Citizen's Dividend

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Citizen's Dividend

Post by Tortoise » Fri Sep 02, 2011 5:06 pm

Stone has mentioned the idea of a citizen's dividend in a number of different threads, and it often sparks a lively debate, so I thought it might be good to start a dedicated thread for the topic to allow thorough exploration of various aspects of the concept.

One proposal Stone has offered is to base this hypothetical citizen's dividend largely or even entirely on a general asset tax. The overall tax revenue to the government would be roughly the same as what it currently is for the total of income tax, property tax, sales tax, etc. The idea is that an asset tax-based citizen's dividend would encourage people take some of the money they otherwise would have saved and instead spend it. This, in turn, would stimulate business activity by increasing demand for various products, inducing businesses to hire more workers and expand, etc.

This concept of a citizen's dividend seems like it might be preferable to having a myriad of different taxes (including a labyrinthine income tax code) and a mind-numbing array of ways in which the government distributes the tax revenue to the citizens (e.g., welfare, social security, education initiatives, corporate welfare, bailouts, etc.). It would (1) presumably weaken the power of special interests and lobbying, and (2) simplify the tax system to such a high degree that it would be much more difficult for large corporations and super-wealthy individuals to find loopholes through which they can avoid paying most of their intended tax burden.

I do have at least one major concern with the idea, though. The macroeconomic effects of funding the citizen's dividend mainly with an asset tax would be hard to predict, and as a result, the citizen's dividend as a cure may prove to be worse than the disease.

For example, let's say the citizen's dividend is set to be equal to the "poverty level." But the poverty level is affected by the general levels of spending and saving in the population, so varying the asset tax will likely vary the poverty level. Introducing an asset tax would cause people to spend more and save less, which would tend to raise prices and thus also the poverty level. So we might have to raise the asset tax in response, but again, this would tend to further raise prices and thus the poverty level, and so on.

For an increase of X% in the asset tax, would the poverty level increase by more or less than X%? The answer is not at all obvious to me, because I think it depends on a myriad of macroeconomic factors that cannot be captured accurately in any single model or equation. The relationship between the asset tax and the poverty level is likely not even linear, meaning there could be an asset tax level beyond which spending suddenly becomes much more preferable to saving, and this would tend to cause prices and thus the poverty level to skyrocket.

As usual when dealing with macroeconomics, the phrase "all other things being equal" rarely applies since virtually every variable in the equations depends at least to some extent on most of the other variables.
Last edited by Tortoise on Fri Sep 02, 2011 5:08 pm, edited 1 time in total.
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Re: Citizen's Dividend

Post by 6 Iron » Fri Sep 02, 2011 11:44 pm

If a large portion of a person's wealth were tied up in illiquid assets such as a small business, or his home, converting to this manner of taxation would be quite problematic.
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Re: Citizen's Dividend

Post by stone » Sat Sep 03, 2011 2:40 am

Tortoise and 6Iron, I'm really flattered that you've grappled and argued with this rather than just telling me to shut up. Cheers!

I don't think that there is much danger that a citizens dividend would raise the cost of subsistence living. Almost everyone (in a developed country) already gets all the food, clean water etc that they need to subsist. Paying a citizen's dividend would not induce people to go out and buy twice as much potatoes. Almost by definition, subsistance consumption goods are things that you only want enough of and no more. The only increased demand pressure would be for discresionary purchases -things like piano lessons, ipads and holidays. I think that there is tremendous spare productive capacity in the economy such that much increased demand for such things could also be met without prices getting pushed up. BUT lets say, the price of piano lesson were to double as a consequence of the citizens dividend- I don't think that that would be a problem. The citizens dividend would not need to be increased, at least as many people would still be getting piano lessons and also I think there is zero danger that all the potato farmers would leave the potato fields fallow in order to teach piano. Them doing so would be the only way I could envision subsistance costs getting pushed up.

