Feeble NOTW/Tory spin

Sean,

Thank you so much for filling us in on the detail and putting us right on the NOTW's errors. I should have known they'd have got some bits wrong - like I suppose you should have known they'd twist your story to say what they wanted it to say.

One point, though. If the value of all your benefits came to £1,702/month, even if you only had a tiny fraction of that to spend as disposable income (which I can well believe), then you were still better off than a large proportion of British households (though possibly not of households in your area, if you live somewhere near London). The table that I used for comparison was net of benefits and taxes, so one has to take account of things like housing benefit and council-tax rebate to compare like with like. It's not that you were well-off, but that so many people are badly-off under this government. That's what always happens with socialist governments - their cack-handed attempts to make things better actually make things worse. This lot are as bad as we've had in a long time, but the alternatives aren't much better.

I have every sympathy with your position. I regard Gordon's welfare system as not just absurdly wasteful and incompetent, but cruel and heartless in the way that it traps people like you in poverty. It is one of my criticisms of the Tories and LibDems that they are not savaging Gordon for the cruelty of his approach, and suggesting radical alternatives. All three mainstream parties seem content to tinker around with a broken system. Shows how much our political elite think and care about the reality for people like you. Like you say, what you need is not a token handout for married couples. You need a complete overhaul of the system so that you (and your wife) can take whatever work you can find and are capable of, and keep a decent proportion of your earnings. When you take home less if you work than if you stay on benefits, I don't blame you if you stay on benefits. I blame the government and the cowardly opposition for allowing that situation to exist.

If you have a look through this site, you will see that I am a passionate proponent of the Basic Income / Flat Tax system (for instance, here, here and here). The idea is that we all - man, woman, child - are entitled to a certain amount of money (our safety net) from the Government each month regardless of our employment, age or any other factor, and we all pay a fixed proportion of any earnings to the Government, but keep the majority of the money (our ladder).

Let's say that the Basic Income were £4,500 a year, and the Flat Tax rate were 40%. Your household would have £13,500 of Basic Income entitlement (3 x £4,500). (Some of your child's Basic Income would be earmarked for child-care and/or education, but I won't go into that here - I've said a little about it in another post.) If you took a job that paid £20,000 a year, you'd pay £8,000 of tax, leaving £12,000 to add to the £13,500 of Basic Income, making a net household income of £25,500 a year. That would make it really worthwhile taking the job.

Even if all you could cope with, given your sciatica, was a part-time job bringing in £10,000/year, you'd still increase your household income by £6,000/year, which would be better than nothing. In short, a Basic Income makes it worth people doing whatever work they can find and cope with, rather than the current system that makes it not worth your while unless you can earn a lot of money.

People say we can't afford a Basic Income, because £4,500 per person is a lot of money. But most people won't actually receive that money - they will be paying more tax than they would receive in a Basic Income, so they are net contributors, not beneficiaries of the tax/welfare system. For instance, if you took that job for £20,000, you'd be due to pay £8,000 of tax but to receive your £4,500 of Basic Income, so all you'd actually do is pay £3,500 of tax. It's like an infinitely progressive rate of tax and a gently reducing benefit system without the need for means-testing, with no poverty traps where you lose out if you earn more. I have done the maths, and my calculation is that we could balance the books at roughly the levels suggested above, without major winners and losers, nor significant disincentives to work.

People also say that £4,500 isn't enough to survive on. Sadly, we'd have to have a single-adult household supplement (I guess of around £2,000/year) so that it provided a similar level of support to single-parent families as the current system. I say sadly, because I would rather not pick winners in this way, but it is a political necessity, there really are some costs that multiple-adult households can share that single-adult households can't, and at least this would be very much less disincentive to stay together than the one that has driven you and your wife apart. With this supplement and a standard rate of £4,500, including children, very few families would lose out. Pensioners would also be better-off (particularly as they could work as long and as much as they like without it making a difference to their state income, which would help to tackle our increasing pension liabilities). Some singles and couples without children would be a bit worse off, but I think people like me (I am married without children so far) should accept that as a worthwhile price for reducing the current penalty on families.

It still doesn't sound like much to survive on, particularly given housing costs in some parts of the country, but I suggest that, alongside this system, we introduce an obligation on councils to provide housing to a very minimal standard (so that people only take council-provided housing if they really can't afford their own), for those who meet certain conditions (e.g. residence within the area for a given time, or a few other similar qualifying conditions) at a defined cost. This cost would be set as a proportion of the Basic Income (that is a simplification - it would incorporate a mechanism to take account of number and age of people in the household). The councils can meet this obligation with their own council houses, or they can do it by renting from the private sector. But in expensive areas, it will cost councils more to provide this facility, which they will have to raise in local taxes. So shortage of affordable housing will translate into higher local taxes, which should make councils and residents keen to grant planning permission to developments that ensure plenty of housing is available locally and therefore that housing costs are driven down. At the moment, people are very keen for there to be more housing in theory, so long as it isn't developed near them, and doesn't affect their property values. We need to change people's incentives.

This is much better than the idea that all the mainstream parties are promoting (and you seem to support) of trying to create a special class of "affordable housing" without doing something about local housing costs generally. This simply defies the laws of economics. It is no more sensible than Cnut's advisers telling him that he could hold back the tide. The only way to deliver affordable housing is to ensure there are sufficient houses available to stop prices driving ever upwards. (Mind you, putting some controls on absurdly lax credit wouldn't hurt either, or as a likely alternative in the not too distant future, a natural collapse of our credit house-of-cards.)

Sorry it's a long reply, but I am passionate that we need to make these changes, so that people like you can start to work your way up the ladder. I believe we need a new political movement - provisionally to be called "Freedom and Responsibility" - to argue for the real changes that our mainstream parties are too cowardly to propose. It will be based on the "classical-liberal" philosophy that the role of government should be to provide strong law-and-order, defence, competitive markets, a safety net, and to "internalise externalities" (a complicated notion, but it means ensuring that we take account of those things we do that physically affect other people, their property or their reputation), and nothing else. Government should raise sufficient tax to fund these responsibilities, and no more. Apart from that, they should let us get on with our lives. They should certainly never create a situation where a man can't earn money without leaving his family.

Paul,

You've obviously given this a lot of thought. There are indeed many ways to skin this cat. The basic principle is the most important part, and on that I think we agree. I hope we can enjoy further discussion on how one implements the details.

One of the interesting and positive things about the Basic Income (BI) idea is that it can provide common ground between left and right. We can disagree over the exact levels of the tax and the income, but we are united in our compassion for those who are trapped by the current system, and our contempt for those who are callous enough to continue to justify that system, when we can see the effect that it has on people like Sean.

I agree exactly with your comparison of this structure with Milton Friedman's Negative Income Tax (NIT) idea. The problem with NIT was that it had to be managed through the annual tax-return, which was too infrequent to be useful as a safety net. As you say, if BI is deducted from the monthly or weekly income-tax bills of those who pay tax, it has the same effect as the Negative Income Tax, but with regular compensation that makes it more practical to those who are dependent on the supplementary income.

Your perspective (and that of Vivant) on the principles of the BI and the way it ought to be implemented are, I suggest, more continental than mine. I am coming at this from a classical-liberal perspective, so I do not believe in redistribution beyond the provision of a safety net. Hence, my support for a Flat Tax. The combination of Flat Tax and Basic Income yields a progressive effective rate of tax, and a flat marginal rate of tax, which seem to me to be the two objectives of a compassionate, competitive tax system. From my perspective, I don't see thresholds and variable tax-rates as improving on that basic model, but I appreciate that we have different traditions on the question of redistribution. I think the key would be to agree to disagree on the details, campaign jointly for the general approach, and leave the details of the implementation to each national government.

I am pleased that our calculations of the standard amount of BI that is affordable and necessary are quite close - I understand your figures to refer to monthly sums, so your 600 EUR/month makes 7,200 EUR/year, or around £5,000/year. Not too far off my £4,500/year.

That discrepancy and the zero-rate for low earners, probably explain why your standard tax rate (50%) is higher than mine (40%). I see 50% as a significant disincentive to work. In fact, I think even 40% is too high, but that is my "starter for ten", aiming to balance the books and assuming few cuts in government programmes. In practice, I would be looking for major cuts in government expenditure, to bring that tax-rate down significantly.

