they will be able to focus on other activities, such as educating themselves or raising their children, which will have long term benefits for society and the economy as a whole. But within those experiments, only the ‘receiving’ aspect of a basic income was tested – the ‘giving’ aspect of a basic income was not. Within the experiments, money was made available by governments or organizations and the effects of receiving the income were observed. What didn’t happen, was taking a small village or town that was approximately representative of the national population and taxing incomes in that village in such a way as to generate enough funds to redistribute it equally among everyone, where the amount given to each one is sufficient to live off of. In that scenario, one might have observed a greater shift from employment to unemployment, simply to be on the side of those that ‘benefit’ rather than those who work and pay for others to benefit.  It is this effect on unemployment that Paul De Grauwe was referring to in his article.

I’ll continue in my next post.

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Day 135: 6 Billion wasted on US Elections

http://americablog.com/2012/11/2012-election-spending-topped-6-billion.html

The 2012 elections in the US reached 6 billion dollars, which is the highest amount ever. Most of this money goes to media and communication. And also consider -- that voter turnout was only around 50%. That's a lot of money, to convince only half the population.

If we look back at Day 17: Starvation is Murder, where we had a look at priority spending in the world and looked at how much money would be needed to achieve universal access to basic social services in developing countries -- we can see that this 6 Billion could have covered basic education for all.

What about, instead of spending all this money on campaigning, which is basically advertising -- you go and spend money and so something real like provide all developing countries with basic access to education -- that would be real nice campaigning stunt.

What does this tell us about Human Nature?

In economics we have thing called 'opportunity cost' which was also discussed in Day 46: The Economic Problem:

"Within that, opportunity cost specifically, refers to the next best alternative one forgoes for the option which was chosen. So if you have $50 and you want both a jacket and a shirt – and you decide to spend the money towards the jacket – the opportunity cost is the shirt as the next best thing you could have gotten. A cost for economists is what you had to ‘give up’ to ‘get it’. "

This tells us something about our values, and what we are willing to forgo in order to get what we want. This is just one example of how we are willing to invest massive amounts into an election -- but will not use this same money towards creating a world that is Better for All.


Economics is often called the 'science of scarcity' -- and likes to emphasise the problem of having limited resources to achieve certain things. Yet, we are living in a world where we care fuck-all about scarcity and being able to do 'only so much' -- instead of doing something real, like making sure that everyone has universal access to basic requirements -- some parts of the population hog up all the resources at the expense of many. If scarcity is such a problem, then why are we not acting according to this problem -- and use our resources effectively and responsibly?

How many more natural disasters do we need to experience? How many more disturbing news stories to we have to read EVERY DAY? Before we realise that ENOUGH is ENOUGH.

If you agree that enough is enough -- check out www.EqualMoney.org, and inform yourself on how we can make this world a better place for all.

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• Day 199 - Christianity shows the way to money.
• Day 178 - The salesman in my head, Buying Crap Part 2
• Day 179 - The Salesmen in my Head Part 3

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Day 86: Who Really Pays the Taxes?

Governments spend lots of time specifying and developing the ways in which taxes are raised and who should carry the heaviest or the lightest tax burdens. However, governments can really only specify who hands over the tax to the government - and this is called the statutory or legal incidence of the different taxes.

But a distinction must be made between who hands over the money to the authorities (statutory/legal incidence of taxes) and who bears the actual burden of the tax (this is called the effective incidence of taxes).

Taking a company as an example. It is often forgotten that when a company is taxed, it is the individuals behind the company who bear the burden of the tax. In the case of a company, we can identify 3 groups of individuals:
1. The owners and shareholders of the company
2. The employees of the company
3. The customers of the company

Whenever a company is taxed at a higher rate, it will attempt to pass on the burden of the higher tax to: its customers - trying as much as possible to protect the owners, shareholders and employees of the company.

Having to pay a higher tax to be able to operate as a company in essence means that the company is incurring higher costs to supply the particular good or service the company supplies. If the cost of production goes up - we know that the price of the product will go up. So, even though it is a company that is being taxed, it is the consumers who end up paying the higher price - and thus, who bear the tax burden.

The extent to which companies can pass on their taxes will depend on the price elasticity of the good or service they are providing. If the demand of the product does not go down by much with an increase in price - then most or all the burden of the tax will be passed on to the clients/customers. If the demand, however, is very sensitive to a change in price - then the company will only be able to afford to pass down the tax to the customers to a limited extent.

So - even though the government uses taxation as a way to redistribute resources in a more fair or equitable way - the economic system itself negates these efforts to a large extent, rendering them ineffective - and thus, the government, using this tool, fails to establish an economic situation where all resources are fairly distributed amongst all.

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Day 85: Financing Government Expenditure

There are three ways a government can finance its expenditure (and where usually all three are being employed): taxes, borrowing and income from property.

Taxes and borrowing are quite straightforward ( though we will dig deeper into the tax point later), but 'income from property' might need some additional explaining. Income from property basically refers to the income the government receives from for instance publicly owned enterprises, rent (eg. mining rights) and other forms of charges and license fees. When all of these are added up, they however only result into a very small proportion of the income of the government. In general, taxes will be where the major share of income originates, but is usually also not sufficient to cover all of the government's expenditure.

