Who will pay for justice?
Tommy PotterIn this chapter we discuss measures to improve the effectiveness of the economy. The aim of good tax policy and financial regulation should be to increase citizens' prosperity and achieve more social justice, but not "equalization" or "levelling."
In fact, almost everything requires additional funds - the elderly care system, the education system and the health care system. An accelerated transition to renewable energy and new military spending demand additional funds. What priority do citizens' dividends have in the list of priority expenses? I would put the fight against poverty and homelessness first. And I believe that the immediate introduction of citizens' dividends is the right thing to do.
The rich should contribute more
Most take this to be self-evident for reasons of justice. More reasonable, taxation of the rich should be increased to make the economy more efficient. Few people realize that high inequality braked the economy, and increased inequality reduces the “national pie”.
Many people are incredulous at this claim - high inequality has stalled the economy. After all, they've been hearing for years that taxes on the rich are being cut to boost the economy. But the claim, that high inequality slows down the economy is a historical fact.
During the “German economic miracle”, the marginal tax burden on the super-rich was very high, and for the rest of the population it was lower than it is now. This has resulted in higher economic growth and increased prosperity for all segments of the population, not just the rich. By the end of the last century, the tax burden on the rich was gradually decreasing. By now, the rich and super-rich pay a bit, if any, taxes. As a result, their property is growing rapidly and the real incomes of a large part of the population are falling.
The fact that the German population is getting poorer year by year is hard to believe, especially for young people. But if you ask those who have already retired and are forced to apply for social assistance, the situation looks catastrophic.
To understand that freeing the rich from taxes shrinks the “national pie” you don’t need to dive deep into economics. Enough elementary reasoning. We begin our argument by recognizing the historical fact that the tax burden on the rich was high (in the first decades after World War II) and then was reduced. This means that the rich now have more money at their disposal, and the rest have less.
First question: “Can the rich in this situation expand production and create additional jobs?” Answer: “No, they cannot. People have less money, so they can buy fewer goods, let alone more”. Therefore, jobs and the production of goods will have to be reduced!
Second question: “What should the rich do with “extra” money?” Answer: “Invest for further growth. For example, in China. Or purchase goods that do not lose value, such as gold, works of art, real estate or land”. As a result of increased demand, prices for all these goods increase, which is what we are seeing. As property values rise, rents also rise...
There is also an effect of exponential growth in inequality. The greater the inequality, the faster it increases.
So, we need to increase the tax burden on the rich. But the conventional wisdom is that this cannot be done, given the ongoing tax wars, tax havens and resistance from multinational corporations. American economists have shown (in their book “The Triumph of Injustice”) that these problems can be solved, if there is political will.
Optimal taxation
Increasing taxation of the rich is certainly fair. But to what extent? We're assuming, that by increasing taxes on the rich, we will boost the economy and increase overall prosperity. But too high burden on the rich leads to leveling incomes and slows down the economy. Therefore, there is a certain optimal taxation and optimal inequality that ensures the greatest efficiency of the economy.
John Rawls (in his book A Theory of Justice) has a different criterion: as long as increasing the tax rate on the rich generates more income for the poorer, it should be increased. This criterion requires higher taxation of the rich, in contrast to the criterion that causes the greatest acceleration of the economy. So, if the goal is not the welfare of all, but the maximum welfare of the poorest, then the tax burden on the rich will have to increase a bit more.
Further increases in taxation of the rich reduce both overall prosperity and the prosperity of the poorest. This is the path to "equalization" or "levelling."
Consider the challenges facing society, I vote for optimality in terms of efficiency. Unfortunately, the general consensus is that in modern political conditions it is impossible to achieve optimal inequality, if such a goal is set at all.
Taxation of capital
For modern developed economies, the share of capital in GDP significantly exceeds the share of labor. And the capital intensity of the aggregate economy is constantly increasing, while labor intensity is decreasing. In the ultimate case, with complete robotization, labor will not be needed, and accordingly, there will be no taxes on labor. Paradoxically, in practice, most of the tax burden falls on labor.
