Debunking UBI funding schemes

by Serban V.C. Enache

There are a number of people on the internet, supporters of Universal Basic Income or Basic Income Guarantee, who peddle regressive taxation to “pay for” the program. The most common funding schemes you’ll find on the internet consist of: VAT (Value Added Tax) or a Tax on all financial transactions – the latter’s final goal being that of replacing all other taxes. VAT is a regressive tax that hits the poor. A tax on all transactions is regressive as well; if its aim is to replace all other taxes, it will translate into the rent-seeker’s wet dream. Not all taxes are the same. Most taxes carry deadweight. In contrast, land-value and vacancy taxes have negative deadweight (they add efficiency to the market).

I certainly don’t believe that all UBI/BIG advocates have malicious intent; but ignorance of double-entry bookkeeping at macro level, ignorance of how fiat money works and its implications regarding fiscal policy, ignorance of economic rent… leads to sabotaging their own goals. Those who champion linking UBI with VAT or a Transaction Tax, or with any other tax that’s not designed to capture economic rent, are either clueless or are deliberately chasing a pernicious agenda. Let me repeat, I believe most of them are in the former category. A financial transaction tax will simply get rolled onto consumers. Firms won’t end up forking the bill, consumers will. There is no point in levying regressive taxes to accompany UBI.

Robot workers are good and all, but firms still require demand for their produce. UBI DOESN’T need to be “funded” with a tax. What happens in case the economy goes into recession? Will UBI advocates (like all the rest) slash public services and public investment because tax revenue shrinks (due to nongovernment sector deleveraging)?

National Government taxes don’t pay for anything. They just create demand for the currency and drain income out of the economy. Why tax say 1 trillion out of the economy in a regressive manner (hurting the real productive economy) only to spend 1 trillion in UBI, income which gets eroded by usurers and land-lords demanding higher interest and rents.

There’s no need to add deadweight taxes to have BIG, or UBI, universal health care, education, R&D, the military, infrastructure etc. A transaction tax is garbage and should it replace all other taxes, it would be mana for rent-seekers. VAT is also garbage. So is sales tax. So is taxation of labor (earned income). So is taxation of improvements to the land. So is the business tax. Any rent of location left untaxed by the Government is free to be pledged as rent to property owners or as interest to money lenders (aka unearned increment).

What chunk of the economy is categorized as wealth-extractive rather than wealth-creative? Well, it’s a complex number to figure out. In the US, for the past 50 years, over half of the total value of property has been represented by land. Privatized land rents account for more than 15 percent of GDP in Australia. If we add other forms of rent seeking on top of that like: usury, patents, cartelized markups, and political lobbying, the final figure representing wealth-extraction grows ever larger. It’s certainly a bigger drainer of money than traditional corruption.

Rent-seekers get their free lunch in both the contraction and expansion phases of the business cycle, particularly during the upturn. The following graphs illustrate this clearly.

 

If I was a rent-seeker, I would encourage higher minimum wages, private investment (restaurants, banks, hotels, supermarkets etc), and most of all – public investment (roads, electricity, water and sewer etc) which precludes the former anyway. Why? Because that’s how I maximize my unearned increment made possible by the presence of the community and enterprise of its people. Big corporations feed their shareholders tremendous windfall gains via patents and political lobbying efforts – getting politicians to cut regulations and their taxes and to give them more (unfair) advantage in the marketplace.

This is an old school labor platform. A platform the petty liberal bourgeoisie has forgotten or hates. In its stead, it embraced cosmopolitanism, phariseeism, inorganic, market-driven nonsense.

I stick to the middle regarding the debate on automation, job destruction, and the future of human labor. One side will casually say, let us embrace the robots – things will be cheaper, there will be more leisure time – and, hey, look, the robots are already here! Yes, that’s a nice scenario, but how exactly are we going to transition to that in a frictionless manner, without exacerbating the political, socio-economic, cultural and racial problems persistent today? Technological progress is not something new under the sun. It’s always been a factor and it (alone) has never delivered humanity from struggle, conflict, or poverty.

