A Market-Based Alternative To A Redistributive Basic Income

Swiss citizens have submitted sufficient voter signatures to put an initiative on the ballot that would pay every citizen of Switzerland $2,800 per month, no strings attached. Similar efforts to provide a basic income to country citizens are under way throughout Europe. Even in the United States there is growing talk of establishing an annual Citizens Dividend or Social Credit for Americans as well.

Such schemes are redistributive and must be financed by a tax (open or disguised). While it is true that everyone today suffers from past injustices in terms of property rights, further extracting taxes to pay an annual Citizens Dividend or Social Credit will further destroy private property principles and bolster the State as the effective, if not legal title owner of property. In essence such schemes made ownership meaningless by taking away control (usufruct) through State confiscatory taxation for social purposes. Such schemes accede to the socialist principle that taxes are an exercise of the State’s ultimate property right.

Such schemes would shift property ownership (control) from individuals to the State and usufruct and control the fruits of ownership, and all income and increases in value attributable to property would belong to the State. The State would assume the right to exercise property in landed and other productive capital (effective title; dominion or proprietas) by controlling the fruits of ownership (exercise or use; usufruct), draining and exhausting a man’s means by excessive taxation for social purposes.

What is never addressed is that our country's founders regarded taxes as a grant from the citizens, and unjust without their consent. Such schemes counter our country's founding principles of consent of the governed.

The backers of such schemes consider ownership title an irrelevant legal technicality as long as effective title is vested in the State through the State’s control of all land and productive capital by taxing profits. That being the case, taxes would not be a grant from the people to the State to defray legitimate expenses of government, but instead, an exercise of an ultimate property right by the State, to be used for any social purpose, i.e., to provide for individual welfare directly, instead of indirectly by maintaining the common good. In other words, advocates for a basic income for all would use the taxing power for a social purpose. Such a State tax appropriation would utterly destroy private property and is unjust per se. Taxation for social purposes (such as redistribution) in any amount lessens private means to achieve a presumably more equitable distribution of wealth. Such tax extraction measures should only be justified as an expedient in an emergency, with the purpose of keeping people alive and in reasonable health when no other recourse is available––not as the usual way of running society.

The fact is that taxation for “social purposes” accomplishes its ends solely by taking from those with “too much” for redistribution to those who are judged by the authorities as not having enough. This is prohibited under the natural law. The principle of taxing for social purposes as a usual thing instead of as an expedient in an emergency is itself the problem, not how much is taxed or how the tax is administered.

Furthermore, such proposals do not address the issue of concentrated ownership of wealth-creating, income-producing productive capital assets, or its impact on private property principles, but instead takes from those who are productive and redistribute earnings to those who are not or less productive. What should be the solution is to make EVERY citizen productive, so that they do not become dependent on an annual tax-extracted Citizens Dividend or Social Credit nor on wages from toil jobs or State welfare supports, but through owning wealth-creating, income-producing productive capital assets.

As an alternative that does protect private property principles and is market-based, implement the Capital Homestead Act (http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm). Here is an explanation of the main part of the proposal:

Right now in the United States, the Federal Reserve creates money by loaning it to banks, who re-loan it multiple times because of fractional banking rules. With Capital Homesteading, money would be created by loaning it directly to citizens at near-zero interest to invest in asset-based economic growth. To build real wealth and also phase out our near-defunct social security scheme, the new full-reserve money would go into a long-term retirement account to be invested in full-dividend-paying shares of qualified successful corporations. That way, money power would be spread to all citizens. The middle class would be invigorated using the principle of compounding interest, instead of being decimated by mushrooming public and personal debt.

For solutions see "Financing Economic Growth With 'FUTURE SAVINGS': Solutions To Protect America From Economic Decline" at NationOfChange.org http://www.nationofchange.org/financing-future-economic-growth-futu....

In the United States, the reform of the financial system that resulted in the National Banking Act of 1863 restricted the non-rich to the existing (and diminishing) pool of past savings to finance new capital formation and economic development, while the rich could create their own money for the same purpose by issuing bills of exchange. The National Banks and state banks functioned as banks of deposit for the non-rich, severely restricting participation in the economic common good, while they served as banks of issue for the rich, giving them a virtual monopoly over the ownership of new productive capital assets other than homestead land and small ancillary businesses.

Unfortunately, both capitalism and socialism rely on the demonstrably false premise that the only way to finance new productive capital formation is to cut consumption and accumulate money savings; financing for all new productive capital is presumed to come out of the present value of production that was withheld from consumption.

As Harold Moulton demonstrated in The Formation Of Capital (1935), reducing consumption (withholding production from consumption) in order to finance new capital formation harms the financial feasibility of the new productive capital the investor intends to finance. It can even, when the investor realizes that there is insufficient consumer demand to justify the new productive capital formation, prevent the new productive capital from being formed in the first place.

Given that, as Adam Smith said, the sole purpose of production is consumption, one can reasonably conclude that it is contrary to the purpose of production to withhold production from consumption in order to finance new productive capital to increase production. More simply put, if we are not consuming all that is being produced now, of what conceivable use is it to increase production?