I wouldn't vary the amount with age. I would use child BI to deal with various problems such as maternity/paternity/guardian leave, child-care and education funding and incentives (I won't go into the details now). And I can't see why the amount goes up with age, when the longer you've been around, the more time you've had to save up and/or pay off your mortgage. One of the advantages of a BI, from my perspective, is that it can make the concept of a retirement age redundant - you can save up to retire at 50 or work on into your 80s, depending on your preference and capability. I don't want to steer people to choose any particular age, so I would move away from 65 as an age at which things change. We all know we can't afford this retirement age, so why drag this outdated notion into a new system?

In general, the simpler the system the better, so that there are fewer points at which there are step-changes in incentives, and in order to minimise the bureaucracy required to manage the system.

Here is a graph of how I believe effective and marginal tax-rates would work out against earned income using roughly the figures I have suggested (£4,500 BI, £2,000 means-tested single-supplement, a little over 40% tax-rate):

It's not clear whether you mean that BI replaces the minimum wage, or is set at the same level. In my opinion, it should be the former. A BI makes a minimum wage unnecessary (because it is harder for employers to exploit employees if those employees have a guaranteed survivable income if they leave their job). In those circumstances, if someone agrees to work for £1/hour, that is their business, and better for them, their employer and society than that they be prevented from doing the work, which might not exist at a higher wage-rate. Getting rid of the minimum wage, which most economists recognise as a market inefficiency, is one of the major benefits of a BI, from my perspective.

Do you not have a single-adult supplement? Without it, singles (with or without children) would be very much worse-off under your system than under the present system in the UK. I'm not saying I like the idea of such a supplement, but I think it is probably politically inevitable. The objective would be to make it no more generous than necessary, to balance the extra per-capita costs of singles against the desire not to disincentivise people from living together.

I'm not with you on the proposal to increase the use of referenda. I am no more enthusiastic about democracy than was Churchill. We should have as much of it as is necessary to hold government to account, but no more.

I'll have a look at the consumption tax proposal. Usually, excessive reliance on consumption tax is seen as regressive, but that may not be fair in the case of Vivant's proposal. 

Paul,

Vivant is also proposing in his budget a free health care system and school vouchers

As you will see elsewhere on this site, I think it is a bad idea to make available for free anything that has a cost and a value. It is very difficult to balance supply and demand for goods that are free. People tend not to value them appropriately and use them rationally. Suppliers/producers find it difficult to know how much of the goods to produce, and what people prefer. Prices provide necessary signals and information. The answer, in my opinion, is to make goods that you regard as a fundamental human right, such as education or healthcare, available at a price, but ensure that people have sufficient means to be able to afford the minimum-acceptable level of provision.

In the case of education, there is not a big difference between a low level of Basic Income for children plus school vouchers, and a higher Basic Income for children, a portion of which is earmarked for education, but no vouchers. One difference, from my perspective, is that the latter enables parents to home-educate where appropriate, or to grow new schools organically, by ganging together on home education. This is a complicated area, for which I should set out my full proposals, rather than dribbling out suggestions in this way. I must get round to putting together that Freedom and Responsibility site.

In the case of healthcare, I have to admit that I have not included the cost in my calculation of the BI. I do not think the British people are ready yet to accept paying for their standard healthcare. But it will come some day, because demand is insatiable for ever-more expensive treatments from people who are living ever-longer into decrepit old-age. It will eventually bankrupt us if we do not find some way of rationing it appropriately, and the only sensible, sustainable way of rationing that has ever been devised is through the price mechanism. We are still in the throes of thinking that we can have it all, or that, where we can't have it all, doctors or NICE (the National Institute for Clinical Excellence) can somehow work out what is best for everyone. But there are daily examples of how this doesn't work - where someone's gain is someone else's loss. Stories abound, and will eventually take their toll, of the unfairness of forcing someone to pay taxes and then telling them that they can't have a drug that would save their life, because a bureaucrat decided that their tax-dollars would be better spent on another treatment for someone else. One has to be realistic and wait for people to realise the economic impossibility of free, unlimited, universal healthcare, rather than trying to force that reality on them. So I will argue for paid healthcare (and an increase in the BI to match), but I will not include it within my BI proposals.

if labour becomes less expensive, because we shift all taxes on labour to consumption in our model, child care will become much more affordable.

That is a very strong argument. It applies to more than just child-care - it would make a huge difference to encouraging employment generally. If it could work, it would make arguments about income-tax levels unnecessary. I have a feeling it would not be practical to completely replace income tax with consumption tax, but I may be wrong. One might at least change the balance between consumption tax and income tax, so the former were higher and the latter were lower. I must have a look at your proposal. This may be much more significant, and beneficial to many people who struggle to make ends meet, than people's usual objection that consumption tax is regressive. Interesting idea.

About the amount of BI, and the fact that it is going up with age, this was also the result of the fact that we started our calculations with the amounts who are paid now for child allowance, unemployment allowance, retirement, sick leave etc.

You are absolutely right to do that. This is the key point, and accounts for 90% of the difference between us (which isn't that much anyway). I have also done the same (comparing my proposals to the UK tax/welfare system), so I guess this tells us that the UK system is different to Europe (and I guess they vary quite a lot from one country to another in Europe as well). As you say, it is important that not too many people are too disadvantaged by the introduction of a BI, which means, if different countries are different now, we should work together on the generality of a BI but accept that we will each implement it in the most suitable way for our country.

On that basis, I will not argue with your numbers, although I would point out that there is a common problem in Europe with unsustainably generous state-pension provision, which understandably leads you to offer something similar, but which may not be sustainable in the long-run, given the demographics. It should tell you something about the tight-fistedness of the UK state-pension that my suggested standard rate represents a significant improvement on the current basic pension. The current minimal provision is made even worse by high costs of living and high local taxes, so that most pensioners without significant savings can barely afford to live nowadays, and those with significant savings find those savings (and even the capital in their properties) being eaten away at a rate of knots. It is my ambition to combine a slightly more generous provision (but not so generous that it takes us to the unsustainable continental position) with removal of the strong disincentives to work and save in our system, so that it is easier for people to be self-reliant in their old-age. It is my impression that old people don't want charity, they want dignity, respect, and some ongoing stimulation in their lives.

It must be better, although some will lose with our proposal (because it is an average of a very complex existing system) but on the other side it is unconditional. No questions asked, no controls no begging no arguing, it is a right. Could it be freedom?

Well said. As a Brit and a classical liberal, I must, of course, observe that it is important that the freedom be no more than freedom from absolutely penury (the minimum safety net), so that it is necessary to work to achieve any of your desires, otherwise a BI itself becomes a disincentive to work. But that, I believe, is also what you propose. We just express things slightly differently, based on a different philosophical tradition. I am uncomfortable with descriptions of this as a right, or as freedom, because I am not keen on the notion of rights beyond basic human rights, or freedom in any sense other than freedom from coercion. To me this is simply the most efficient way of providing a social safety-net. But I understand what you mean.

We are used to have a legal minimum wage and there is a consensus among employers and workers that there is a minimum wage level.

If there is a consensus in Belgium or the European continent in general, then you will have to retain the Minimum Wage (MW). In the UK, I do not believe there is a consensus on the subject. There is a consensus, I would say, that no one should be exploited to do degrading work for menial wages, but that is not the same thing as saying that there should be a MW. A BI should ensure that no one is forced to accept menial wages. If they agree voluntarily to work for less than the current MW, I think it would be wrong for the state to prevent employer and employee reaching such an agreement of mutual interest (which also benefits the efficiency of the economy as a whole).

The result is that if you are working full time you earn at least the double amount of the BI. This is an incentive to work.

And earning 180% of the BI would not be an incentive to work? That will depend on the person I suppose, but I would not limit people's freedom to make that choice. You will not create extra incentive by ensuring that no jobs can be offered at less than the rate of the BI. Jobs that can justify a wage that is double the BI will be available in the UK as much as in Belgium (let's say we introduce our respective systems in our respective countries). But jobs that would only exist if the employer could pay a rate lower than the BI will only exist in the UK. This does not lead to higher incentives in Belgium. It leads to higher unemployment in Belgium.

And, except for illegal immigrants, we know for years that the price for a working hour in the illegal economy (and that is a free market) is more or less what we are proposing for legal minimum wage.