The other side will claim that automation is negligible, that there will always be need of human labor, and that there’s no reason to worry about the future. Yes, there is. Try telling that to someone who lost his well-paying job to a machine. What is he left with now? Crummy welfare checks, zero hour contracts, or dead-end (poverty) minimum wage jobs. More so, some will ask – where are these robots because productivity is crawling or standing still? You can become redundant as an employee without the machine doing more work than you can. It’s sufficient for it to do the same amount of work, but more efficiently. Gains in efficiency translate into lower costs for the employer.

Both of these sides (the robots are here & the no they’re not) are naive and not worth listening to, unless you want to make the sign of the cross (whether you’re a theist or not) as you sigh deeply and shake your head. It’s not just manufacturing that’s withering away, but service jobs also – it’s called Fintech (financial technology, algorithmic processes).

Yet for every technological revolution there has been a net increase in the size of the (human) labor market. A consequence of automation in the political and socio-economic context of class warfare is that the returns on robots are being concentrated in the pockets of the opulent minority. Monopolistic tech firms will simply extract economic rents from everyone else – and they will control the price of entry into the business sector. Think feudalism with electricity, wireless internet, and fancy pocket-size gadgets.

We’ve got a good memory to remember the jobs that were lost or will be lost, but we can’t imagine the new jobs that will be there. This lack of imagination also applies to some critics of the Job Guarantee. I will venture to say that a well-regulated market, overall, delivers good results in satisfying consumer demand – so long as people have an income from which to spend (i.e. full employment).

Some wish for the Job Guarantee to be more than just a buffer stock of employed labor. They want it to also be a tool for social-engineering. I don’t know how that will fare in the West. It’s worked pretty well for the Chinese, though, who (contrary to popular belief) have a highly decentralized system, in which 80 percent of public spending is done by local governments and only 20 percent of spending is done by the central authority. I say experiment as much as you want, so long as you start from a Chartalist and Georgist framework.

Let’s return to the question of funding

For a Government with monetary sovereignty, taxes for revenue is an obsolete concept; more so, it is an operational impossibility, since the sovereign has to spend the currency into existence before it can tax and or pay interest on it. [Note: paying interest is a policy choice. The difference between a Treasury bill and a banknote you have in your wallet is that the former is a bond with a maturity date and interest yield attached to it, while the latter is a permanent bond with zero interest. An interest yield above zero is a subsidy; below zero is a tax].

Where will the money come from to finance the program is the easiest question to answer. From Central Government fiscal debits. The Executive via decree or the Legislative via a vote passes the required budget for the program. After that, the Central Bank debits the Government’s account and credits the accounts of the recipients as necessary. It’s not a hard or ridiculous thing to understand. Politicians do it all the time for war/defence spending; let’s have them do the same for civilian goals. Easiest way to implement UBI (in my view) is to give every citizen a free checking account at the Central Bank.

Conclusion

Implementing a UBI without a tax code in place designed to capture economic rent will, in time, erode the income gains to the benefit of rent-seekers. The same is true for other schemes such as Universal Healthcare, higher minimum wages, infrastructure spending etc. Implementing a UBI alongside a VAT is worse than implementing UBI without it for both political and economic reasons. A budget-neutral UBI plan should spark caution in all who identify as progressive in one way or another; for it will mean the UBI isn’t high enough and odds are will entail more than the necessary cuts in public spending to avoid waste and overlap with the traditional Welfare bureaucracy. Implementing UBI alongside a Transaction Tax, which replaces all other taxes, will be even worse. Supporters of UBI of good faith should run like hell from this scenario.

I said this before and will say it again, UBI advocates need to contemplate how they can rein in potential excess demand relative to supply – how to contain potential demand-side inflation. That is the key argument they need to have prepared; and VAT is not a fair or efficient way to contain it. That leaves the vacancy and land-value taxes, which add efficiency to the economy. They discourage and penalize idle-land (the owners of it) and shrink the rent-seeker’s bargaining power to the benefit of capital and labor. They are economically efficient and morally just.

Serban V.C. Enache is a Romanian journalist and indie author. Though interested in history, politics, and economics, his true passion is for medieval fantasy fiction. https://www.amazon.com/Serban-Valentin-Constantin-Enache/e/B00N2SJD6O/ He can be reached over Twitter. https://twitter.com/SerbanVCEnache

15 thoughts on “Debunking UBI funding schemes”

    1. There is no seignorage foregone when banks issue loans. They just mark numbers up & down on their own ledgers. Trying to discipline banks on the liabilities side doesn’t work. They are not regulated on the asset side – that is the problem. All money is credit. Al money is debt. There’s a big difference between interest-free money & debt-free money, the latter being a non-sequitur.
      In this article, the issue of asset side regulation is addressed.