That is the “economic dilemma” (as Moulton put it) facing the “capitalist,” or (in socialism) the State if it takes over control of the economy. It should be obvious that new productive capital investment must take place if economic activity is to be sustained. At the same time, the individual investor cannot justify financing the formation of additional new productive capital when there is clearly insufficient demand for what existing productive capital is already producing.

It is, to all appearances, a perfect “Catch 22” situation. If the capitalist invests in new productive capital when there is no demand for what the productive capital will produce, he or she will go bankrupt. If, on the other hand, there is a demand for all that is being produced and more besides, there is little or no possibility of withholding anything from consumption to use in financing new productive capital formation.

Past savings — the present value of past cuts in consumption — are not, however, the only or even the best source of financing for new capital formation. There is also “future savings,” that is, the present value of future increases in production. Just as derivatives (“money”) called mortgages can be created using the present value of existing marketable goods and services as the “underlying” asset backing the derivative, derivatives called bills of exchange can be created using the present value of future marketable products and services as the underlying asset.

Believing — erroneously — that past savings are the only source for financing of new productive capital formation has one of two results. If we believe that the market will take care of things without the State doing more than policing abuses, enforcing contracts, and in general providing a level playing field, we end up with capitalism. Ownership of productive capital must be concentrated in the hands of a private sector elite, for only people whose productive capital assets produce far more than they can consume can afford to finance the formation of new productive capital, thereby providing jobs for the rest of us, to the extent that they are not necessary due to ever-increasing shifts in the technologies of production.

If, however, we believe that the market and private initiative cannot be trusted to take care of things, and that government action is required to both regulate and control the private sector so that everyone will be taken care of adequately and there will be sufficient investment to create enough jobs (whether or not we believe State control will continue to be necessary, or it will wither away), the State must take an ever-increasing role in the economy. That is socialism.

The way to avoid the fallacies of both capitalism and socialism is to realize that new productive capital formation can be financed better using the present value of future increases in production – future savings – than by using the present value of past cuts in consumption – past savings. Reliance on past savings, however (despite its obvious falsity) is accepted as an absolute dogma by all mainstream schools of economics, and virtually all of their offshoots. That is the challenge – to re-educate.

Of course to succeed practically in creating broadened private, individual ownership of FUTURE productive capital formation, there must be a provision to secure investment. This is where collateral insurance comes in (i.e. the provision of sufficient security to support a loan for productive capital acquisition). Because beneficiaries would be enabled to undertake financing on the strength of non-recourse pure capital credit loans from banks and other lenders, the question of collateral or other satisfactory security to support the loans is critical. Banks cannot extend pure capital credit without security to cover the risk of the borrower's inability to repay the loan. Nor can existing owners be saddled with the risk of business failure. Thus the risk of productive capital investment failure (a risk that is now borne primarily by existing owners, but with considerable governmental back-up mediation through economic intervention by way of taxing, borrowing, monetary, regulatory and other powers) can instead be commercially insured with government reinsurers in reserve if necessary. This would be included as an element in the cost of borrowing in the case of each pure capital credit loan to provide financial compensation to the lenders. Similar insurance mechanisms can be employed as used by the Federal Housing Administration (FHA) to overcome the formidable financial barrier that prevents most people form effective productive capital acquisition. Once we set put on this path to prosperity, opportunity, and economic justice it is an open question whether government involvement (and how much and in what form) is necessary to promote the market provision of pure capital credit insurance. In the writings of binary economist Louis Kelso, he consistently proposed the creation of an agency to operate on the broad principles as practiced by the FHA in providing loan insurance to home buyers. The FHA has experienced decades of profitable success in facilitating the financing of broader home ownership throughout the United States. Instead of financing with insured loans a consumer purchase (a home to live in) we would be financing productive capital asset formation that generates its own earnings out of which to pay back the loan. Capital credit insurance is not a government guarantee. To the contrary, capital credit insurance would be provided only if the premium is competitively attractive in view of the risk insured. Any investment risk that is not insurable on market principles should not be undertaken. The government's reinsurance corporation would be expected to meet the profitable performance standards of programs like the FHA's home loan insurance program.

The Agenda for the Just Third Way (http://foreconomicjustice.org/?p=5797) and the proposed Capital Homestead Act addresses the alternative to schemes for a basic income for all achieved through tax extraction and the coercive powers of the State.

Within the scope of the proposals, the Federal Reserve would stop monetizing unproductive debt, including bailouts of banks "too big to fail" and Wall Street derivatives speculators, and begin creating an asset-backed currency that could enable every man, woman and child to establish a Capital Homestead Account or "CHA" (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and creating private sector jobs for local, national and global markets. The shares would be purchased on credit wholly backed by projected "future savings" in the form of new productive capital assets as well as the future marketable goods and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares.

The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on our only legitimate social monopoly – the State – and whatever elite controls the coercive powers of government.

Support for this article was provided by the Center for Economic and Social Justice (www.cesj.org).

See "A Market-Based Alternative To A Redistributive Basic Income" at http://www.nationofchange.org/market-based-alternative-redistributi....

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