Currency Viability In a Pure Income Tax Regime With a Basic Income

The notion of tax-driven money is easiest to understand in relation to an exogenous tax such as a property tax or simple head tax. Demand for a state money is most effectively driven by exogenous taxes, not endogenous ones such as income taxes. Even so, in a hypothetical system with a tax imposed solely on income, the tax would still drive demand for a state money. It is worth considering why this is the case, because it also indicates why some level (but not any level) of a basic income would also be consistent with currency viability.

Consider, first, an exogenous tax. The imposition of a simple head tax drives demand for a currency by ensuring that some people need to earn an income to pay the tax. This enables the government to induce labor services and also creates a supply of workers willing to work for the currency in the private sector. Anyone lacking sufficient savings will have a need, as a result of a head tax, to earn income to meet the tax obligation.

An income tax is somewhat different. Those without an income need not pay the tax. The imposition of an income tax would not be sufficient to induce labor services if people were able and content to live on air. Of course, since people are not able or content to live on air, an income tax will drive demand for a currency much like a property tax or head tax. In other words, an income tax can drive demand for a state money because of the need or desire of many to earn an income.

Private ownership of the means of production also ensures a supply of ready workers, but this is a willingness of workers to supply labor services without regard to the particular money that is paid. In principle, a private money could take the place of the state money. The tax imposed by the government ensures a supply of labor services in exchange for the state money in particular.

Now, a basic income obviously reduces to some extent the capacity of an income tax (or other tax) to induce labor services. People cannot live on air, but they could choose to live on a basic income, provided the level of the payment was at least sufficient for subsistence. It is possible, then, that a basic income set high enough could completely destroy the capacity of an income tax (or other tax) to induce labor services. This would occur if everybody was content to live on the basic income.

But if, after the introduction of a basic income, some people still wanted more, the capacity of an income tax to drive demand for the currency would remain operative to some extent.

And if not just some, but most, people wanted more than the basic income, the capacity of an income tax to drive demand for the currency might be left largely unaffected.

This is especially so once non-financial factors are taken into account, such as the social benefits or sense of purpose that many people derive from their jobs. The empirical finding of the modern monetary theorists in relation to Argentina, indicating that the poor prefer a job to an income without a job, not only makes a strong case for a job guarantee but illustrates the likelihood that a basic income would not seriously undermine the capacity of a tax to induce labor services. It would, however, give workers the power to say no to undesirable jobs, which would be a good thing, and put them on a more equal footing with those possessing independent means and facing no economic compulsion to join the labor force.

In any case, clearly there is some level of a basic income that would not seriously impact the viability of the currency or make it impossible to induce labor services. Just as most cannot do without an income, most desire a much higher income than would be provided under any realistic level of the basic income.


11 thoughts on “Currency Viability In a Pure Income Tax Regime With a Basic Income

  1. You have to tax harder with a basic income – since you’ve crippled one half of your automatic stabiliser system.

    Something in the order of 50% marginal tax rate of additional income with any normal size of government.

    “This would have a clear
    and progressive structure, but would have a basic rate of around 50 per cent
    (for people of working age) over most of the earnings distribution.”:

    That in itself is a significant barrier to pushing for extra income, and a significant reason for resentment of those on basic income who choose not to work – causing agitation to have it removed.

  2. The assertion by Neil Wilson above appears incorrect (“you have crippled one half of your automatic stabilizers”. I’ve done some stock-flow consistent models where the economy is stabilized with fairly low income tax rates (20-25%). (I have the simulation results on my website.) The stabilizing impact comes from the changes in tax flows or transfer payments, not the levels. (My models are simple teaching models, and I label the transfer payments “Welfare” (or “Unemployment Insurance”), which is proportional to the unemployment rate. You could relabel what I call “welfare” as “Job Guarantee payments” without really impacting the solution, so long as the output of the Job Guarantee jobs are not sold (as that would drain revenue from the private sector).

  3. Agree with Peter on all counts.

    A means-tested BIG would function as an automatic stabilizer. During a recession, more people would tap into the BIG. During a boom, good paying jobs would seduce people to leave the BIG.

    *If* the economy was operating at full capacity, then yes you would have to raise taxes to prevent a BIG from being inflationary. But when was the last time the economy operated at full capacity? WWII? America has *NEVER* had full employment in my lifetime.

    Like Peter, I advocate a JIG, but I also suggest that in the interest of fairness, the work week should be reduced. In other words, instead of one person working 60 hours a week (very common for salaried employees in the private sector) while another person stays at home and draws a BIG, it would be fairer to divide that 60 hour job into two 30 hour jobs.

  4. “I label the transfer payments “Welfare” (or “Unemployment Insurance”), which is proportional to the unemployment rate”

    Basic income is paid to all, regardless of whether they are unemployed are not. Hence why it cripples half the auto stabilisers.

    You’re modelling Unemployment Insurance which stops when people get a job.

  5. (In response to Neil Wilson.)
    Taxes would still rise if people get a job, and drop if people lose employment. You still get a relationship that net cash payments will rise and fall with the unemployment rate, in the same manner as a system with unemployment insurance/welfare payments. The automatic stabilisers would function, and the end result would be similar from the point of view of the government.

    However, I now see your point that the marginal rate would have to be high, if the basic wage was a decent proportion of the average wage in the economy. I had not run through the implications on the tax take.

  6. Just this post, I think.. The content is in the first third of the width of the page. The only thing that goes the whole width is the link in Dan’s post..
    Might be this annoying IOS-7 ii unwittingly updated to.

  7. Thanks for the extra info. Maybe the i-Pad was using the width of Dan’s link as a reference point or something? I’ve edited Dan’s link. Hopefully this helps. (?)

  8. Reading the paper you link on Argentina, the vast majority of recipients were poor women in a rather misogynistic society. The Job was preferred because of how it challenged gender roles and brought women out of the family home and into a community of women. I don’t think the preferences of these women can be generalized to men or to women in societies without very rigid gender roles.

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