Estate tax and Basic Income

Introduction

A short time ago we published a post on monetary reforms, one commenter raised the issue of social inequality. In this post we will address the issue of social (in)equality and equality. Before we continue, we need to define what we understand with equality.

If we talk about equality, we need to ask equality in what perspective? When it comes to social equality, then we can either refer to equality of changes or to equality of results. Basically this covers the primary difference between classical liberalism and socialism, classical liberals focus on the equality of opportunities, whilst socialists focus on the equality of results. The reader might wonder: what about equality for the law? Equality for the law is a fundamental principle common to both classic liberalism and socialism.

Since Lagrangian Republican Association endorses classical liberalism, we will limit ourselves here to equality of chances.

Asset-based egalitarianism

In 1797 Thomas Paine published his pamphlet Agrarian Justice. In this paper Pain argued for the establishment of an estate tax of ten percent for close relatives and a higher percent for heirs who aren’t close relatives of the deceased. The revenues raised this way would be used for 1. an annual pension of 10 pounds for every person 50 years of age and older, and 2. A one-time payment of 15 pounds to every person at reaching the age of 21 years. In Paine’s age the average annual income of a labourer was 23 pounds.

In order to fund the ordinary functions of government, Paine argued for the imposition of a land value tax. Modern income taxes were only introduced from the latter half of the nineteenth century.

But why an estate tax? According to the labour theory of property one can become the owner of unowned object by mixing your labour with those objects. Or in other words by performing labour one gets entitled to the fruits of one’s labour. A tax on income from labour would therefore be immoral, since it’s equivalent to stealing. However, if you inherit property from someone else, you haven’t worked for it and consequently you don’t “deserve” it.

One counter-argument could be that a person has a right to dispose his or her property as he or she see fit. This is true, only as long as you are alive. But at the moment a person dies, he or she ceases to existed and non-existent persons are not able to have property. Consequently after death one’s property automatically becomes unowned. There is no rational reason why the next of kin of the deceased would have more right to get this inheritance than any other person. The only reasons for this are cultural ones.

The proponents of “traditional” inheritance law, should consider the following moral dilemma: Do people born in wealthy families deserve to inherit this wealth any more than people born in poor families to inherit their poverty?

There is another strong argument in favour of estate taxes. This argument is derived from classical republicanism. Republicans believe that civic virtue is the foundation of freedom. However, as explained by Michael J. Sandel:

Civic virtue required the capacity for independent, disinterested judgment. But poverty bred dependence, and great wealth traditionally bred luxury and distraction from public concerns. (Sandel p. 136, 1998).

The inheritance of wealth allows the accumulation of wealth over generation, concentrated in a few families. In this manner a class of people is created who are disconnected from the public interest. Since these people do not have to work, they can devout their careers to politics. Hence a class of ambitious politicians are created.

Paine’s plans would tackle two things: by imposing a tax on inheritances the emerging of a wealthy, powerful but corrupt class would be severely hindered. And secondly, by giving every person a small capital, young people would start their adult life financially independent. Therefore this proposal would encourage a republican form of government.

The reader might ask why giving people this money at the age of maturity? If the government would give the money at birth, the parents would have to manage it until their child becomes an adult. But if the parents have to manage the money, they might be tempted to waste the money, what would cancel its very purpose. Recall that in the late 18th century, most people did not have bank accounts. Nowadays, we could deposit the money on a blocked savings account, but this would effectively the same as giving the money at the day of maturity.

The case for equality of opportunity

Classical liberals, such as David Hume and Adam Smith, believe that inequality of results creates incentives for people to take risks and to accomplish things. Business owners are motivated by the prospect of profit to provide goods and services to the public, workers are motivated by wages to offer their labour. Those who chooses to take risks, should be rewarded for it.

