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ironphoenix) wrote2010-12-12 11:01 am
ironphoenix) wrote2010-12-12 11:01 am
Ending poverty?
The Globe and Mail published an interesting article in which the author advances a proposal to "guarantee everyone in Canada $20,000 a year." There are a lot of good reasons for this kind of approach, not least being that for at least some people, it would cost us less overall. Admittedly, certain people would require additional help in managing this money; there is a small proportion of people who, for one reason or another, really can't handle their own finances, and who would benefit from more structured programs, but the second link shows pretty clearly just how tiny a minority that is. The stereotype of welfare and other aid recipients being guzzlers at the governmental teat is by and large just plain wrong, and the obstacles put in their way by both procedures and attitudes do little more than discourage and demean people and use up time and energy they could put to better use gaining skills and taking care of themselves and their families.
If we try this guaranteed income idea, though, a tricky and possibly unexpected problem rears its head. Fortunately, I think it may be solvable: read on!
Let me first define for convenience an incentive rate; this is the increase in after welfare subsidy and tax income on an incremental dollar of earned income (i.e., a marginal rate). For high-income earners (who get no subsidy), it is one minus the marginal tax rate.
Currently, in Ontario, the "Ontario Works" program nominally reduces benefits at 50% of earned income after taxes (Section 49.1.i-ii) (with a tax rate of 20.5%), although a slightly tricky policy (see Section 49.3-4 of the Regulation cited) seems to make the reduction effectively 100% in a number of circumstances. The basic maximum benefit for a single person can be worked out as $7,104 per year. From this, we can calculate that the incentive rate between 0 and $17,871.70 of earned income is 39.3%; above that, the incentive rate jumps to 79.5% until we hit the first magic tax bracket number of $31,278 in earned income. Above that, the incentive rate drops off gradually to 59.84% for incomes above $127,021, half again the best possible rate for low-income earners.
There is a tension between four factors:
The higher the minimum welfare benefit, the more will be paid out to each person on welfare, and the lower the low-income incentive rate becomes for a given zero point. The higher the net welfare subsidy-tax zero point, the higher the incentive rate low-income earners, but the more money is needed to subsidize this larger group of low-income workers. The higher the incentive rate for people with high incomes, the less money is available to cover welfare and employment supplements. If we don't get the books to balance out with enough surplus to cover the other government programs, we create a cycle of deficit spending which makes the whole program a temporary, unsustainable indulgence. The socialist extreme is to disregard the third factor and flatten their incentive rate; the libertarian extreme is to disregard the first factor and provide no basic benefit; ignoring the fourth factor and operating on an indefinite deficit has been shown not to work. Avoiding these three pitfalls has led us to where we are today: making the incentive rate for people on welfare dramatically lower than the incentive rate for any other group in Ontario.
If we raise the minimum welfare benefit to $20,000, it becomes quite expensive to maintain any kind of low-income incentive rate at all. Even the existing rate of 39.3% would put the net welfare subsidy-tax zero point at $32,948.93. Consider next that the minimum hourly wage of $10.25 in Ontario equates to approximately $21,320 per year at full-time hours; this means that the government would have to subsidize each full-time minimum wage worker by $11,628.93 per year, instead of receiving $4,370.60 from them in taxes, for a net difference of almost $16,000 per worker.
While it may be politically unpalatable, I think that much of that money should come from a decrease in the high-income incentive rate, which means an increase in the marginal tax rate for high income earners. There would be much well-funded complaining about such a measure, but I have little sympathy: Across Canada, "Average after-tax incomes remained roughly the same for families with incomes in the bottom 20% and the middle 60% between 1976 and 2007 but rose for those in the top income group after 1995. The difference between the top 20% income group and the bottom 20% rose by 37%." The disparities are highest in BC and Ontario. (A more pointed presentation of this can be found here.)
What limits the marginal tax rate I think the high income earners should pay? Fairness first: their incentive rate should not be significantly worse than anyone else's. Second is a more pragmatic limitation: many high income earners, like it or not, are economically significant investors and entrepreneurs, and it is unwise to kill golden egg-laying geese or, what is more likely, drive them to fly away to other ponds. People with a lot of money are less constrained in their mobility than those without it, because they can cover the expenses of relocation and the disruption in income that usually accompanies an international move.