So under a BI, black-market workers will be better-off even without a MW, because even if their pay-rate falls by half, they will still be taking home one-and-a-half times as much as before, because they get the BI plus their wage. That extra money has to come from somewhere. Now taxpayers are paying most of this person's earnings, even though they were previously prepared to work for less and charge taxpayers nothing. You must have a MW if that is the consensus in Belgium, but it will make your system more expensive and less efficient.

The NIT had the problem that it promoted illegal labour by taxing the first dollar earned

It is easier to avoid tax on the last dollar than the first. You can hide the last one without reference to the others, but if you want to hide the first one, you've got to hide all the others too. Differential tax-rates with a high upper-rate encourage more tax-avoidance than a lower flat-rate across the board. If you have a high threshold for tax-exemption, your tax-rate above that threshold has to be higher than if you have no exemption, simply to balance the books. And because of the Laffer Curve, this is not even pro-rata - it tends to be a vicious circle. Plus, with a single-rate with no exemptions, there is no need for bureaucracy to consider other earnings (e.g. a second job) when calculating the amount of tax due. As soon as you introduce differential rates and thresholds, you introduce bureaucracy. It's a trade-off, and you still have to take account of what people will accept, but if it were possible to persuade people (as may be more possible in the UK than in west continental Europe), it is more efficient, and less of an incentive to tax-avoidance, to have a simple flat-rate tax with no threshold than to have gradations.

Why declare that you are a family and loose benefits ?

Exactly. I would prefer also not to have a single-person supplement for this reason. But I think you cannot ignore in this context your earlier correct observation, that "it is impossible to make a proposal where all people on welfare or sick leave loose money". In the UK, at least, there is sufficient sympathy for single parents that it is not politically possible, in my judgment, to make no provision for them whatsoever. Remember, many of them are alone from force of circumstance rather than choice - divorcees, widows, the deceived and deserted, for example. Again, culture will play a part, but it is my judgment that it is necessary to make some provision for singles, but that we should try to correct the balance so that couples are not so heavily penalised. I do not think the modest amount I suggest for a single-adult supplement will be sufficient to drive many couples to the "living apart together" pretence. It is the extreme unfairness of situations like Sean's that produce that effect. But I agree there is no perfect solution, and it is all a question of balance in the context of cultural preferences.

Paul,

As I say, we come from very different traditions and philosophies. I do not want to get into a detailed argument, because there is always a danger that people whose opinions are close but not identical may get stuck focusing on the small differences rather than the major agreement. As I say, it would be important to acknowledge differences of culture, and to implement a Basic Income in the way that is most appropriate to each nation.

But perhaps, as you say you are not an economist but clearly have a strong interest in the subject, I could recommend a couple of articles to you, so you can review the arguments on the other side from your position. The first is a famous article by Friedrich Hayek, "The Use of Knowledge in Society". The second is the equally important "Economic Calculation In The Socialist Commonwealth" by Ludwig von Mises. They make similar points. Mises demonstrated the impossibility of economic calculation in a socialist economic system. Hayek pointed out the impossibility of centralising all the information necessary to run an economy by central direction, and that therefore, "in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan."

Mises wrote his article in 1920. There followed a dispute with the socialist economist Oskar Lange, who claimed that one could devise systems within a socialist economic system that would substitute adequately for markets in a capitalist system. In an era when many intellectuals accepted the inevitability of the historical progression towards socialism, most economists judged that Lange had won the debate. And then, over 60 years later, the Iron Curtain fell and the socialist system was seen to have suffered from exactly the failures - of rational allocation and coordination in the absence of real markets - of which Mises had warned. Even the contemporary socialist economist, Robert Heilbronner, had to admit that "it turns out, of course, that Mises was right". The trouble is, many people in Western Europe (including in Britain) have yet to notice.

So my view is that the question of whether to utilise markets and price-signals may be a choice, but it is a choice between an economic system that can be demonstrated, both logically and empirically, to be bound to fail in the long-run, and an economic system that works. By all means, continue to run with socialist systems in Belgium if that is what people want. But I hope that, in Britain at least, we can start to move away from this delusion, which has sadly been gaining ground again following its temporary defeat during the 1980s.

You should remember that this is not a question of equity. If it is agreed that everyone should have access to healthcare, and that what can be afforded is roughly (say) £1,500 per person per annum, you can either provide free healthcare and give that money direct to the medical system, or you can give the money to individuals and charge for healthcare. The net effect is the same. If you argue that the difference is that some people will need more than £1,500 and some less each year, insurance can provide the same benefit of spreading the risk that state-provision can provide. The difference is that the consumers of the healthcare have a signal to tell them what the treatment is worth, which will give people incentive to take measures that will reduce their risks, and suppliers of healthcare will have a clearer idea of real demand (when people have to take the cost of the service into account) and information for carrying out financial calculations. Free services are not fairer, they are simply inefficient.

(Incidentally, I am posting this as a reply to your earlier and not your latest post, as the indenting was making the text narrower and narrower.)
 

Paul/Ian

With regard to tax-systems and -levels, the first priority must be to reduce the overall cost of government and therefore the amount of taxes needed to be raised. But I think you have made a strong case for moving taxation away from income and onto consumption, in order to provide for the cost of the inevitable, justifiable parts of government expenditure.

Unfortunately, in the UK at least, it does not seem practical to replace the other taxes entirely with a consumption tax. We already have a national sales tax - VAT - whose standard rate is 17.5% (there are several categories of exemptions or reduced rates). VAT raised around £77bn in 2006/7. Income Tax and National Insurance (a separate form of income tax) raised around £234bn, the total tax-take was around £516bn, and the total level of expenditure was around £550bn. The estimated cost of the exemptions and reduced rates of VAT for certain goods (e.g. food and energy) is around £38bn. So to balance the books and replace all our taxes with a consumption tax, assuming (falsely) that higher rates of tax had no impact on consumption or compliance, would require us to set the rate of VAT at 125% if we retained the exemptions, or at 84% if we did away with the exemptions.

In my view, that is politically impossible. It is also highly undesirable, because consumption is important to an economy, and such a strong disincentive to consume is as bad as the current disincentives to work that stem from our income-tax and welfare provisions. And, of course, if one did double the price of goods and services by moving all taxation on to consumption, that would require you also to double the level of the Basic Income, as the safety-net would be set relative to the cost of living. Doubling the BI would require much higher taxes still, with further reductions in consumption, compliance and therefore revenue-raising efficiency. It is a vicious circle of reducing revenues, in exactly the same way as increasing the higher rate of income-tax tends to reduce tax-revenues. A complete switch to a consumption tax seems clearly undeliverable and undesirable.

Nevertheless, the basic point is still valid, that it is good to move some of the burden of government from income to consumption, to reduce the disincentive to work/employment presented by the income tax. I would look at a marginal increase in sales tax (VAT) and elimination of the exemptions and reduced rates, to contribute, alongside reductions in government expenditure, to a lower, flat rate of income tax and elimination of some of the lower-yielding (but often unpleasant and bureaucratic) taxes, with a Basic Income to ensure that neither the flat income tax nor the increased sales tax resulted in a regressive impact on poorer members of society.

Paul,

I'm enjoying this.

I am convinced that there is no "universal truth" in any system.

Ah good. The historico-institutionalist (HI) school lives on. We can rehash the Methodenstreit. Or we can look at the history of the twentieth century and agree that the politics and economics that was justified or excused by the dominant school of political economy in Germany (the Kathedersozialisten, or Socialists of the Chair, who promoted the HI approach) didn't work out too well. I shouldn't need to convince a Belgian of that!

I know Von Mises from my money interest www.socialcurrency.be

I couldn't find the references to him there. Could you point me at them? I take it you are thinking particularly of his Theory of Money and Credit in that context. What is your view of that book? For what it's worth, I think it was a work of genius, providing the first complete, satisfactory description of how money works, but it now needs updating to reflect the impact of the decline of commodity money and the growth of credit money, against Mises's strong advice. One of the many books sitting in piles in my study waiting to be read is Money, Bank Credit and Economic Cycles by Jesus Huerta de Soto, which may be exactly that updating of Mises's ideas to modern conditions. Have you had a look at it?

I think that we, here in Belgium and neighbouring countries have a good mix of both the systems

Really? How are your levels of unemployment, national debt, economic growth-rate, and pension under-funding? How much worse would they be without the Brussells gravy-train? How are the social tensions, the racism, the divisions between Fleming and Walloon? What is the level of support for far-right parties in elections?