With the asset tax, I think a key benefit would be the effect on asset prices. Currently asset prices get distorted by bubble effects. The prices reflect what people envisage the price will rise to. Under an asset tax system, asset prices would be on the sounder footing of reflecting potential earnings from the asset. A start up company would have minimal asset value until people were really convinced that it had earning potential. House prices would reflect the cost liability of the asset tax versus how willing people were to pay to live in a big house. Housing would get seen as a consumption rather than a speculative store of value.
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Re: Citizen's Dividend

Post by stone » Sat Sep 03, 2011 2:50 am

6iron, under a hypothetical asset tax/citizens dividend system, a business would not be paying corporation tax or payroll tax and the employees would be getting a citizens dividend. If the asset tax on the business could not be paid out of the earnings from the business, then that would indicate that the business was tying up assets such as property or equipment that others could use more productively. If that wasn't the case, then the asset value of the business would be lower and the asset tax would be affordable. As I see it, an asset tax ensures that capital is deployed productively.
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Re: Citizen's Dividend

Post by stone » Sat Sep 03, 2011 6:26 am

Tortoise, thinking about it, energy costs are probably a way that the citizen's dividend might feedback on the cost of subsistance living. Perhaps the citizens dividend might make oil more expensive because more "luxury" consumption might occure. That increased cost of oil could contribute to the cost of potatoes or whatever (oil is used for fertilizer, tractors, trucking the goods etc). I don't see any scope for a runaway effect though. collectively we have the capacity to support ourselves in real terms. Someone will never go on a long haul holiday flight if she personally can not afford potatoes to eat. Such daft economic misalocations IMO only come about from unequal access. I go on long haul flights whilst other people starve due to not being able to afford potatoes because wealth inequality distorts resource allocation.

I'm also not 100% sure that increased energy efficiency might not actually end up offseting much of the extra cost of living.
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Re: Citizen's Dividend

Post by 6 Iron » Sat Sep 03, 2011 9:23 am

stone wrote: 6iron, under a hypothetical asset tax/citizens dividend system, a business would not be paying corporation tax or payroll tax and the employees would be getting a citizens dividend. If the asset tax on the business could not be paid out of the earnings from the business, then that would indicate that the business was tying up assets such as property or equipment that others could use more productively. If that wasn't the case, then the asset value of the business would be lower and the asset tax would be affordable. As I see it, an asset tax ensures that capital is deployed productively.
Some businesses are more asset intensive than others; this would seem unfair to me to tax farmers and massage therapists in the same fashion based on their assets.
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Re: Citizen's Dividend

Post by MediumTex » Sat Sep 03, 2011 11:04 am

Aren't tax cuts in a progressive tax system the equivalent of a citizen's dividend?
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Re: Citizen's Dividend

Post by stone » Sun Sep 04, 2011 1:48 am

Medium Tex "Aren't tax cuts in a progressive tax system the equivalent of a citizen's dividend?"

What Milton Freidman proposed was to have progressive income tax with the first $10K tax free, the next $10k taxed at a low rate and the next $10k at a higher rate etc and to bolt on to that a "negative income tax" ie a citizens dividend that everyone would get. His idea was that a citizens dividend would be less distorting and cheaper to administer than means tested welfare (ie its simpler to pay everyone $10k and tax the wealthy more so as to give the same final net outcome).

I don't think income tax does the job that tax needs to do. I think that the only tax that would, would be a flat asset tax applied to cash, real estate, shares, bonds, colectables- anything with a value. The tax would apply to anything owned by a citizen of the country where-ever in the world it was held. To legally own anything you would have to be up to date on the asset tax.
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Re: Citizen's Dividend

Post by stone » Sun Sep 04, 2011 2:09 am

6iron "Some businesses are more asset intensive than others; this would seem unfair to me to tax farmers and massage therapists in the same fashion based on their assets."