Unfortunately, balancing these things probably still leaves a shortfall in the budget. Where should the money come from? Historically, governments have assumed debt to fund programs, but as a long-term strategy, this merely mortgages the future. I would instead urge the government to simply print the shortfall as cash, and rely on "trickle-up economics." Trickle-down economics is inefficient because wealthy folks tend to save their money, especially in financially troubled times like these. Poorer folks, however, don't have that luxury: a dollar gained is usually a dollar spent on necessities, and thus pumped into demand for real products and services, boosting the real economy rather than the ethereal one of derivatives and hedge funds. This in turn builds up employment opportunities, reducing the load on the government subsidy system as unemployed and underemployed people take up the available work.
We could expect a short-term inflationary bump due to the influx of cash to cover the initial shortfall, and it might in fact be necessary to smooth over the starting impact of that with a certain amount of government debt, but this would need to be a transitional measure at most. The inflation would also be offset by the increase in actual production, reducing scarcity of real goods, especially in necessities, so it would be likely to hit luxury goods harder than basics, so that the usual flat tax effect of inflation would be slanted toward higher income earners.
A guaranteed income has other advantages. Entrepreneurship is a chancy thing, and if one risks ending up penniless and starving on the street, one is less likely to try starting a business. A guaranteed income can support an entrepreneur during the initial launch, and help them recover if it fails. This makes it easier to start a company, and to try again when the first one fails: it usually takes several tries before an entrepreneur finds a winning game. The guaranteed income can also support volunteers, artists, stay-at-home-parents, and others whose work may be useful and productive to society while not being financially sustainable in itself.
Overall, it seems to me that a guaranteed income is probably possible, and even worth trying. Integration of federal and provincial planning would be immensely useful in making it happen, which sadly makes it much harder to achieve in practice. Nevertheless, I can hope that someday, when Harper's Conservatives get replaced by a government that cares about Canadians, we may find someone with the political guts to give it a go.
If we try this guaranteed income idea, though, a tricky and possibly unexpected problem rears its head. Fortunately, I think it may be solvable: read on!
Let me first define for convenience an incentive rate; this is the increase in after welfare subsidy and tax income on an incremental dollar of earned income (i.e., a marginal rate). For high-income earners (who get no subsidy), it is one minus the marginal tax rate.
Currently, in Ontario, the "Ontario Works" program nominally reduces benefits at 50% of earned income after taxes (Section 49.1.i-ii) (with a tax rate of 20.5%), although a slightly tricky policy (see Section 49.3-4 of the Regulation cited) seems to make the reduction effectively 100% in a number of circumstances. The basic maximum benefit for a single person can be worked out as $7,104 per year. From this, we can calculate that the incentive rate between 0 and $17,871.70 of earned income is 39.3%; above that, the incentive rate jumps to 79.5% until we hit the first magic tax bracket number of $31,278 in earned income. Above that, the incentive rate drops off gradually to 59.84% for incomes above $127,021, half again the best possible rate for low-income earners.
There is a tension between four factors:
- The minimum welfare benefit
- The net welfare subsidy-tax zero point
- The incentive rate for people with high incomes
- The sustainability of the welfare and taxation program
The higher the minimum welfare benefit, the more will be paid out to each person on welfare, and the lower the low-income incentive rate becomes for a given zero point. The higher the net welfare subsidy-tax zero point, the higher the incentive rate low-income earners, but the more money is needed to subsidize this larger group of low-income workers. The higher the incentive rate for people with high incomes, the less money is available to cover welfare and employment supplements. If we don't get the books to balance out with enough surplus to cover the other government programs, we create a cycle of deficit spending which makes the whole program a temporary, unsustainable indulgence. The socialist extreme is to disregard the third factor and flatten their incentive rate; the libertarian extreme is to disregard the first factor and provide no basic benefit; ignoring the fourth factor and operating on an indefinite deficit has been shown not to work. Avoiding these three pitfalls has led us to where we are today: making the incentive rate for people on welfare dramatically lower than the incentive rate for any other group in Ontario.