And why should a free service give no idea of real demand?

Economics 101. Price-elasticity of supply and demand. This statement of the obvious (that, as prices rise, all other things being equal, demand will tend to fall and supply will tend to rise) is not "man-made" and dependent on circumstance and institutional framework. It is universally, obviously true.

The trick is to use the "good" things of any system and to avoid the bad things of any system.

I think the trick is to deduce the most effective approach from first principles. I don't think you get an effective philosophy with a pick-n-mix approach, any more than you get an effective religion by mixing bits of Christian, Hindu, Jewish, Buddhist, Sikh, Moslem and Scientological beliefs. You get a new-age cult. The "Third-Way" or "interventionist" cult, which is so popular in Europe, has a natural tendency to veer towards socialism and authoritarianism, and produces the many unsatisfactory results that we can see in European economies (including that of Britain) at the moment.

But more important than whether you are right or I am right is the principle of respecting people's rights to make their own mistakes. I believe I have more chance of persuading people of my case in Britain than in Europe (though only a small chance even here). This is often characterised as a distinction between the Anglo-Saxon and the continental model, though this is historically inaccurate, given that many of the greatest proponents of the "Anglo-Saxon" philosophy, such as Mises, Hayek, Turgot, Bastiat, Mariana, etc, were Europeans. Perhaps one day Europeans will rediscover their true heritage. But the present distinction is between those who have carried on the intellectual heritage of the European Enlightenment, and those who have been led down Napoleon's and Marx's blind alley. But it's your alley to walk down. In an ideal world, we'd have policy competition to see which works best, between your implementation of a BI in Belgium and my implementation in the UK. Of course, that's not likely to happen in a month of Sundays. But we ought at least to agree that nations should be free to adopt the policies that suit their citizens, and should not have to either accord with or pay for the decisions of citizens of other nations.

1% social security taxes on wages is equal for government income to 1% VAT on consumption

That looks about right, ignoring income and substitution effects (which you shouldn't ignore). As I say, in the UK, VAT at 17.5% raises £77bn, and would raise £115bn without any exemptions and reduced rates. Our social security taxes, which are levied at rates (combining income tax, and NI employer and employee contributions) of 43.8% above the lower threshold and 53.8% above the upper threshold raise £234bn. Social-security taxes at more than double the rate of our consumption taxes raise more than double the revenue. So you are probably right that consumption-tax of 100% might allow, if there were no impacts on consumption from such a rate, for the elimination of taxes on wages. But not only does this ignore the other taxes that I understood consumption-tax advocates wanted to reform or replace, but there will, of course, be impacts on consumption from doubling the cost of goods and services, even if people now have a higher disposable income. You are right that it is simply a question of moving the point at which taxes are raised, but that is not an insignificant factor. You affect supply and demand by moving that point. And that affects prices, behaviour and tax-revenue. Your calculations should not assume pro-rata, or even predictable, impacts of increases or decreases in tax-rates.

Even if the outcome were as predictable and desirable as you claim, you would have a Herculean political task in selling it. The lowest earners pay disproportionately little tax, taking the effect of the current tax and benefits system in its entirety. Their benefit from reduction or elimination of income tax would be marginal. But they would feel the impact of doubling the costs of goods and services as much as the rest of society. There are, of course, mitigating explanations in the Basic-Income proposal, but if you make this change too aggressively, many people will be afraid (rightly or wrongly) that the poor will lose out from the proposal. In the UK, that is sufficient to ensure that a proposal will not be accepted.

If, on the other hand, you made the change in a measured way, with increases in consumption tax that people can easily see is more than compensated by the introduction of the Basic Income, along with cuts in overall government spending, you could have a chance of selling the proposal and thereby of making significant inroads into the level of taxes on employment, which we agree is a worthy objective.

If we shift those taxes to consumption all producers where ever they may be localised pay the same taxes when they sale their products in Europe.

This is a good point. I am not interested in protectionism, but I am interested in removing distortions that favour one set of producers or consumers over another, whether they are in Europe or outside. If part of the consumption tax were a carbon-tax, it would also help to re-internalise the costs of carbon that have been avoided by offshoring carbon-emissions. But even though this is a desirable outcome, you still have to do it in a way that does not destabilise the economy and that is politically deliverable. I would still go for evolution rather than revolution in this regard.

look at the taxes on cigarettes, alcohol or gas

Inelasticity of demand for certain goods does not demonstrate that demand would be inelastic for all goods.

The Vivant BI....proposal is partly financed by reducing the government.

Excellent. Which bits are you proposing to reduce? The "unnecessary administration" obviously - you are quite right that that is the first gain. Have you or Vivant quantified how much that will save? I'm afraid that the overheads of welfare-provision in the UK are only a small proportion of the overall cost, and would not be completely eliminated in your system or mine, I believe. In fact, in my case at least, I think there would be a need for benefits offices to manage the provision of BI to those out of employment in much the same way that they previously distributed benefits of one form or another, but their job would be very much simplified, so there would be some marginal savings at a local level, and greater savings in the central bureaucracy. I would not be banking more than a per cent or so of the welfare bill on account of these savings, though I haven't done a precise calculation.

The real benefits are less in the administrative cost-saving than in the removal of distortions and disincentives. Unfortunately, that will feed through only gradually in the form of increased tax-revenues due to the economic boost of removing these distortions, rather than quickly from a dramatic reduction in costs. There will no doubt be a reduction, but I suggest one would have to be conservative in one's estimates of the savings. There are tougher choices to be made, in terms of cutting subsidies (agricultural, industrial, commercial R&D, arts, sport, etc) and other parts of the bureaucracy (in the UK, quangos in particular, but also some unnecessary departments, such as DBERR, or parts of departments). Simplification of regulations would also allow slimming-down of enforcement bodies, such as the Environment Agency in the UK (although, given their recruitment problems, it might be more a question of slimming down their responsibilities and powers than their numbers). Are you proposing similar tough choices and efficiencies?

Regarding the VAT there could also be some improvements....I am not a VAT specialist and my English is restricting me here but I hope you understand what I try to explain.

I do understand you, but I would aim for simplicity all the time, and certainly not have government picking which manufacturers should be winners and losers in the struggle to be allowed VAT-deduction. Just slap it on everything, allow VAT-deduction as at present (to avoid costs ratcheting up across a multi-factor production process), and set the BI at a level that takes the final VAT-impact into account. If you don't allow VAT-deduction as at present, you will undo your ambition to provide a more level-playing field for European producers.

Paul,

We really are homing in on a lot of common ground. I didn't understand you in a previous post when you made the point that abolition of Income Tax is not acceptable ethically in Europe, but it seems we agree precisely - there probably must be some continued Income Tax, but less than today. I think that is an eminently saleable proposition to the public.

And of course we came across the subject of funding the BI. One of the proposals was Seignorage.

I came across Huber and Robertson on the recommendation of friends from the Irish think-tank Feasta (you may be familiar with them - they often come up next to you on Google when I search on this sort of subject). I have serious reservations about the proposal, and your words quoted above are a good example of why. I do not like any solution that relies on government as a deus ex machina, with monopoly control of an important function on which they have supposedly perfect knowledge and intentions. Although most governments behave (roughly) in a rational way within the constraints of imperfect knowledge and bad models of the world, and most of their mistakes are not disastrous, the consequences of a bad government making bad monetary decisions are so serious (e.g. Weimar Germany or modern Zimbabwe) that I would prefer a system that did not give such powers to the occasional, unavoidable nincompoop. I realise that H&R made suggestions for how to minimise this risk, but there is no such thing as an independent public authority whose powers cannot be subsumed or overridden by a determined government. There is vulnerability in ceding powers to authority, and resilience in liberty and diversity.

I am intuitively attracted by the Hayekian proposal to do away with central banking and return to competitive banking and currencies. But the behaviour of banks in spawning credit almost without control in recent years certainly undermines an argument that relies on independent banks to behave reasonably and prudently. Failing that takes you back to commodity-backed money (probably a single, limited commodity like gold, rather than a basket of more plentiful and variable commodities), but that relies on governments to honour/protect the link to gold in the same way that the seignorage-reform proposals rely on governments not to print themselves "rich".

