Universal Income and the End of Economic Sanity…

A headline from the Associated Press reads: ‘As robots take jobs, Europeans mull free money for all’.

Hmmm. The report explains:

The radical notion that governments should hand out free money to everyone — rich and poor, those who work and those who don’t — is slowly but surely gaining ground in Europe. Yes, you read that right: a guaranteed monthly living allowance, no strings attached.

In France, two of the seven candidates vying to represent the ruling Socialist Party in this year’s presidential election are promising modest but regular stipends to all French adults. A limited test is already underway in Finland, with other experiments planned elsewhere, including the United States.

Free money? What a notion. Is it another sign of governments gone mad? Not really; the concept of a ‘universal income’ pretty much already exists. It’s called welfare.

This plan is (unfortunately) just taking things to the next logical step…

More taking than giving

When most folks of a right-wing-leaning mind look at the concept of universal income, they’ll immediately claim that it will lead to high inflation.

That may be true. We certainly wouldn’t have a problem with the claim that it could result in some kind of inflation.

However, it’s worth pointing out that the type of universal income described by the Associated Press, and advocated by many, is little more than an extension of the welfare system.

At its core, it’s just another way for governments to claim more control over individuals and their incomes. Because, as with any form of ‘free money’, it isn’t really free money at all.

Think about those $900 stimulus payouts the Rudd government splashed about in 2008 and 2009. It sure was a headline grabber. But, as with all ‘gifts’ from the government, it didn’t last long.

What the government gives, it grabs back at the first opportunity. That first opportunity was the Queensland Flood Levy. For many, that returned the $900 handout, plus a bit more, to the government.

And if the government didn’t grab as much as it wanted from the Flood Levy, it was replaced by the Temporary Budget Repair Levy…which, thanks to ongoing and increased government spending, hasn’t really repaired anything at all.

Unless, that is, you consider higher deficits and debts as a repair.

The point we’re making is that if anyone thinks a universal income or living wage is ‘free money’, they’re sorely mistaken.

Right now, roughly half of all Australians are net recipients of welfare payments. And a large amount of the other half of the population receives at least some form of welfare payment too — it’s just that they pay more in taxes than they receive in welfare.

So, could a universal income happen here in Australia? If the idea takes hold around the world, you can bet your bottom dollar it will come to Australia.

For the 2016 financial year, the Australian federal government spent around $435 billion. Of that, $154 billion (35%) went on social security and welfare payments. To provide a minimum level of payments across the whole population, a progressive government wouldn’t think twice about implementing a universal income.

If the government doubled its welfare budget, it could provide a cash handout of nearly $13,000 to every Australian. Of course, there would no doubt be a political backlash if the rich got the same as the poor, so you can imagine a smaller minimum amount with a progressive structure, similar to the tax system.

As we say, this is all about control. There’s little doubt that the idea of a universal income would win votes.

Arguably, it would win more votes than a tax cut. Tax cuts can often feel insignificant, especially when broken down to the weekly benefit. Also, it’s hard to see a tax cut. People quickly forget how much extra they’re getting in their pay packet compared to what they received previously.

But with a universal income, it’s there for all to see…a credit from the government going into your bank account each week or fortnight. That’s got ‘vote winner’ written all over it.

Will it be effective? Will it work? Will it cut poverty?

No. There’s an equal chance that it will actually increase poverty. Much has been made in the US about Barack Obama’s legacy. One of those is his campaign to increase minimum wages.

Several states have done so. Has it reduced poverty in the US? No. Compared to when Obama first came into office, the poverty rate is up 0.3%. Not a big jump. What is a big jump, though, is the fact that the number of ‘food stamp’ recipients has soared 36%.

Far from helping folks out of poverty, welfare only succeeds in helping people fall further into poverty.

But we’ll repeat it again: This isn’t actually about helping people get out of poverty. It’s about keeping them in poverty, and then controlling them. Welfare payments, including universal incomes, are just one of the methods used to achieve this.