In an ideal world all persons would be able to do whatever they want to do. But in the real world we have to deal with social-economic inequalities. In general those born to wealthy parents have a much better start position in life, than those born to poor parents. Wealthy parents can afford better food, better education and so on for their children. Being born to affluent parents is a matter of luck, not desert (unless you believe in some kind of reincarnation and future births are the result of karma).

The question is therefore whether a society in which people’s opportunities are highly determined by luck can be a just society. In his book A Theory of Justice (1971) American philosopher John Rawls argues that this is not the case. By making use of a famous thought experiment, the original position, he shows why.

Suppose you and I with some other people are to make an agreement about the rules of a new society. We know all relevant facts regarding the physical universe, but we do not know beforehand which position in this new society we will get assigned. This latter lack of knowledge is called by Rawls the veil of ignorance, and he argues this precaution will cause people to arrange the rules of society such that whatever role they will get in that society, they will receive a fair treatment.

According to Rawls people in the original position will derive two principles: 1. all people should have the same set of basic rights, and 2. the so-called difference principle. According to the latter principle economic inequalities are allowed as long as those who are the least benefited will have their situation improved. Therefore Rawls rejects the equality of results as the primary objective of social justice, while he argues for the equality of opportunity.

Thomas Paine’s proposal for asset-based egalitarianism, is fully defended by Rawls’ theory of justice. Actually one could argue that Paine’s idea is closer to Rawls vision of a property-owning society, than the modern welfare state.

The Basic Income Guarantee

A fundamental argument against Paine’s plan is that if you give people a one-time sum of money, many, if not most, of them will waste the money by spending it in a short period of time. Only a few people are likely to manage this money wisely, by investing it in education, a house or business enterprise. A solution for this problem would be to place the money in a savings account, and give people only access to the interest, whilst the principal remains untouched. Another idea would be to give people stocks in a national mutual fund instead of giving them the equivalent money, the stock will pay dividends to their owners but they will not allowed to sell their stocks.

Both the savings account plan and the national mutual fund plan, transform the one-time capital grant to a basic income guarantee program, since people will now receive a periodic income from either interest or dividends instead of a single capital grant. The idea of a basic income guarantee has been proposed at many different times in history. Many different versions have been devised and many different methods of funding such scheme have been suggested.

Before we continue, it’s a good idea to define what a basic income guarantee is. According to Wikipedia, a basic income guarantee is an unconditional payment of a sum of money at regular intervals. Unconditional means here, that save for citizenship no specific requirements are imposed. Every person gets the same amount of money, regardless of income or wealth. In other words a basic income is not  means tested.

This is in direct contrast with most modern welfare programs, which are only available to certain groups of people. In order to prevent welfare fraud, governments of welfare states need to spend much time and money to control whether people who receive welfare are actually entitled to it. By switching from a welfare state to a basic income guarantee system, the government will save enormous amounts of money. And additionally such system would also eliminate the constant violation of privacy which is inevitably linked to the welfare state.

Another argument in favour a basic income, is a classical one and has been used since the middle ages. By giving people a regular basic income, the poor will not have to resort to (violent) crime in order to survive. Those who use this argument believe that the cost of a basic income are way less than the alternative of a society dominated by crime.

A third argument, mainly used by (prominent) economists, is that the implementation of a basic income scheme would allow the abolition of minimum wage laws. The idea is that minimum wage laws result in systematic unemployment of certain categories of people. These people can now be employed at market wages, while they have still sufficient income to live.

Several authors differ on the precise height of the regular payment, but in general proponents of a basic income guarantee believe that such income should be sufficient to live a modest life. Those who desire more luxury should work to support their lifestyle. Empirical research has shown that the introduction of a basic income, doesn’t lead to a decline of the workforce. In fact the exact opposite happens.

Our vision

The basic features of the system we want to introduce in our space-based society, are the following:

1. A basic income for every citizen or permanent resident of 16 years of age and older, to be paid every month.

2. The amount of money paid should be sufficient to live from, therefore no other welfare programs and minimum wage laws will be introduced.