I don't feel I have sufficient knowledge to promote an alternative system with confidence at this stage. This is an incredibly complex subject, on which I have barely scratched the surface, and which I suspect needs years of dedicated study to claim a good knowledge. For that reason, and because I think many people will look at the combination of BI and Seignorage Reform and fear that you will be tempted to print the money you need for a BI, I would avoid tarnishing one proposal with the other.

And the statement of doubling the price of goods and services is not right. Retail prices don't change (on average) if you shift taxes to another moment in production, as long products are produced in Europe and sold in Europe.

I think I must be missing something in your proposal. It is not the moment of application of VAT that I am referring to (I think we agree that you have to continue with the deduction rules, so I am not clear that there would be such a change), it is the fact that the rate of VAT has gone from 17.5% to 100% or maybe more. But this is not the case if we retain some Income Tax, so perhaps we are talking at cross-purposes.

But it is no problem, and give no more administrative complexity, to differentiate on VAT levels for some goods.

It does make a difference, because by applying different levels of VAT, there is a substitution effect. You change the balance of values, discouraging the consumption of high-VAT items, and encouraging the consumption of low-VAT items. I am assuming full internalization of externalities by other means, in which case I can see no justification for differential rates of VAT. There are certainly strange ideosyncracies due to our current differential rates. For instance, the exemption of children's clothes means that smaller adults often get cheap clothes, while larger children may have to pay more for their clothes than smaller children (larger and smaller are not synonyms for older and younger, nor for more or less needy or deserving). Remember, simplicity in everything, therefore one VAT-rate for everything. If you feel that that affects the minimum cost of living, adjust the BI.

That is what the French are now going to try with (I think) a shift of 5 % of social security taxes on labour to consumption.

Perhaps this gives a clue to the point you are trying to make. Are you arguing that a reduction of 5% in income tax and an increase of 5% in VAT should lead to no change in prices, because the income-tax reduction reduces production costs proportionately to the VAT-increase? If so, this is simply not correct. Labour makes up only a proportion of the costs of a good - usually not the majority of the cost (though usually the majority of the cost of services). A reduction of 5% in the cost of one aspect of production will be less than an increase of 5% on the sales-price. The result will be an increase in prices.

You are right though that prices will not increase by as much as the increase in VAT, provided that producers pass-through their reduced costs of production in the form of lower prices. Experience from the introduction of the Euro suggests that people will take advantage of such situations to increase their prices/margins/profits where they can, so I doubt there will be full pass-through of cost-savings initially, though competition and inflation should whittle it down over time.

With small changes of (say) 5% up or down, the impact on cost-of-living, inflation and public sentiment will probably not be too significant. We agree that it is important to make such changes gradually.

But a technical proposal don't win elections. You have to sale it. And like a car, the sale is never achieved by , even the best, mechanical engineers.

But it is a good idea to let engineers and designers design and build the car before you let salesmen sell it. The other way round is likely to produce something that sounds fantastic but doesn't work. I am interested in the right thing to do, and then once that is established, how one can sell the concept. A really well-designed product will almost sell itself.

But Vivant members calculated the full government budget with their proposal and compared it with the actual budget.

I have now found one such budget, in the Vivantmodel document on their website. They have indeed allowed for some tough decisions on cuts. Support for agriculture and small business is cut by 80%, for education, culture and sports by around 60%, defence and law & order by one-third, and "landscaping, traffic and environment" (which I take to mean public works generally) by over two-thirds. Besides some either misguided or over-aggressive cuts (such as education, public works, defence and law & order) from a British perspective, there are several other suspect aspects.

Why does the budget for commerce and industry get increased, when the budget for agriculture and small business gets slashed? This sounds like a sop to big companies - national champions, as the French like to think of them.

The costs of General Administration are assumed to have been cut by almost two-thirds. General, non-specific savings from more efficient operation of government are every politician's favourite explanation of how they will have more money to spend than the incumbents. It is a convenient fiction. If you can make the savings, all well and good. But they are likely to be marginal at best, and not something one should count on from the start.

Even more suspiciously, the interest repayments on government debts are assumed to have been cut by around one-third. That is remarkably convenient.

Without the cuts to education, public works, defence, and law & order and the convenient assumptions of reductions of administrative waste and interest payments, the Vivant budgeted expenditure would be around 20% higher than is calculated.

On the government-revenue side of the budget, further suspect aspects are included. The budget does not only rely on switching from Income Tax to consumption tax, it turns out. A Financial Transaction Tax (a Tobin Tax?) is introduced, bringing in around 2.5% of the revenue. Income from property (is that from government properties or what we would call a Stamp Duty tax on sale of properties?) has mysteriously doubled. Tax on people (non-specific) still brings in half what it used to, representing over 13% of the budget, even though the Vivant model has supposedly done away with Income Tax. Tax on companies is magically yielding almost 50% more than it used to, as are excise duties and customs payments. Then there is the item labelled "Basic Income Tax Companies", which is bringing in nearly 8% of the revenue - I have no idea what that refers to.

I'm sorry. This adds up, in the sense that the numbers on one side (expenditure) balance the numbers on the other (revenue). That is presumably what the university was asked to check. But it doesn't seem to stack up as a credible budget. Perhaps all will become clear as I get to understand more of the detail of the Vivant proposal, but at first sight it seems very optimistic.

But that's OK, because what Vivant are proposing is a much more aggressive change than what you are proposing. But whether you see yourself as the salesman or the mechanical engineer, you still need someone to vouch for the construction before you can sell the product as a roadworthy vehicle.

Any comment on repaying VAT only when the invoice is paid?

Not much. I believe certain industries (such as those involved in construction) jump through various administrative hoops to avoid paying any more tax than necessary ahead of time. And in the case of bad debts, this would seem to limit losses. On principle, then, this proposal sounds like a simplification, and therefore an idea to be welcomed. But I wonder if the administrative obstacles are really so insignificant from the government's perspective? It may be harder for the taxman and the company accounts to determine when VAT is due based on the date of payment than on the date of invoice. One should always follow Adam Smith's four principles of good taxation. Whether this is a good proposal depends on whether it meets his criteria. I don't know enough to contradict your VAT specialist on the question of administrative simplicity. If they are right, it probably meets Smith's criteria.

Paul, 

In the Vivant proposal there is an "income tax" (all personal income) in a flat tax system with two thresholds... It is the tax "on labour" (social security taxes) who are shifted, in his definitive state, entirely to consumption.

Oh I see. You distinguish between Income Tax and what we call National Insurance. The difference ceased to be meaningful a long time ago in the UK. I think of it all as different forms of Income Tax. Now I understand why the Vivant proposal still had half of the revenue from taxes on wages.

That's [the risk of inflation] why Vivant and H&R are proposing the fourth independent executive branch, the financial power.

You can call it what you want, it is still a central power, and is therefore a vulnerability. Did you hear Zimbabwe's central banker speak a few years ago before inflation really took hold? He was a thoroughly reasonable man. I doubt he ever wanted to follow the course that has been followed. He would probably agree, like me, with Milton Friedman, that "concentrated power is not rendered harmless by the good intentions of those who create it."

The "commodity backing" on itself is no guarantee at all.

There is no guarantee in any mechanism that gives exclusive power to the Government and relies on it to honour its word not to print excess amounts of money, and/or its obligations to exchange debt and currency for another form of money (that's why it would be handy if the Hayek proposal were practical). But linking money to gold (for example), so a dollar or a pound or a Euro would be exchangeable for a specific weight of gold, makes it both risky and visible for a government to engage in a printing spree. As soon as people suspected the government of printing more money than it could back with gold, it might trigger a rush to exchange the money for gold. The depletion of reserves or, in extremis, the failure to be able to redeem all token money, would demonstrate in the harsh light of day that the government had undermined the currency, and would cost the government dear in the process. In practice, no government would take the chance on having to redeem token money at a fixed exchange rate that was above the real exchange rate created by printing excess money. Instead, they would announce the non-convertibility of the currency before any rush was triggered. This would lead to earlier exposure, and the threat of being found out so easily would be what would tend to keep them in line.