Therefore, it is necessary to increase the taxation of capital and reduce the tax burden on labor. Unfortunately, since the seventies of the last century, a reverse process has been going on. Capital can be easily transferred to another country, so governments reduce or eliminate capital taxes. Work cannot be moved easily, and governments take advantage of this. But high labor taxes lead to lower employment and slower economic growth.
Progressive taxes
A progressive tax is when the tax rate on small incomes is lower than on large ones. There is often a tax waiver up to a certain minimum amount. In the United States, the tax waiver for income is known as the "standard deduction." It is set at $12,550 for single individuals (for married couples filing jointly, $25,100 and for heads of household, $18,800). In Germany there are different tax classes that have different tax waiver and tax rates depending on marital status and number of children.
For very high incomes, the maximum rate may be set very high, such as 90% or more. This high rate is called the confiscation rate. The confiscation rate was applied to income taxes in most developed countries in the middle of the last century. For example, in the United States in the 1950s and 1960s, the top tax rate reached 91%. The highest turn point of income was $200,000 - (income more than $200,000 was taxed at 91%). By the way, $200,000 is equal to approximately $1,900,000 in today's dollars. Only about two million! Today, some of the richest earn billions and pay almost nothing!
As an example, consider our version of the progressive inheritance tax: inheritances up to 0.1 million are not taxed (deduction value is 0.1 m); for brackets from 0.1 to 1 million, we set a rate of 5%; from 1 to 10 millions – rate 20%; from 10 to 100 millions - 40%; from 0.1 to 1 billion 60%; over 1 billion – 90%.
Let us not deny ourselves the pleasure of calculating how many millions our inheritance tax is, for example, for a fortune of 3 billion.
5% × 0.9 = 0.045; 20% x 9 = 1.8; 40% x 90 = 36; 60% x 900 = 540; 90% x 2000 = 1800. Total 2377 845.
The effective tax rate for 3 billions is 79%! (2377.845/3000 = 0.7926).
Capital and personal property
Currently, about 10% of the richest people consume more than half of the earth's resources. A significant part of the economy serves the parasitic consumption of the richest. To reduce this parasitic consumption, personal wealth should be taxed more heavily than capital. The top tax rate on personal capital should be relatively high, for example 1 billion, and the top tax rate on personal property should be relatively low, for example 1 million.
By capital we mean everything that is used to generate income (or used to preserve or accumulate wealth). Personal capital tax is levied on the total amount, which includes the value for physical equipment, stocks, deposits, real estate, land, etc. The same way is taxed the personal property - as a total amount on the family home, holiday home, car or yacht.
The division of wealth into capital and personal property limits the parasitic consumption of the rich more effectively than any prohibitions could ever do. For example, a ban on private aircraft is currently being discussed for environmental reasons. With such taxation, even the richest can no longer afford a private jet. At the same time, high levels of capital leave room for entrepreneurial activity.
Personal income tax
Progressive income with a confiscation rate is levied on the amount of all income - labor and non-labor (passive). The latter includes income from investments in stocks, bonds, real estate and other financial instruments, income from rent, copyrights and licenses, as well as income from pension contributions and insurance.
Consumption taxes
Sales tax and VAT are regressive, meaning the rich spend less of their income on these taxes than the poor. From a social justice perspective, these taxes should be abolished. (However, some supporters of an unconditional income consider consumption tax to be the main source of financing, which is illogical...)
Numerical example of financing citizens' dividends
Recently an interactive web tool has appeared that is based on DIW micro-simulation (Deutschen Institutes für Wirtschaftsforschung - German Institute for Economic Research). This simulator offers interested audiences a rare opportunity to immediately visualize economic connections. The existing German tax system can be changed using sliders and switches to finance basic income through new taxes or redistribution of existing taxes.