If we raise the minimum welfare benefit to $20,000, it becomes quite expensive to maintain any kind of low-income incentive rate at all. Even the existing rate of 39.3% would put the net welfare subsidy-tax zero point at $32,948.93. Consider next that the minimum hourly wage of $10.25 in Ontario equates to approximately $21,320 per year at full-time hours; this means that the government would have to subsidize each full-time minimum wage worker by $11,628.93 per year, instead of receiving $4,370.60 from them in taxes, for a net difference of almost $16,000 per worker.
While it may be politically unpalatable, I think that much of that money should come from a decrease in the high-income incentive rate, which means an increase in the marginal tax rate for high income earners. There would be much well-funded complaining about such a measure, but I have little sympathy: Across Canada, "Average after-tax incomes remained roughly the same for families with incomes in the bottom 20% and the middle 60% between 1976 and 2007 but rose for those in the top income group after 1995. The difference between the top 20% income group and the bottom 20% rose by 37%." The disparities are highest in BC and Ontario. (A more pointed presentation of this can be found here.)
What limits the marginal tax rate I think the high income earners should pay? Fairness first: their incentive rate should not be significantly worse than anyone else's. Second is a more pragmatic limitation: many high income earners, like it or not, are economically significant investors and entrepreneurs, and it is unwise to kill golden egg-laying geese or, what is more likely, drive them to fly away to other ponds. People with a lot of money are less constrained in their mobility than those without it, because they can cover the expenses of relocation and the disruption in income that usually accompanies an international move.
Unfortunately, balancing these things probably still leaves a shortfall in the budget. Where should the money come from? Historically, governments have assumed debt to fund programs, but as a long-term strategy, this merely mortgages the future. I would instead urge the government to simply print the shortfall as cash, and rely on "trickle-up economics." Trickle-down economics is inefficient because wealthy folks tend to save their money, especially in financially troubled times like these. Poorer folks, however, don't have that luxury: a dollar gained is usually a dollar spent on necessities, and thus pumped into demand for real products and services, boosting the real economy rather than the ethereal one of derivatives and hedge funds. This in turn builds up employment opportunities, reducing the load on the government subsidy system as unemployed and underemployed people take up the available work.
We could expect a short-term inflationary bump due to the influx of cash to cover the initial shortfall, and it might in fact be necessary to smooth over the starting impact of that with a certain amount of government debt, but this would need to be a transitional measure at most. The inflation would also be offset by the increase in actual production, reducing scarcity of real goods, especially in necessities, so it would be likely to hit luxury goods harder than basics, so that the usual flat tax effect of inflation would be slanted toward higher income earners.
A guaranteed income has other advantages. Entrepreneurship is a chancy thing, and if one risks ending up penniless and starving on the street, one is less likely to try starting a business. A guaranteed income can support an entrepreneur during the initial launch, and help them recover if it fails. This makes it easier to start a company, and to try again when the first one fails: it usually takes several tries before an entrepreneur finds a winning game. The guaranteed income can also support volunteers, artists, stay-at-home-parents, and others whose work may be useful and productive to society while not being financially sustainable in itself.
Overall, it seems to me that a guaranteed income is probably possible, and even worth trying. Integration of federal and provincial planning would be immensely useful in making it happen, which sadly makes it much harder to achieve in practice. Nevertheless, I can hope that someday, when Harper's Conservatives get replaced by a government that cares about Canadians, we may find someone with the political guts to give it a go.
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There's also another (solvable) problem, where instead of just looking for people who pretend not to exist like the current tax system, CRA will also have to be looking for people who pretend to be multiple people, since there would now be a real incentive to do so.
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Once again, global trade agreements play out in really weird ways with national economic policy.
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In lands like ours funded by tax revenue, of course, it might be a hard sell to say the least to start programs that dole out material help rather than cash, or that encourage a cash-free barter economy where one can donate one's labor in exchange for dollar-free credits redeemable for food and shelter. That, though, might be the only way to give some folks necessities in times when the money supply is shrinking (due to the continuing debt readjustment).