That is the theory, as I understand it, but it seems inflexible to real changes in demand for money (as opposed to changes created by policies that mask the real economics), and threatens deflationary conditions from the inability to expand the money supply to suit. It does not seem to me that it is practical, or any solution to this problem, to propose backing money with a basket of commodities instead - how can that be redeemed? I think you mean indexing, not backing. We see in the variety of monetary indices used nowadays how unsatisfactory is an arbitrary basket, however composed. It must remain reasonably fixed to provide a useful guide over time, but as values and volumes tend not to remain equally constant, one has either to adjust the content of the basket, making time comparisons invalid, or accept that the index itself is not stable. And it is hard to see how an index helps to restrain a government from printing money. It may not even make such action particularly visible, if other policies conspire to export most of the extra currency in exchange for imported goods (as has occurred with the manipulation of the Chinese exchange rate in recent years).

And as far the "printing themselves rich" comment, we know governments did do that and sometimes they still try to do so. But we do understand that mechanism and, like private banks, we could avoid that when the mechanism is transparent and understandable for the public.

It will be different this time? The most overused and dangerous words in the English language.

And maybe subject to "direct democracy" rules ? Taxes are no exemption to referenda in a real "democracy".

Because the public, in their infinite wisdom, will always choose economic pain over an illusory get-out, right? When Ben Franklin warned that "when the people find that they can vote themselves money, that will herald the end of the republic", he didn't know what he was talking about. The wisdom of the average of uninformed opinion should not be denied.

European law is allowing "social security taxes" to be levied where ever you want (payroll, consumption, ...).

So kind of them. As a libertarian Brit, I thought it was none of Europe's business how we levy our taxes, and that our rights are not handed down from above, but are innate in us and delegated to a limited extent to our governments. You may not understand how irritating that sentence is to a Brit (or would equally be to most other natives of the Anglosphere). It is a difference in our culture and heritage that sets us apart from the perspective of our fellow Europeans. I realise you meant it entirely innocently, but it does no harm to highlight that philosophical difference from time to time.

Because not all goods are labour intensive it will be necessary to change some VAT levels as to maintain retail prices and government income.

Because the current price levels are inherently the right ones? Even if they are the result of distortions of our tax system? And we are going to empower governments to try to maintain these notionally "right" levels of tax as values change, rather than simply applying a single rate of VAT? No thank you.

Quote :"A really well-designed product will almost sell itself."
That is an illusion. A good salesmen will sale anything. You must have both.

A well-designed product includes being designed to meet the budget, to suit the market, to facilitate production, and so on. It is not simply the best product technically. VHS won on price, on getting volume into the stores, and then on network effects. In many senses, it was a better-designed product than Philips or Betamax, because it did as much as people wanted for a better price.

To a libertarian, the best product technically would be no government welfare. Everyone would be responsible for themselves. But that is not what the market wants. The market wants a social safety-net, so the challenge is to work out how to give them as much as they want (and no more) for the least cost. (Of course, if you ask people, they will want the Philips-equivalent; the all-bells-and-whistles social safety net, where no one has to worry ever again, but our economy won't be able to afford it any more than most consumers could afford the Philips 2000.) I think a well-designed BI and tax-reform package does that, which is why I think it would be relatively easy to construct the sales-technique if you got the design right.

But we had several "audits" on the calculations and if there were flaws we had been liquidated on that by our political opponents.

As I say, you can ask someone to check whether figures add up and get a positive response, without that meaning that the figures being added up were realistic. Only time would tell whether it stacked up, but, from prudence, I have a great aversion to "counting chickens" on administrative savings, and would rather bank large savings in retrospect than in advance.

You must realise that the interest rates paid at that time were very high and between then and now these rates are "renegotiated" indeed.

That was a comparison between the actual budget in 1998 and the proposed Vivant budget for 1998. There can be no time-lapse excuse. And if there were, it would be an unfair comparison. The standard budget would have benefited just as much from changes in interest rates. It is counting an exogenous saving as endogenous to the proposal.

There is no need at all to pay high interest rates by a (west European) government, or better formulated by their citizens, when there is no risk involved.

Interest rates reflect time-preference and rates available in alternative investments, as well as risk. And incidentally, default by western European governments is not completely unheard of. The interest rate will be whatever the market determines it needs to be, given specific government priorities (e.g. inflation targets, exchange-rate objectives etc), not what a group of bankers or government officials believe is reasonable.

This notion of "money creation out of nothing" is very dangerous. It gives a misleading picture of what constitutes money. Perhaps we should call it "debt creation out of nothing".

Yes, this was even agreed by law here in Belgium but not put into practice. (the Tobin - Spahn variant)

I am not convinced that it is in anyone's interests to inhibit the operation of currency markets.

Some "big sectors" (banks, Insurance companies, etc..) must nevertheless pay some social security taxes but not proportional to wages but they are paying a sum equal to the BI of their employees.

I cannot see why companies in some sectors would be treated differently to others. As these are the sectors in which the City of London has a strong lead over European competitors, perhaps we should be grateful in the UK that you are inclined to treat them more harshly in Europe. But if everyone's social security costs are covered by a tax on consumption, why should certain businesses, in effect, pay twice?

In any case we showed an other way is possible and now practically all political parties have taken some points of our program. But, even after ten years, there is still a lot of work to do.

I am not surprised that other parties are adopting your ideas. There are many strong points to your program. But I think no government has yet introduced the BI itself (I believe it has been a subject of hot debate in Germany recently). So we must continue the fight in our respective countries. We must resist European centralization, to ensure as much flexibility as possible for each country to implement the tax and welfare approach that is most appropriate to its heritage and conditions. And we should consider what aspects of the BI proposal are unattractive to other parties, to understand why they are implementing some parts of your program but not the BI.

Ian,

Good luck in your campaign. Reducing Income Tax, increasing tax on consumption, reducing the size of government, and reforming welfare to reduce effective rates of tax on low-earners definitely seems to be the way to go.

With regard to the specifics, I would point out that even Prof. Kotlikoff does not think the books balance with a Fair Tax at a 30% nominal, 23% effective rate. He thinks you would have to cut expenditure by 18% to make that rate fiscally balanced, and calculates that, without such cuts, the rate needs to be 26% effective (35% nominal).

I am also bemused why there is such a big discrepancy in Prof. Kotlikoff's model between the Official figures for "baseline" (i.e. without-change) tax revenues, and the ones used in his model (Table 3, p.30 in the Appendix). Official tax revenues are given as 20.6% (of national income?), whereas the model assumes 18.7%. Most of that discrepancy is attributable to differences in the figures for direct taxes, and most of that discrepancy is attributable to differences in the figures for Personal Income Taxes (which include wage taxes and capital taxes). This latter discrepancy (9.5% official, vs 7.6% modelled) constitutes a 25% difference between reality and the model. That's a big gap. Could do with some kind of explanation.

The other thing to point out for European readers is that America is a relatively low-tax economy for the developed world, and that federal (i.e. central-government) tax makes up a relatively low proportion of what is raised. I believe you also have significant taxation to raise funds for state and local government, which I guess are not included here, and I believe that is often levied as a sales tax. Where that is the case, the total level of taxes on consumption will, of course, be higher than the level of the FairTax.

In Europe's case, with much higher levels of central-government tax-and-spend, a nominal rate of 35% would not remotely be sufficient to balance the books if Income Taxes were abolished.

Paul,

There are several proposals we are following.

Stop!!! You are tarnishing a simple, straightforward, largely-mechanical improvement of our welfare system (the BI), with all sorts of new-age wackiness and pulling-of-rabbits-from-boxes in the currency reforms you want to associate with it. The BI idea requires no more than an understanding of the implications of means-tested withdrawal on effective tax-rates. It is not much more complicated than that most simple of mathematical equations: y = ax + b.

These currency proposals rely on theories about the nature of money and value which I doubt that more than a handful of economists would recognize. I have strong reservations about Huber & Robertson's proposal, and very much greater doubts about Lietaer's ideas, but I will concede that it is possible that they are right and that conventional monetary systems and economists are wrong. But to try to combine the two (BI and currency-reform) in one "big bang" is, at best, like trying to be the first person to achieve powered flight before anyone has even got an internal combustion engine working properly. Make the glider work, and make a reliable and compact engine, and only then put the two together.

In the case of Lietaer and most complementary currencies, I suspect that the design is one of those early flapping contraptions, based on superficial imitation of a poorly-understood process, rather than a solid grasp of the fundamentals of aerodynamics. All that will happen, when you put an engine in it, is that the crash will be more spectacular, and (what I am really afraid of) people may question whether it was the engine that was at fault, rather than the design of the flying machine. I may be wrong, but I am confident that you will have a hard time persuading many people to climb on board such a contraption. BI is too important to risk damning it by association.