Taxes won’t cover it

But wait a minute, how will they pay for it? The same way they always pay for it — by bludgeoning the middle classes with taxes.

And they’ll do that by making out that they’re taxing the rich. In reality, the rich (the real rich) will likely get out of it without paying a single extra dollar in taxes. That’s why they hire expensive lawyers and accountants.

Not only that, but they know that, from a practical perspective, they wouldn’t be able to raise enough money in taxes from the rich to make it worth the effort.

To give you an example of what we mean, we’ll reduce this to the ridiculous. But first, for some context, take this report from USA Today:

Eight men now own the same amount of wealth as the poorest half of the world. A top corporate CEO earns as much in a year as 10,000 garment factory workers in Bangladesh. And the world’s 10 biggest corporations together have revenue greater than the 180 poorest countries combined, according to a study published Sunday by Oxfam…

Oxfam based its calculations on data from Swiss bank Credit Suisse’s 2016 Global Wealth report and Forbes’ billionaires list of the world’s richest people.

That means the eight men who have as much wealth as the world’s poorest half — 3.6 billion people — are Bill Gates ($75 billion); Amancio Ortega ($67 billion); Warren Buffett ($60.8 billion); Carlos Slim ($50 billion); Jeff Bezos ($45.2 billion); Mark Zuckerberg ($44.6 billion); Larry Ellison ($43.6 billion); and Michael Bloomberg ($40 billion).

It’s a stunning set of numbers. And the solution sought by Oxfam, and no doubt others, is obvious. Oxfam’s solution? This:

‘[To] reduce inequality and the extreme concentration of wealth by ensuring that workers are paid a decent (salary) and by increasing taxes on both wealth and high incomes.

Makes sense, right? Tax the rich…redistribute wealth…and level the playing field.

For those who subscribe to this way of thinking, of course it makes sense. But then, if they actually stop and look at reality, they’ll figure out that raising taxes on the super-rich wouldn’t make a jot of positive difference to the plight of the impoverished.

In fact, taxing the super-rich would more than likely increase poverty.

How so?

Simple. Look at the numbers. The combined wealth of the world’s eight richest people stands at US$426.2 billion. That’s a lot of money.

The poorest half of the world’s population amounts to 3.6 billion people.

Now let’s do the maths. If you divided the combined wealth of the world’s eight richest people by 3.6 billion, you’re left with…US$118.39.

In other words, if the US government immediately taxed the world’s eight wealthiest people at 100% of their wealth, the world’s poorest 3.6 billion people would receive the grand sum of US$118.39 each.

You can argue how beneficial that sum of money would be.

We’ll admit that, to someone in abject poverty, it’s a big sum of money.

But also remember that if the government taxes the wealth of the super-rich at 100%, how will governments and charities pay for charitable actions once this initial cash windfall has been spent?

What about another example? How about raising taxes on the super-rich in order to pay down the US government’s mountainous debt?

For those of a progressive mindset, again, it seems like a reasonable argument…until you do the numbers.

The world’s wealthiest eight people have a combined total wealth of US$426.2 billion. The US government is in debt to the tune of around US$19 trillion.

So, to put that in perspective, taxing the entire wealth of the world’s richest eight people would pay off no more than 2.24% of the US government’s debt. Trouble is, thanks to the wonder of interest, it would take less than a year for new interest charges to pile that debt back on again.

What would they do then?

By the way, the official economic term for taxing wealth at 100% is nationalisation. That’s been tried more than once…and it always ultimately fails.

You see, it’s a fallacy to think of higher taxes as the answer to the problem of debt or poverty.

Taxes aren’t the answer. The answer to the problem of too much debt is for governments to stop spending tax dollars and going further into debt.

The answer to the problem of inequality is to eliminate cronyism and market-distorting government policies — a major one being minimum-wage laws.

But that will never happen. Because it’s easier to blame the rich…and then tax the middle class! Strange, but true.

Regards,

Kris

Editor’s note: The above article is an edited extract from Port Phillip Insider.


Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.


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