-To my mind tax provides a vital role in maintaining a functioning economy. Our economy is disfunctional because the tax system is currently hijacked to try and make it perform other roles such as being a means to bestow favor or disfavor according to political opinion and its vital role is ignored. In order to get a tax system that simply acts to keep the economy ticking along in a sustainable, undistorted, way; I think it is vital not to burden the tax concept with extra baggage such as concepts of each person paying a fair amount. I know that sounds awfull but I think the point of an asset tax is that it is a tax not on people but on assets. If a person happens to control lots of assets, then they will have the responsibility of paying the tax for those assets. Farming would never become loss making- the price of farmland would market adjust so that asset tax was covered by the earnings from the farmland. Massage therapists would still be afordable by farmers because all the competing massage therapists would all have a low tax burden and so competition would drive down the therapy charges. 
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Re: Citizen's Dividend

Post by KevinW » Sun Sep 04, 2011 11:52 am

I'm with you on replacing entitlements with a citizens dividend, and simplifying the tax code down to a single tax with no exceptions.

I'm not so sure that an asset tax is the right single tax, though.  As I said in the "China" thread ( http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4 ), I'd rather have a land value tax as I believe that would create fewer market dislocations and be simpler to administer.
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Re: Citizen's Dividend

Post by stone » Mon Sep 05, 2011 4:52 am

Kevin W,  your post on the other thread raises such important points (I've pasted it below my reply). IMO it is important to ferret out what the point of taxation is. I don't think it is predominately required to provide funding for the government as the government can just deficit spend to do that. I disagree with MMTers in that I don't think that the role of taxation is to "create unemployment from which the government can hire" as Bill Mitchel claims. I think the important role of taxation is to ensure that "capital" gets deployed in a way that reflects what everyone wants. By capital I mean all resources and potential resources. I think that market value is the best measure we have of "capital". As you point out, the asset tax I was talking about would only include things that could be sold such as collectables, cash, land, shares etc. It would not include personal attribute "assets" such as singing ability or business acumen or whatever. I still think that the border of my suggestion is distinct and workable and that the  Georgist "land value" concept has serious problems. In Holland they have an asset tax. It is expensive to administer and they have it in addition to other taxes.  I'd favour just having  that expanded to be the only tax and so the admin cost would be offset by the saving from doing away with all other taxes.

I'm thinking of an example to clarify my thoughts. A tiny biotech company started up with venture capital money in 2000. They leased the premises and employed staff. They had no earnings until 2009 and until 2008 were not expected by most people to have earnings ever. Most people presumed they would just fold with a pure loss. By 2009 it was clear that they had the potential for great earnings and bidding started to buy them out. They were bought for £100M in 2009. Under the asset tax system, the taxing would be tricky I agree. The venture capitalists would be free of tax for the aprox £7M they invested for most of the 2001-2009 period. There would need to be a rule for valuing private businesses. I guess the people who bought the business for £100M must have a methodology for valuing. No one would have paid anything much for it a couple of years before. As soon as the venture capitalists got cash in hand they would be paying the tax on that. I think that is how things need to be. I think it is important that they are taxed more for having the money sitting unused than they were for having "blown it" on paying for people to develop new medical technology. They had many years not knowing if they would ever get any return. During that period IMO they quite rightly should be free of tax.
Compare that to the land value tax scenario. If I understand you rightly, the land owner would be charged tax based on the ground rent that reflected that that land had planning permission for labs to be sited there. If the venture capitalists kept the money in the bank and so the lab owner could not rent out the labs and so could not aford the ground rent, then the land owner would still be taxed regardless. The land owner would have no means of influencing the actions of the venture capitalists to induce them to use their money. To my mind the system would be broken.
Under the asset tax system, the land owner would be taxed but her tax burden would be much less because the total tax burden would be spread across all assets rather than all being piled onto land. People would only be taxed on the basis of the financial power they themselves held rather than being in an impossible bind as a consequence of the financial choices of other people. 