I have done a separate post on the intellectual credibility of Prof. Lietaer and most of the complementary currency ideas. It should be worrying (for those who support the Euro) or encouraging (for those who think the Euro is a mistake) that a man with such suspect ideas about money was a key architect of the Euro.

I did not cover the idea of an energy-backed currency in that post, because I have not seen that Prof. Lietaer proposes such an idea, nor the Talent or the CES for similar reasons, but the same criticisms apply. There is a reason why money developed in the way it did. Right or wrong about today's monetary systems, I think Mises's Theory of Money and Credit is an excellent explanation of that evolution. Having read and understood that work, it should be difficult to see a retreat to an earlier stage in the evolution of money as an advance.

This also suggests the circumstances in which complementary currencies may be most applicable. In Third-World situations, where conventional money is not so widespread or badly-managed, it may be useful for complementary currencies to be adopted, mirroring the evolution of money in the developed world. But the objective should be to move away from money as a literal embodiment of a unit of some commodity or service, towards an abstraction where money simply represents convertible value for whatever purpose the holder desires. For developed countries to move backwards to money as it existed in the early stages of its evolution is nonsensical. Let's have competitive currencies, by all means, but not go back to money as IOUs or barter.

Excerpt from quote from Robert L. Hickerson: "We set industrial production arbitrarily at a rate equal to the saturation of the physical capacity of our public to consume... Contrary to the Price System rules, the purchasing power of an individual is no longer based upon the fallacious premise that a man is being paid in proportion to the so-called 'value' of his work (since it is a physical fact that what he receives is greatly in excess of his individual effort) but upon the equal pro rata division of the net energy degraded in the production of consumer goods and services... Hubbert goes on to state that following a transition the work required of each individual, need be no longer than about 4 hours per day, 164 days per year, from the ages of 25 to 45."

This quote demonstrates that these ideas are simply a restatement of the Marxian errors - imagining that the purpose of money is simply to represent value, that everything else can be centrally-coordinated, and that the proper approach to distribution is "from each according to his abilities to each according to his needs". You really must read Hayek on The Use of Knowledge in Society, and some history books to notice that he and Mises were right and the central-planners were wrong. This is idealistic tripe. Again, please don't taint a perfectly sensible and reputable proposal (the BI) with this sort of head-in-the-clouds nonsense.

Well, it [European power-grabbing] is starting to annoy some of us too. Therefore we are pushing for "direct democracy".

Good. But government by referendum simply changes the nature of the majority that we are governed by. As a libertarian, I want to be ruled by the voluntary democracy of the market (the "dollar vote") as far as possible, and only according to the coercive wishes of the majority where necessary.

The people of France and the Netherlands rejected the constitution proposal by referendum. What they (the politicians) are doing now: they call it a "Treaty" and there will be no referendum anymore.

I'm glad that annoys you in Europe too. I thought we Brits and one or two others (e.g. the Danes) were the only ones who felt shafted. But I haven't heard that there is a strong movement in countries like France and Belgium for a campaign for a referendum and a "Non" on the Treaty. Are the British media ignoring this movement, or are you in a minority at home?

(I have turned off comment-nesting, as the indenting was getting to be a problem in a long thread.)

A propos of politically-tolerable levels of a sales tax, this entry in the Adam Smith Institute blog is interesting. The Norwegians, who have been relatively tolerant of high tax levels, are starting to complain that their sales tax of 25% (nominal, not effective, I believe) is too high. They might take a different view if their income taxes and inheritance taxes were lower, but I think there are psychological barriers to big increases in any tax, about which one would have to be careful. That accords with my and the Vivant proposal to change the balance between income and consumption incrementally, but it raises questions about the "big bang" FairTax approach.

Paul,

it is the duty of the BI movements to point out the possibility's of how to pay for a BI

You can create money, but you cannot create value by creating money. By changing the way the monetary system works, you may change the direction of travel of some aspects of value, and you may change the value of money, but you will not create something out of nothing, with which to pay for the BI. If monetary reforms funded a BI, they would do so by removing value from some other aspects of the economy. You should not and cannot avoid balancing the books. A well-designed BI proposal should show how costs and savings, revenues and expenses balance, or if not, where the extra savings are to come from or how the costs are to be incurred and funded. This must be entirely separate from proposals for currency reform, for which the same exercise must be carried out.

Once upon a time I saw a panel discussion on TV with Nobelprice winners. And the only thing I remember still was that I never heard so much "I don't know, I am not sure", and so on. That's giving me the courage to go on and defend what I think is right, even I don't know everything.

That is a strange lesson to take from this experience. If people who are highly-intelligent and well-regarded by their colleagues and who have spent their whole lives studing something are acutely aware of the limits of their knowledge, ought that not to make you more reluctant to prognosticate on things which you neither are an expert on, nor have spent most of your life studying? Your interpretation seems to be that "experts don't know everything, I don't know everything, therefore I am an expert". That is a false sylogism. Even if you water-down the conclusion to "therefore I know as much about this as the experts" and/or "therefore my conclusions are equally valid to the experts", it is still a false sylogism.

I don't deny that the experts can often be wrong. I am simply cautioning against using their uncertainty as a reason to under-estimate the extent and significance of your ignorance (in the specific sense of the limitations of your understanding of the theory of money, not in a broader, abusive sense, of course). I have very much more confidence in those who are aware of the limitations of their knowledge and hedge their conclusions with descriptions of the uncertainty surrounding those conclusions, than I have in those who either are not aware of their limitations, or who dismiss them.

Ideas that overthrow the consensus often come from outside the academic establishment. But these innovators have an obligation to understand the field in at least as much depth as those whose ideas they wish to challenge. It is not a sufficient answer to a critical question about an innovative proposal that "I don't know, but neither do the experts". By claiming to understand things better than the specialists, you are taking on an obligation to be able to explain things better than them.

But why not experience with complementary systems? If you like money backed with gold, well there is e-gold (and e-silver, ...) Everyone must be free to experiment in a free market is that not what you want?

I have no objection to people experimenting in whatever way they like. I am simply cautioning against any assumption that these experiments are some deus ex machina that will conjure useful value from nothing. In my view, these currencies will either collapse under their contradictions or retreat to very similar rules of existing fiat currencies, but people are free to make their own choices, so long as they don't come crying to me and other taxpayers if their schemes collapse.

And when you must pay taxes you can convert your e-gold money to fiat money.

But remember that you want to move taxes to consumption. So either the taxes must be levied in terms of e-gold (or hours or joules or whatever other pseudo-currency is being used), or every transaction must be convertible into the fiat currency for purpose of taxation. This is an administrative nightmare, and the necessity that every exchange be convertible makes these currencies inseparable from a fiat currency. One reason that some people like barter, and other forms of exchange not involving fiat money, is that it makes the taxman's job harder. There seems to be a strong internal tension between the different parts of your proposal. I'd like to see someone offer to pay the taxman in Time Dollars.

USA is a third world situation? It may be small but it still exists ( Ithaca dollar )

I didn't say it couldn't be done in the USA, I said it was less applicable. Squatting, hole-in-the-ground toilets can be installed in the USA, but they are not, as a rule - they are more appropriate to third-world conditions where any sanitary improvement helps, than to first-world conditions where we now have something better. Only luddites would suggest that there might be a benefit in retreating to this technology, though it remains a perfectly feasible option, and one doubtless still encounters the odd one in the back woods.

Mind you, if the dollar collapses like the Argentinian peso or Zimbabwean dollar, as some are predicting (though presumably not in such an extreme fashion), then that may be an opportunity for complementary currencies to gain a real toehold. Not because there is something inherently good in their design, but because there is something bad in the management of the fiat currency. People would be looking for anything that seemed to represent a more stable embodiment of value, but they would still, over time, coalesce around those alternative currencies that are the most flexible as well as the most stable. As I have said more than once, I have no objection to competing currencies, in fact I think they are probably a good ideas. It is the naive design of most of these complementary currencies that I think is a mistake, though people are entitled to make their own mistakes.

Have you read the history of the WIR currency linked from Prof. Lietaer's website? There couldn't be a clearer example of how a naively-designed currency is forced over time to adapt itself to reality until it is barely distinguishable from the fiat currency it was intended to replace.