The authors of this simulator prove that a UBI of 1200€ can be introduced immediately (which from our point of view would be unreasonable). They claim that 75% of the funding needed is already provided through existing taxes, and that taxes would have to be increased to get the additional 25%.
Let's try using this simulator to calculate the step-by-step introduction of citizens' dividends: The first three steps are 100€, 200€, 300€ for everyone, and then 300€ for children and 600€ for adults and the last step is 400€ and 800€ for children and adults.
The population of Germany is 83 million people. Required expenses for payment of 100 € per month : 100 € * 83 Mln. € = 8.3 B€. Funding per year is 100 B€. That is 2.5% of the gross domestic product of around 4 trillion euros.
Step 1. 100€ for everyone – for children and adults.
Required 100 B€ per year; Available 13 B€; 88 B€ is missing.
With a checkbox in the simulator we cancel all tax privileges for the rich. That give us 105 B€ tax revenue. As a result, instead of the missing 88 B€ we get an extra 17 B€ (they will not be unnecessary in the treasury).
Step 2. 200€ for everyone – for children and adults.
Required 201 B€ per year; Available 130 B€; 70 B€ is missing.
In the simulator we put two checkboxes, as a result we have:
15 B€ - Tobin tax (0.1% on all financial transactions)
59 B€ - capital tax (rate 1.5%; tax deduction - 1 million €)
Now 4 B€ remain “extra”.
Step 3. 300€ for everyone – for children and adults.
Required 301 B€ per year; Available 217 B€; 84 B€ is missing.
To compensate 84 B€:
50 B€ - modernization of the tax system
6 B€ - increase in inheritance tax
46 B€ - we introduce draconian excise taxes on CO-2 emissions.
Now 17 B€ remain “extra”.
Step 4. 300€ for children and 600€ for adults.
Switch on: Minors receive half price
Required 552 B€ per year; 350 B€ available; 203 B€ is missing.
For compensation 203 B€ we increase income tax (on average by +14%, and the maximum rate from 42% to 56%). We get 212 B€.
Now 9 billion € remain “extra”.
Step 5. 400€ for children and 800€ for adults.
Required 737 B€ per year; 584 B€ available; 152 B€ is missing .
For compensation 152 B€:
127 B€ - cancel social and unemployment benefits
+23 B€ - we increase the capital tax from 1.5% to 2.1% (tax deduction - 1 million €).
We DO NOT increase these taxes:
- VAT, since VAT is paid mainly by the poor
- Corporate tax - no need to increase the tax burden on business
It seems that the simulator's capabilities have been fully utilized. Unfortunately, it does not allow us to change taxes in the way we think is right. But you can see approximately what revenues can be expected from various changes in tax policy.
Of course, you can spend time and independently calculate your version of the “correct” taxation. But the value of such calculations is small. Too many unpredictable circumstances can ruin all calculations. For example, how will employers change wages in connection with the emergence of unconditional income for employees and how much will this reduce the taxes collected? Will it be possible to prevent capital flight from the country? Owners of capital are capable of bringing the economy of any country to its knees, even one as large as Germany. But this is another topic: “Straitjacket for capital”.
Conclusion
The introduction of citizen dividends implies fundamental changes in society. Maybe we should even talk about a new socio-economic formation? About a new ideology that inspires people to solve accumulated problems? About a new morality in which, instead of envy of the parasitic consumption of the rich, there is uncompromising condemnation? Instead of alms and pity for the miserable - absolute rejection? The economic basis of such morality should be, on the one hand, citizen dividends and, on the other hand, a fair financial and tax system.
The discussed changes in taxation and financial regulation are offered to increase the productivity of social labor and accelerate the rate of economic growth, especially in developed countries. This growth should provide financial capacity to address global challenges such as the energy transition and accelerated development of poor countries. The introduction of citizens' dividends is one of the means to achieve these goals, and a mean that eradicates poverty and reduce social inequality.