"stone, maybe you misunderstand.  Each parcel's value would be assessed separately.  So the assessor would know that a Mayfair parcel of land is worth 30M GBP and a Burnley parcel of the same acreage is only worth 100K (or whatever).  The parcels would be taxed proportional to their value, so the good Duke would end up paying quite a large sum.
I actually think this kind of system has few opportunities for loopholes since every enterprise uses physical space, either directly or indirectly.  And it's difficult to evade since physical space can't be hidden or sheltered the way financial assets can.
I like the anti-dynastic properties of the asset tax but I have two concerns with it.  First is double-taxation.  If I work hard to earn $200k and put it in the bank, it will get taxed down and worth less each year.  So the work that I did once is taxed every year in perpetuity.  This would seem to encourage wanton spending and discourage saving and economic mobility.  Second is the complexity and bureaucracy involved in taxing every asset.  How are volatile assets like precious metals assessed?  What about tangible assets that are expensive to assess, like fine art or purebred dogs?  What about intangible assets; is there a tax on MD and PhD degrees?  Celine Dion's voice?  Bill Gates' social network of business contacts?  Will there be forms to disclose all these things?  It seems like a morass which is why I'd prefer taxing something that's simple to measure and understand."
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Re: Citizen's Dividend

Post by Tortoise » Mon Sep 05, 2011 4:17 pm

As the old saying goes, if you tax something you'll get less of it.

I suspect people might respond to the introduction of an asset tax by shifting their wealth into assets that are much harder for the tax collectors to valuate. So we'd gradually end up with fewer "assets" as defined by the tax collectors. It might turn into a game of cat and mouse with the tax collectors continually expanding their definition of what constitutes an asset and people continually responding by shifting their wealth out of those assets and into less liquid or less clearly definable assets.

However the tax rules are defined, it seems that people--especially very wealthy people--are usually able to find loopholes through which they can legally avoid much of the tax, or at least to alter their behavior in a way that reduces their tax burden. I'm hard-pressed to think of any kind of tax that would be largely immune to this effect.
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Re: Citizen's Dividend

Post by stone » Tue Sep 06, 2011 3:24 am

Tortoise, the rule would be, if it can be sold at auction then it is an asset. So if you have say a bible like The Book of Kells, and don't declare it for tax, then the tax collector can auction it off. If you are correct and it is not worth anything as an asset, then you won't mind buying it back at the auction (because you won't have to pay anything much). If you are wrong and it is worth a lot, then you will regret having not kept up to date on the tax.
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Re: Citizen's Dividend

Post by stone » Tue Sep 06, 2011 4:26 am

The insurance industry seems to manage to value things afterall.
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Re: Citizen's Dividend

Post by stone » Tue Sep 06, 2011 6:55 am

Tortoise, inorder to conceal assets, wouldn't the most wealthy need to hold them in obscure and illiquid forms that would not provide the means for the most wealthy to control the wider economy. To my mind the only thing that matters is that the wider economy provides what people at large want and provides oportunities for them to contribute what they do best. If the most wealthy have secret wealth tied up in say obscure garden plants or whatever then I don't care so long as it does not distort the real economy. Developing world dictators having secret wealth tied up in London real estate and Swiss Bank accounts has distorted the real economy by massively distorting exchange rates (isn't it supposed to be about $11T USD of African money held in Europe?). My impression is that you can't do that damage unless the wealth is in some liquid and so tracable form. Please correct me if I'm wrong.
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Re: Citizen's Dividend

Post by Tortoise » Wed Sep 07, 2011 3:26 am

Your explanation makes sense, Stone, but I'm still wondering about the practical aspects of enforcing a flat tax on assets.