Maybe ancient systems with modern tools like computers can be very effective in a limited way perhaps but nevertheless.

It's not just a question of data-collection and -processing. These designs are fundamentally misconceived. See my post on Lietaer. I have no faith in anything that claims that the solution to structural or design flaws or to limitations of knowledge is to throw computer-power at them. This is the modern way, and explains how we produce so much bad academic work. "Garbage in, garbage out" is the mantra of computer modellers, and that applies both to the data and to the design of the model.

Why not Watt and Joules? The sun is the reserve and we are living from it. Much more than from gold.

That age-old question - why are light or water or bread cheap and gold expensive, when the former are so much more important to our lives than the latter? Why did gold and silver, which had few practical uses other than for ornament, evolve into the de facto media of exchange? And while we're on the basics of economic philosophy, don't forget those other staples: How do we determine the just price for a good? Is the charging of interest justified, and if so, how should the rate be determined?

For millennia (see Murray Rothbard's History of Economic Thought from an Austrian Perspective for the history), these have been some of the first questions that anyone engaging on the study of wealth and value have had to ask themselves. You need to do the same. When you have the answers, then you should come back to the theory of money. I'll give you a clue: it's not because anyone said it should be so. No one designed this system. Its form is not determined by some external arbiter's definitions. It evolved in a form that best reflected people's needs and concerns. An artificial currency that tries to overcome by brute force some of the features of this evolutionary design is no more likely to be a satsifactory replacement for a real currency than a robot is likely to be a satisfactory replacement for a real human being.

We are just shifting bits and bites from one account to another. We have developed, since the gold backed money, a tool that even not existed at that time, the computer.

Here we go again. "The mighty computer will make good design irrelevant. It transforms the nature of money." No it doesn't. It transforms the nature of money-handling, dramatically reducing transaction costs, and therefore improving economic efficiency, if we don't use it also to introduce economic inefficiencies. But the nature of money remains the same. Those bits and bites are just an electronic ledger - much more efficient, but not different in nature. All the old rules apply. We ignore them at our peril. What is sad is how often people believe that they have invented the perpetual motion machine, that this time it's different, that the lessons of history do not apply to them because they have seen something that all their predecessors missed. So long as these people can only wreck their own lives, that's fine. But giving them the chance to contaminate the oil that lubricates our economy would be mad.

I wasn't giving this as a basis of a possible evolution, just information on a proposition you maybe not knew about. If Hubber lived these day's he probably rewrote his work. But there are probably good ideas in his work, that's why I kept it. To compare with other "reform" proposals or to look where ideas are originating.

I guess, as this was a proposal relating to energy, the Hubbert you are referring to is Dr Marion King Hubbert, geophysicist and inventor of the Hubbert's Bell concept for production rates from oil fields. He was not an economist. Not even close, judging by the section you quoted. That was tripe of a quality not often encountered nowadays. You may not have intended it to be used for the purposes of evaluation, but "by his words shall you know him". Anyone who could think this, let alone set it down in print, is not to be trusted for an economic assessment. There isn't one iota of a good idea in that section. On oil reserves I will (and do) take him very seriously. On economics, he needs to be laughed out of court.

In a Mad-Max world, this (energy as a currency) might yet transpire. But my objective, and the objective of any sane human being, ought to be to avoid getting to a Mad-Max world. Economic incontinence actually makes it more likely that we will end up there.And his ideas of social cooperation and equality certainly won't survive such a world.

Paul,

BGP: Ideas that overthrow the consensus often come from outside the academic establishment. But these innovators have an obligation to understand the field in at least as much depth as those whose ideas they wish to challenge.

PN: "interdisciplinary thinking" has his advantages and it is not a sign of an open mind to dismiss idea's of people for no other reason than that they are working in other specialties.

My warning was not that the views of those who are not academic specialists should be dismissed (or I would be arguing to ignore myself!), but that those who wish to challenge the specialists must gain at least as much understanding of the subject as their adversaries. You have provided an inspiring example of exactly what I was talking about. You challenged the experts by studying a field in sufficient length and detail that you became more expert than the experts. Your ideas were good because you had understood the fundamentals, not because you were an outsider. We are all outsiders in most subjects - it does not make our opinions equally valid on all subjects, let alone more valuable because we bring "interdisciplinary thinking" to the subject. That only becomes useful when one combines one's outside interests with a deep understanding of the subject in question. I am suggesting that Hubbert's words indicate that he had not acquired that deep understanding of the subject of money, and if you think there is merit in his proposal, then neither have you.

So let me ask you a basic question: what is the purpose of money? Why don't we simply barter our time and goods for those things that we cannot or do not want to produce ourselves?

Paul,

Answering this question would say that I have anything to add at this moment to the textbooks. This isn't the case.

In that case, we've reached the end of the line. We'll let others be the judge of whether that is a satisfactory reason, or whether you are avoiding the issue because a fundamental consideration of the nature of money would reveal the fallacies at the heart of most of these designs for complementary currencies.

Good luck with your promotion of the Basic Income concept.

Incidentally, I enjoyed these gems from Molly Scott Cato, from the gaianeconomics site that you pointed at:

"Molly Scott Cato has been working as a green economist for five years. Her approach to economics is to seek to replace capitalism with an economic system which is benign for people and the planet."

"The fact that many of these organisations are dominated by men explains the attempt in gaian economics, in contrast to environmental economics, to balance up the gender scales. This not only means encouraging contributions from women, but also allowing the style to move away from the hard-edged, objective and scientific discourse that men, and especially male academics, tend to favour. Emotion, subjectivity and intuition and are valued within green economics."

"Everything I have learned about economics over the past ten years or so is in my book Market, Schmarket, which you can investigate on this page."

Again, people can make their own judgments about the credibility of these views. 

Here's another good one from Molly:

"Work is a confidence trick that lies of the heart of the economic system of capitalism. If a man walked up to another man and hit him over the head with a stick and stole half the money in his wallet this would be considered a crime and the man would be considered a threat to society. But if a man offers another a job and pays him half the value his labour generates we laud him as a wealth-creator, as a worthy entrepreneur, the sort of person our children should be taught to emulate in school. The perceived difference between the two situations is the primary myth that the capitalist work system generates."

Pure labour theory of value. And this is supposed to be new thinking? Her ideas are conventional Marxist, feminist drivel, to which only those whose brains got permanently addled in the 60s and 70s could give credence. 

Is it me, or does the chap in this picture, from Molly's site, look like Barack Obama? Ironic, don't you think?

Hi Paul,

From a quick scan, that does indeed look interesting. But it needs careful reading rather than a quick scan to do it justice. For instance, I need to understand how he reconciles these statements:

"Our results suggest that more generous entitlements are associated not only with lower relative poverty, but also lower absolute poverty."

"we find no evidence to suggest that relatively more generous unemployment benefits systematically reduce poverty."

I suppose they can be squared by saying that it is entitlements other than unemployment benefit that matter, but I need to read it in detail.

The important point when applying this to a comparison between the US and European nations (or indeed any other nations) would be to distinguish between relative and absolute poverty. An extreme example of that point was illustrated by a story in The Economist a while back, which is worth a read. From my perspective, I am interested in notions of relative poverty only in the sense of "relative to local costs of living", not "relative to median incomes". Or put another way, absolute poverty, but in terms of PPP.

And what "living" is for you may not be a live at all for others

Indeed, and I would encourage everyone to pursue whatever sort of life they want, but not expect others to subsidise that pursuit.

what ever "poverty" standard is chosen it must be one who is relatively easy to compare and to give a definition

The "relative to median income" idea has started after findings that "social exclusion" has to do with "median income" . That's why I got interested in that definition (also happiness and well-being) and I found some very interesting study's about that, done by NEF (New Economics Foundation).

You are worried about amorphous definitions of poverty, and you think the answer is to focus on really solid things like "social exclusion", "happiness" and "well-being"? I know what food, water, clothing and shelter costs - I can quantify them in pounds. These other concepts are so nebulous that, despite the efforts of people like Lord Layard, we have no practical means of defining, measuring or comparing them, and we have even less idea of what causes them or how government can improve them. Happiness research offers little of practical benefit to questions of public policy. I have given my views (and a reference to an excellent booklet) on the subject here, and Tim Worstall has made a couple of pertinent observations on the subject recently, here, here and here.