      1. I suggest to you to analyse the accounting side of money creation. Remember that bank deposits are cash BOTH under US- GAAP and IAS-IFRS.
        Here is a recent paper from Biagio Bossone, World Bank:
        Money As Equity: For An “Accounting View” Of Money
        https://www.themaven.net/economonitor/financial-markets/money-as-equity-for-an-accounting-view-of-money-n5Jq9E7EMEyGKfaCk7DxOg?full=1
        As deposits are cash, there is no further liability to depositors attached (sight deposits are also part of M1, together with coins and banknotes).
        One may tell that the liability is not against the depositors, but against the Treasury as a seigniorage debt. And that is correct. But until this liability is not paid, it must be erased from the books. A further reading is: Deplorable Revelations of the German Bundesbank: The Role of Banks, Non-banks and the Central Bank in the Money Creation Process. Critique of the Article … April 2017 Monthly Report. https://www.amazon.it/dp/B072QT217N/ref=rdr_kindle_ext_tmb

        1. Deposits are not ready cash, though they can be. Banks do not loan out people’s savings when they make loans, they don’t loan reserves (cash) either. A deposit is a bank’s liability. Banks mark-up numbers in their own ledgers (assets and liabilities) when they create money; and they only use reserves (aka HPM, aka Government debt, aka liquidity) to make settlement payments. Banks require reserves to settle payments between themselves and between themselves and the Consolidated Government sector (Treasury and Central Bank).
          Again, there is no seignorage forgone when private or public banks write up contracts with customers, contracts denominated in the Government’s unit of account.
          There are two systems: the savings & loans system, which works predominantly with private IOUs (i.e. bank debt); and the clearinghouse system, which works exclusively with Government IOUs/HPM.
          Reserves are used for settlement and accounting purposes. Reserves are just checking accounts at the Central Bank. Treasuries are just saving accounts at the Central Bank.
          Banks are constrained in their lending by their capital & the actual demand for loans, NOT by reserves. So long as their balance sheet is in order, they can borrow reserves from the interbank market or from the CB to meet settlement payments – or they can sell new shares.
          Numbers on a balance sheet denominated in the Gov’s currency are NOT a burden for the Government.

          1. You are speaking about scriptural money. All money today is scriptural. You don’t need to redeem electronic bank money in banknotes as you don’t need to redeem banknotes in coins. Scriptural money carry a seigniorage which is about 100% of the face value. You print money and you get assets in exchange. If you don’t understand this you don’t understand core banking OR you are dependent on it. Pretending to record a fake liability to zero the seigniorage profits is a crime against accounting and the people at large. It is like pretending that a counterfeiter don’t gain from his activity. The difference is that the counterfeiter do not hide the profits by recording fake liabilities.

          2. You are speaking about scriptural money. All money today is scriptural. You don’t need to redeem electronic bank money in banknotes as you don’t need to redeem banknotes in coins. Scriptural money carry a seigniorage which is about 100% of the face value. You print money and you get assets in exchange. If you don’t understand this you don’t understand core banking OR you are dependent on it. Pretending to record a fake liability to zero the seigniorage profits is a crime against accounting and the people at large. It is like pretending that a counterfeiter don’t gain from his activity. The difference is that the counterfeiter do not hide the profits by recording fake liabilities.

            US-GAAP: GAAP ASC 942-230-20 Glossary

            Cash

            Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made.