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Yeah, I thought of that later. A change in sales tax could offset that, but it makes the sales tax system more complex again. On the upside, it reduces the incentive for well-off people to take their golden balls and go home.
I don't see what's wrong with printing the money to cover it, so long as it is a short-term thing: ultimately, printing money to cover real expenses only fails when the goods and services can't be provided by the real economy and inflation runs away on you. Otherwise, it's just a way of borrowing from the present rather than the future, and adjusting everyone's standard of living to match our means.
I think there are already government agencies that take a dim view of people who pretend to be multiple people!
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Yes, discussion seems called for, perhaps even in a semi-organized way, since several folks seem to want to chime in!
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Canada has different issues from the US: as I see it, our money supply isn't shrinking dramatically at the moment, since it didn't balloon as much in the first place. What I think it would mean in the US is deliberately increasing M1, offsetting the financial sector "adjustments" affecting M2 and M3.
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Really? I may be a bit out of touch, then...
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I'm not a big fan of sales tax (except for possibly on some luxuries) as a whole really.
Printing money and adding to debt are both short term things though. I don't think it's really that critical for the plan where the money comes from, and since inflation is going to go up if everyone in the economy is now doing a lot better putting it into debt seems smarter, since inflation basically reduces real debt.
[info]pezchica's point that some of the costs would be offset by reduced expenses in other services and administration is important, and is a bit of what I was getting at with the link to the story of Million-Dollar Murray.
This I totally get. You're right though that our breakdown of Federal, Provincial and Municipal governments cause a problem with that though, since most of the savings would be at the Provincial and Municipal level.
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According to our class discussion and the textbook, there's huge disagreement between the left and the right on what the amount should be. Should it be 10, 000 or 20,000? Also, the total overhaul it requires to our system. Ongoing worries about people just not working despite the case study a few years ago in Canada where pretty much no one stopped working.
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Barter has the problems you cite, but with the internet, or something likely distributed and anarchic, values could be easily placed on goods and services to be bartered in a fairly transparent manner. This is being done today on a tiny scale, though it flies under the radar for most people. In my ideal world, this barter economy would exist using markers for goods/services/labor other than money, though convertible to money if need be.
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*reads Wikipedia article*
Hmm, yes, a few good ideas in there. I've always been a fan of the principle of "alignment of interests," where an arrangement is structured so that it is difficult for one party to profit by another's loss. Some constructs in Islamic finance seem to implement that ideal pretty well.
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That the amount is contentious isn't surprising, I guess. It's also tough because living here costs more than living in a lot of other parts of Canada, and some places cost even more.
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Property taxes are another thorny one.
Inflation's impact on debt will have the side effect of pushing up interest rates to compensate.
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How do you measure income in a barter system for taxation? If not income, what do you tax? What do you pay taxes in? I guess your use of the term "anarchic" gives a clue as to what you may think of taxes and governments and suchlike?
The base problem commutes to a non-monetary system, though: does society guarantee everyone the necessities of life, and if so, how? How does a society maintain a positive incentive for higher productivity, and not try to use more than it produces? The numbers go away, but the underlying concepts don't solve themselves when we lose the dollar signs.
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All legitimate questions, but somewhat missing the point. After all, if someone raises their own food and very little else, are they doing well enough to be taxed? If they sell that crop, they monetize it. If they eat it, as most with gardens do, they don't. I know lots of people who garden; none pay taxes on their harvests.
And here we have a conundrum of the poor. In order to survive, many raise a portion of their own food. Being forced to monetize this crop forces them to submit a portion of their labor's fruits to taxation, which diminishes the return. Instead of, say, bringing some of the corn to market and selling it, perhaps folks nearer the margins could supply this corn to a neighbor who could trade labor or even another crop. Both would benefit.
The original article suggests something similar in the minimum income. I'm suggesting a way to minimally survive without income.