As seen in the previous blog, the difference between government income and government expenditure is called the 'budget deficit'. In order to finance this gap, the government will turn to borrowing.

As we all know, borrowing creates debt -- and as such, government borrowing will increase public debt. As the debt increases, so will the interest burden which also affects future generations as they will sit with the debts from those who were in government positions before them, and so when borrowing occurs, we are basically spending money at the expense of future generations which will have to pay this debt off. Because of this implication, borrowing will only be seen as justified when it is done in relation to capital investments which are expected to yield a return which will 'set off' the incurred debt.

Taxation

Taxes are compulsory payments which go to the government, and as we said before -- make up the largest share of government revenue.

There are three different types of taxes which each their own sub-categories: 1) Direct and Indirect Taxes, 2) General and Selective Taxes and 3) Progressive, Regressive and Regressive Taxes.

Direct taxes are also sometimes referred to as taxes on income and wealth. Direct taxes are levied on 'persons' (companies can also constitute as 'persons').  This tax includes personal income tax, estate duty and company tax. Indirect taxes on the other hand, are levied upon transactions and are usually paid by those who will be consuming the good or service in question. VAT, customs, and excise duties are examples of indirect taxes.

While for instance VAT is an indirect tax it is also a general tax. It is a general tax because it is levied on most goods and services. Excise duties are also an indirect tax, but can further be classified as being a selective tax since it is levied on specific goods only (eg. Fuel, alcohol, tobacco).

We can differentiate between progressive, proportional and regressive taxes based on the ratio of tax paid to taxable income.

A progressive tax is a tax where the ratio of tax paid to taxable income increases as taxable income increases. This implies that people with higher incomes will pay a larger percentage of their income than those people with low(er) incomes.
A proportional tax is a tax where the ratio of tax paid to taxable income is the same at all levels for income.  (Eg, everyone pays 25%)
A regressive tax is a tax where the ratio between tax paid and taxable income decreases as taxable income increases. In this case, a larger percentage of the low-income people will be taken than those with higher incomes. This usually happens with indirect taxes such as VAT.

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Day 84: Fiscal Policy and the Budget

So - what tools does the government have available to intervene in the economy?

These tools are:
- Government spending
- Taxation
- Borrowing

Every government specifies how they will make use of these tools in the budget. So - the budget will reflect a government's policy in terms of what types of results they wish to achieve and how they will practically do that. The main points that are given attention within the budget are government spending and taxation. For instance, the government will specify how much funds will be available for education, for healthcare, for military training, etc. - as well as what types of products will be taxed, by how much and how incomes will be taxed. Looking at a government's budget will give you an idea of what the government deems to be important and what not. The budget is in essence a plan in terms of how the government wishes to regulate the demand and supply for goods and services in the economy.

We have already discussed monetary policy extensively in previous blog-posts. The budget and all the tools a government has available are referred to as 'fiscal policy' ('fiscal' comes from the word 'fiscus', which is what the public treasury was called in ancient Rome). Monetary policy - as carried out by the central bank - and fiscal policy are attempted to be carried out in harmony to prevent the one policy from counteracting the other one.

In this blog-post we'll introduce you to the 'general idea' of how governments utilise the tools of government spending, taxation and borrowing - after which we'll discuss each point individually.

What will a government generally do when the economy is in a recession?

Firstly - what is a 'recession'? Recession is when the economy is doing 'bad'. Compare the economy to the human body - where exchanges take place, blood flows, organs interact with each other and each cell has certain requirements in terms of the sustenance that it requires in order to function properly. A recession is when the economy is 'ill' - where fluids don't move through the body effectively and resources/sustenance are not reaching the participating cells in an effective way. Signs of a recession are a fall in income, total production, investment spending, business profits and inflation - and a rise in unemployment and bankruptcy.

So - with the understanding of the word 'recession', we ask the same question again: What will a government generally do when the economy is in a recession?

When in a recession, the government will pursue 'expansionary' fiscal policies so as to stimulate economic activity. 'Expansionary fiscal policy' can be translated into: an increase in government spending and a reduction in taxes. Increasing government spending and reducing taxes are both policies to increase the money supply - eg: increase the amount of money in circulation in the economy.

When applying expansionary fiscal policy, a budget deficit is usually created - because governments increase what they spend, and decrease what they earn. The difference between what is spent and what is earned (the difference between what goes out in the form of government spending and what comes in in the form of taxes) is called the 'budget deficit'.

The opposite can also occur - when an economy, instead of being in a recession, is expanding too quickly. In those cases, all prices will rise (inflation) and industries in other countries will become more competitive in comparision, leading to balance of payment problems (where more money leaves the country than comes into the country). In such a situation, the government will attempt to pursue 'restrictive' or 'contractionary' fiscal policy. This can be translated into: a reduction in government spending and a raise in taxes. The idea here is to withdraw money out of circulation.

This all sounds really neat and simple - but in practicality, it's not that clear-cut. The problem is that there is usually quite a big delay between what happens in the economy (for instance a recession) and the response of the government (for isntance expansionary policy). Sometimes - by the time the government is aware of the recession and starts implementing expansionary policies, the economy may have already started expanding by itself and the governments' measures are pointless, or even make matters worse.

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