Wouldn't it be far easier to enforce a flat sales tax than a flat asset tax? If the sales tax is always paid right at the point of sale, enforcement is fairly easy because it doesn't rely on every single person keeping track of and reporting his own tax liability. But with an asset tax, it sounds like enforcement would have to rely heavily on widespread adherence to an honor system--with some random audits and a sprinkling of high-profile tax-evasion lawsuits tossed in for good measure--much like the existing tax system in the U.S.
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Re: Citizen's Dividend

Post by stone » Wed Sep 07, 2011 4:40 am

Tortoise, I think the crucial problem with a sales tax is that it is in proportion to not just value but also turn over. So someone could own land that was not sold for generations and would pay little tax (but still be able to rule the nation by using the rental income to fund political campaigns) whilst someone else could start up companies and sell them and have a huge tax burden. Also would you get your sales tax when foreign assets were sold? A crucial part of any tax system is that it keeps on top of situations such as the trillions of USD of African money held in Swiss and UK assets. It is all very well to say that eventually any savings will get spent. Deposed and/or dead African dictators are unlikely to spend their trillions in Africa any time soon/ever. It has a huge effect when wealth flows between countries in that way. An asset tax would be on the citizens' assets wherever in the world they were held.
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Re: Citizen's Dividend

Post by KevinW » Fri Sep 09, 2011 12:24 am

stone, I'm enjoying this thread in the spirit of "if I were king for a day," discussed over a pint.  So please read my responses with that friendly atmosphere in mind.
stone wrote: IMO it is important to ferret out what the point of taxation is.
Yes it makes sense to define what the goal of a good tax system is before debating which tax system is best.
stone wrote: I don't think it is predominately required to provide funding for the government as the government can just deficit spend to do that.
Actually we disagree on this point so we'll probably never reach consensus on the ideal tax system.  I think the point of taxes is to fund core government functions, nothing more, and in an ideal world the government would have a balanced budget.  So I am only trying to do that dirty work in a principled and cheap way, not steer capital into areas I favor.
stone wrote: ... I think that is how things need to be. I think it is important that they are taxed more for having the money sitting unused than they were for having "blown it" on paying for people to develop new medical technology.
The idea that savings are sitting unused is a myth.  If you hold cash in any way aside from physical paper bills, it is loaned out to someone else who uses it to make purchases.  That's what banks, money markets, T-bills, etc., do.  Savings deposits make credit cheap which helps the economy operate.  So I don't think savings should be discouraged (nor encouraged for that matter).
stone wrote: If the most wealthy have secret wealth tied up in say obscure garden plants or whatever then I don't care so long as it does not distort the real economy. Developing world dictators having secret wealth tied up in London real estate and Swiss Bank accounts has distorted the real economy by massively distorting exchange rates (isn't it supposed to be about $11T USD of African money held in Europe?). My impression is that you can't do that damage unless the wealth is in some liquid and so tracable form. Please correct me if I'm wrong.
Well I would say that large flows of capital into practically useless objects counts as damage.  At least investment in London property provides homes and Swiss bank accounts provides credit for bank clients.  If capital investments are discouraged by the tax system then we'll have less capital available to the exchange economy which means less entrepreneurship and less stuff.
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Re: Citizen's Dividend

Post by stone » Fri Sep 09, 2011 3:18 am

KevinW, I agree with you that the ideal government budget would be balanced and that it is damaging for governments to steer capital into government favored projects. We may have different conceptions of the monetary system but we have come to the same conclusion based on our different conceptions. I think that it is important that the choices of every individual person each acting independently is what directs the economy and capital allocation.

I really think the idea that all savings get used productively needs close re-examination. A very wide range of economic thought describes the current glut of bank reserves as being trillions of dollars sitting unused. As the amount of bank reserves has escellated, the turnover rate has fallen. We have gone from having $1 changing hands ten times per week to having $10 dollars each of which only changes hands once a week. That is why QE has not created anything like as much inflation as predicted by some. Even if bank reserves do circulate, that does not mean that they are contributing towards capital production. Buying and selling of mansions in London does not in anyway create housing. It just pushes up the price of housing that was built 200 years ago. Also there is no need for extra housing. The only demand is by people wanting to own mansions as a way to tap into high asset price inflation. The unsustainable project of the last 30 years has been to foster asset price inflation 5% higher than CPI or wage inflation as a way to transfer power to the most wealthy. We are dealing with the hangover of that scheme.
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