(I'm not suggesting all farmers should have this option. Most farms are indeed for-profit entities, and many of their harvests, being GMO crap, are literally not edible until they have been processed. Tax these folks to death, please. I also use "anarchic" in its literal definition, as "leaderless", empowering every participant to decide value. True markets are anarchic in this regard.)
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A tax who's purpose is to make something less attractive or whatnot would be OK to me.
Property taxes are another thorny one.
I have an idea with property taxes that's pretty radical, that I talked about in my journal before. But that's sort of in the same category as "sin taxes" though.
Inflation's impact on debt will have the side effect of pushing up interest rates to compensate.
Interest rates can only limit inflation so far. See what happened in the 70s with "stagflation" and whatnot.
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I think the tax question is very important from a social ethics standpoint. I am taxed on what I produce and on what I consume, and those taxes go towards things that benefit me and others in my society. I can easily imagine an untaxed "demonetized" (not to be confused with "demonized") economy, as you describe, in which each person exchanges only goods with other people, and there are multi-way deals, etc., and I can even imagine a decent-sized group prospering under this system, all tax-free. And then I ask myself, why should they get away tax-free just because their stuff isn't monetized?
Now, you may say that this only applies to people surviving on the margins at a subsistence level, which is fine, but where do you draw the line? What do you use for a ruler to draw that line? What do you do about folks who have gone beyond it?
Also, how do you deal with people who are, frankly, not well suited to farming, or whose hard-won, expensive skill sets and experience are in areas completely unrelated to farming, and who would be too busy farming to keep those skills up-to-date and seek work that uses them?
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The problem is not graduated taxation like income, but flat taxes on consumables. When one buys just about anything (except food), one pays disproportionately more of one's income than someone with money to spare.
The arable land question seems easy to me. Right now, many, many people live in the 'burbs where a lawn is the norm. Those lawns could easily become gardens. Many are already being converted. And the people living in these homes often rent, sometimes for decades. In fact, rent in a rural home with arable land is often less than rent in a city apartment. When one isn't working, why not work anyway in ways that improve nutrition?
I don't have answers for the last paragraph you pose. Let's remember, though, that those "hard-won, expensive skill sets and experience" might not be applicable in even the immediate future. People are seeing whole industries, along with the careers that fuel them, slide into the past. Farming, basic carpentry, basic plumbing, general handy-man skills . . . these are activities one need not pursue full-time to become at least a means of staving off complete economic collapse.
Also, let's remember that most farming isn't a full-time occupation. Farming should be a matter of watching things grow. We live with a school system that took kids out of the classroom during the one time of year they were needed to bring in the harvest. With even modest mechanization, this time is cut by a month or more.
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I'm not in love with agriculture; quite the opposite, in fact. I hated tending the garden as a kid, and hated with a fervent rage the crops I was forced to swallow from that garden (with one exception, corn). For me, gardens were planted to harvest and nurture a child's misery.
I now realize most of the garden wrath I experienced grew not from the dirt but from my parents' lack of skills in both rearing young and preparing food. Mom, bless her heart, has never met a natural ingredient she couldn't render inedible (except, again, corn, and sadly she does that only passably). The only thing Dad learned about gardening centers on using a roto-tiller and managing the seed drop.
They are both creatures of their generation. Much of my reading and media reveals how much both of them can learn about proper soil management, planting technique, and a host of other issues that would make their crops better both nutritionally and as a small cash source for the marketed surplus.
Mom and Dad are not alone. What can start with small household gardens can spread, turning industrial plots into better-tended organic permaculture sites. We can reverse soil loss, reduce petroleum inputs and improve per-acre yield of both product and nutrition. But we won't be able to do this without radical grass-roots reformation of farming and an infusion of farm labor.
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It's unfortunate that your experience with gardening was rather like being sent out to cut the switch you're to be beaten with!
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A combination of self-sufficiency and modest employment would take quite a bit of the pressure away from needing monetary gain. I only work part-time, for example. I could work even less if I had enough available dirt to supplement our diet, but city plots tend to be too small.
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Here's an interesting take on the tax question: what if the government gave people part-time work at certain times rather than demanding money or goods?
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Compulsory military or civil service bothers me for reasons beyond the scope of this discussion.
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