The Basics of Basic Income

The “basic” concept, pun intended, is that everyone whether rich or poor, black or white, deserves a minimal income to live a “middle class” life by first world standards. In other words, no one should have to live in poverty.

There is a wide range of theories on what the “best” amount should be, but most seem to agree that $1000 per month is a fair number. There are a wide range of supposed benefits to such a system and I agree that many of these benefits would be an improvement over what we have today.

Under a Basic Income system there would be no need for complex welfare systems or unemployment benefits. People could hold out for higher paying jobs and thus there would be no need for a minimum wage. Many people who can work a low paying job choose not to work because they would lose their welfare or unemployment benefits. Basic Income solves that problem.

Replacing Existing Welfare & Social Programs

If you assume the Basic Income budget is set at a level that would replace existing spending on safety net programs then we could probably get everyone a $400 Basic Income. This would give every individual enough money for some simple food and a shared room and some clothing. Most people would consider this situation poverty and thus not really achieving the desired goal, but it is still a life equal to a college student. That said, I would consider a $400 per month basic income vastly superior to our current welfare system. Assuming it applied to children as well it could even completely eliminate the corrupt child support racket. The median child support payment is only $280 per month which means that over half of all single parents would be better off while billions are saved in legal fees.

So how big of a difference would it make to me personally if a basic income was adopted to simply replace existing government spending? For starters, I could buy a new car if this were adopted today. If it replaced child support I could buy a new house as well. Based upon this assessment it is a no-brainer for me to support a Basic Income that merely replaced current government spending.

Unfortunately those who are currently benefiting from welfare, excessive child support, and large social security checks would end up with a lot lower payments. In effect, Basic Income would actually reduce wealth redistribution in the economy and thus a big improvement for those of us who like liberty.

The unfortunate reality is that political forces would always lobby to increase the Basic Income like they do the minimum wage.

Paying $1000 per month Basic Income

If this were to be implemented in the United States with a population of 320 million people, the cost would be 3.8 trillion dollars per year. A staggering sum greater than all the taxes collected by the federal government and even greater than all spending which includes borrowing $500 billion dollars or more every year.

As the founder of a crypto currency, those who are interested in Basic Income often ask me if BitShares could help implement it. As you know I am a libertarian which means I do not believe in taxes collected at gun point, which leaves only one option for funding it: inflation. But before talking about how inflation would work, I want to dispel the belief that taxes could pay for it.

Taxes

Economists who study taxation know that as taxes approach 100%, tax revenue approaches $0. The Laffer Curve tells us that increasing the tax rate has diminishing and eventually negative returns. The only question that is often debated is whether or not we have hit the point of negative returns on tax revenue. Sadly, those who support taxes never stop to consider the opportunity cost of the wealth that is never produced as a result of higher taxes and instead only focus on the increasing percentage collected of a smaller pie.

If we assume that taking taxes from 20% to 30% (a 50% increase in rate) only results in a 40% increase in tax collection then a little math will tell us that if the original size of the economy was 100 with initial tax revenue of 20 and the new tax revenue is 28 (+40%) the new size of the economy must be 28/(30%) or 93. The “cost” to the private sector is thus 7 + 8 or a total of 15. With these numbers it is clear that the cost to society is almost twice the benefit to government. Now these are just theoretical numbers that are still very far away from the theoretical maximum tax rate where a 1% increase in taxes results in a reduction in tax revenue. The closer you get to the maximum tax rate the more significant the opportunity cost relative to the revenue collected.

Even if you assume a Basic Income would replace all welfare related expenses including social security, medicare, education, and other safety net programs the federal spending would still be over 1.5 trillion. This means that taxes would need to collect a total of 5.3 trillion dollars, an increase of 76% from 2014. Because we are already very close to the maximum tax rate defined by the Laffer Curve, we cannot simply increase taxes by 80% and hope to see revenues grow by 76%. I would be very surprised if there existed any tax rate that could generate the desired tax revenue necessary to fund a $1000 per month Basic Income.

Monetary Inflation

There remains a single tool left to pay for Basic Income; inflation. Inflation is a redistribution of money-wealth from those who have it to those who receive the new money. Unlike taxes which operate on income and transactions, inflation is a direct tax on the capital of society. It is also a hidden tax which means that people do not perceive it as clearly as they do an income tax and therefore are less likely to take actions to avoid it. Printing new money is, in theory, progressive in that it takes more from the rich who have money. At first glance inflation appears to be the ideal candidate for funding Basic Income.

Because monetary inflation is the most obvious approach it is also an approach well suited to crypto currencies and this is why many people have approached me.

Replace Taxes with Monetary Inflation

Each and every year taxpayers spend $200 billion dollars complying with tax laws and that number doesn’t include the money that companies spend on tax compliance. Then after that the taxpayers spend a large fraction of the money collected attempting to comply, the IRS and other government agencies spend countless billions every year auditing, convicting, and imprisoning people who failed to comply to their satisfaction. Given that the government has direct access to the printing press why should we waste so much time and energy complying with and enforcing taxes when we could simply print the money we need. No one could escape it, the “rich” pay more, and it could literally save enough money to balance the budget and eliminate the interest due on the national debt.

The answer is simple: without taxation there would be no demand for federal reserve notes. Without the threat of force, no one would hold their wealth in an asset that is being debased to the tune of $5 trillion dollars per year to fund consumption.

This is why a crypto currency project will never be able to implement the concept of a “Basic Income”. The inflation rate would be so high that the wealthy would never choose to hold it. There would be no buyers, only sellers.

Other Arguments

While I have argued Basic Income to be impossible via both taxation and inflation, there are still people that insist that they have a tax scheme that would be able to fund it. To them I will leave the Silver Rule and suggest that violence does not justify an unprovable end. Any attempt to create and enforce such a widespread redistribution of wealth will result in millions of people taking the oath of John Galt:

I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine.

In effect, the Laffer Curve is merely a measure of the point where people disappear from the official productive economy. If you implement a Basic Income you can bet that many people would opt to take their Basic Income and then work outside the tax system in their own version of Galt’s Gulch known as the black market, if they choose to work at all.

It is the fear of poverty combined with the hope of riches that balance economic decision making. If you remove the fear of poverty then significant wealth will be wasted taking excessive risks.

At the end of the day I would support Basic Income that replaced the current system without increasing taxes, but only because it is better than what we have today. I still consider the scheme wrong and morally bankrupt and likely to result in an uncontrolled growth of taxes and spending that will quickly become far worse for me than todays system.