            IAS-IFRS 7.6:
            “Cash comprises cash on hand and demand deposits.” (IAS 7, 2010: A341, paragraph 6)

          3. Banks don’t counterfeit the Government’s currency when they make loans. If they did that, they could operate with negative equity, which they can’t. They wouldn’t have a need to sell shares or buy back shares. Banks create money leveraging off HPM. Deposits are counted as such, but they are not ready cash. If all the customers demanded to withdraw their deposits, the bank would go bankrupt and many customers would be left without their money.
            The 1st part is an exchange of IOUs. The bank promises that the transaction will clear for the debtor (when he buys an item from a vendor, for instance); and the debtor promises to pay the loan. If the vendor banks with the same bank. The entire operation happens on the bank’s ledger. If the vendor banks with a different bank, the bank in question will have to (at a later date) settle the payment with the vendor’s bank, i.e. transfer reserves to it.
            Banks purchase cash notes from the Central Bank with reserves. The Central Bank gets the notes from the Bureau of Engraving (another Government institution). The private sector’s demand for liquidity determines the amount. Central Banks no longer target fixed money supplies, instead they target the overnight rate. The currency monopolist can either control the price of money, or the quantity of it, but never both at the same time.
            You’re attacking the contract instead of the contract clauses. The FIRE sector is overwhelmingly a mechanism of wealth extraction (rent-seeking). The problem isn’t endogenous money or Government deposit insurance. The problem is lack of asset side regulations for the banks. You discipline them on the asset side, not on the liabilities side. Had the Soviets relied on endogenous money creation, instead of rigid distribution of funds approved only by the center, they would have been a lot better off.

  1. Banks do operate on negative cash flows, it is a well known matter. I ask to you to read the references that I have attached instead of replying without reading my sources.
    Here:
    Cash Flow Accounting in Banks— A study of practice, Ásgeir B. Torfason, University of Gothenburg, 2014
    https://gupea.ub.gu.se/handle/2077/35272

    Willem H. Buiter, The Simple Analytics of Helicopter Money: Why It Works – Always, Economics, Vol. 8, 2014-28, Version 2, September 2, 2015
    http://www.economics-ejournal.org/economics/journalarticles/2014-28/version-2/count

      1. Yes, I know. It is a criminal matter. In Italy firms that show negative cash flows are filed for bankruptcy because you cannot spend what you don’t have. From a legal point of view, all banking contracts with “liabilities” instead of money are null and voids.

        1. Stocks and flows are two different things. If you have positive equity, you can spend more than you earn, but you can’t do it indefinitely. Once you burn through your equity, you can no longer operate. If the law allowed banks to operate with negative capital, the banks would in fact be able to create net money, which they can’t.
          Italy, and all the Eurozone member states are currency users, not issuers. The euro is a foreign currency for everyone, including the EZ states. The Euro-scheme imposes the member states to guarantee euro deposits; a thing which they can’t do without violating the Maastricht fiscal deficit and debt to GDP (arbitrary) rules. The ECB is the only institution capable of insuring euro deposits. You can’t have a common currency union, without having a common banking union at least, let alone a fiscal union (i.e. a federal treasury).
          The Eurozone was designed and implemented by financiers for the benefit of trans-national capital. It, the EZ and indeed the EU itself, is inimical to popular sovereignty, democracy, full employment goals, and state sovereignty.
          http://hereticus-economicus.info/the-sovereign-nation-state/

          1. I don’t know for certain. I speculate the idea arose in tandem with the notion of Representative Government. I place it in Ancient times, with the development of city states. The notion of debt/credit, however, is as old as man. And religion built itself upon the concept. Money was created from or alongside the Calendar system, and used as such (standardized IOUs with great circulation among people) by the palaces/temples. Back then they recorded those IOUs in things like bones, wood, clay tablets, and the like…

  2. am i missing something, or would UBI be more or less pure inflation? if we all get $1000 a month from the government that has to create new money to give it to us. is that more or less the new 0 per month with most of it going to the landlord, then the utility companies, then the grocery store etc… after a short time won’t we see homeless who’s $1000 a month buys a weeks worth of shelter and food and calls from the progressives to “double the UBI with a tax on XXXXXX” not be far behind?

    it seems the minimum wage is a great example of this.

    1. UBI would eliminate traditional welfare spending. Depending on how big the program would be, it might eliminate a portion from health care spending as well. UBI would also cause redundancies in the Government Welfare bureaucracy.
      UBI without taxing economic rent would be pretty much useless.
      The minimum wage is not a “great example” of harmful policy.
      Seven decades of historical data finds no correlation between minimum wage movements and employment levels.
      I don’t deny that UBI has the potential to create high inflation short term, until the market adjusts to the new circumstances.

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