3. Workers have a voluntary option to take a total permanent disability insurance.

4. Employment at will, employers are free to hire and fire employees when they see fit, save for a limited number of restrictions. Employees can resign at any time for any reason.

References

Agrarian Justice On line edition of Paine’s pamphlet.

Sandel, Michael J. 1998. Democracy’s discontent. America in search of a public philosophy. The Belknap Press of Harvard University Press. Cambridge, Massachusetts.

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17 thoughts on “Estate tax and Basic Income”

  1. You present very superb ideas. The idea of inheritance tax is one that should be explored and tried to see how well it would work.
    Great post my friend

    1. Thanks for your compliment!

      “The idea of inheritance tax is one that should be explored and tried to see how well it would work.”

      That’s what I proposed, at least to the start of it.

    1. I think they would, and I am working to it. However, it would not be easy. Further I would like to appeal also to the world outside the readership of science fiction.

        1. The only problem with economists, is that my views on the economy are based on heterodox approaches; while many mainstream economists are still trapped in the dogma’s of “orthodox” economics.

  2. All this for the space-based society? I think we need to implement it down here first. Brilliant! And it would seem to go some way to alleviating a lot of ills. Great post!

  3. A superbly informative piece. The much-maligned Paine was IMO the invaluable heart and soul of the American Revolution, and the principal agent opposed to the aristocracy of inherited wealth.

    I had thought of myself as a socialist, but after reading this great article I must reclassify myself as a classic liberal.

    1. Many classical liberals such Adam Smith, Thomas Paine and John Stuart Mill, have had ideas which many would classify as socialist. However, socialism is a broad spectrum and hence a certain overlap with classical liberalism is not surprising. Unfortunately neo-liberals/libertarians have hijacked the term classical liberals. But I would compare those people with religious fundamentalists who cherry pick those parts of their scriptures which suit them best.

  4. This is certainly an intriguing piece. Basic Income could work. Some may choose a bare-bones lifestyle. Others, with this secure income, could pursue artistic ambitions. Then there are the entrepreneurs. Would citizens have option to earn more than the Basic Income to increase their ‘wealth’?

    Inheritance is problematic. If permitted, some get unfair privilege because they receive wealth they did not earn. If not permitted (as in heavily taxed), incentive to increase wealth may fade because your hard earnings go back into the common pool after your death. I suspect that any species in nature will do whatever it can to increase its progeny, (as I understand Darwin) meaning a person will want to bequeath assets to their genetic descendants. Also such a person could give gifts before death. In that case, would Lagrangia control gift-giving? These dilemmas makes one want to give up and have a drink.

    Thank you for the thoughtful post.

    1. >>Would citizens have option to earn more than the Basic Income to increase their ‘wealth’?

      Of course, they could take a job or start their own business. The basic income is meant as base line provision.

      >>If permitted, some get unfair privilege because they receive wealth they did not earn. If not permitted (as in heavily taxed), incentive to increase wealth may fade because your hard earnings go back into the common pool after your death.

      Our intention is to establish a progressive tax-rate structure, i.e. that over a larger inheritance one should pay more taxes than on a smaller inheritance. By choosing the tax brackets wisely, only the more extreme inheritances will be taxed, while the smaller ones (in the order of what an average person will inherit) will not or only to small extent be taxed.

      Further our inheritance tax might got public support, given that we are in favour of abolishing (more accurately not introducing) a (personal) income tax.

      >>Also such a person could give gifts before death. In that case, would Lagrangia control gift-giving?

      1. The state “Republic of Lagrangia” wants to established will be called the “Humanist Republic of Mordan“.

      2. Gift-giving is indeed a problem. One solution could be to consider all gifts the year prior the death of the giver as part of the inheritance, and hence subject to the inheritance tax. Secondly we could consider a gift-tax.

      >>These dilemmas makes one want to give up and have a drink.

      Take your drink, cheers!

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