A year ago, I visited some friends near Rogers, Arkansas. Home to the headquarters of several major corporations, including Wal-Mart and Tyson, it was extremely beautiful. Green, vibrant, and full of people, and with gorgeous free parks and museums. I had a wonderful time there. But after I left, I couldn’t help but think, This is where my money goes when I shop at Wal-Mart in Milwaukee.
The Source of Inequality
We think of money as an equilibrium. Earnings come in, spending goes out. But looking at it from this narrow, individual perspective misses the big picture. The money we earn has to come from somewhere. When we zoom out, we see large-scale processes at work, leading to large-scale trends.
Over the past fifty years, the GDP per capita of the United States has been increasing relatively steadily, but the median income, adjusted for inflation, has remained about the same. The wealthy have benefited tremendously, while the rest of us have only benefited by proxy, with improvements in technology and lowering costs. This trend must have a cause, and that cause is the rates at which the various modes of cash flow between consumers and businesses, shown in a first-order approximation in the diagram below.
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| This diagram shows the major highways of money flow between the poles of the economy, the consumers and the big businesses. There are intermediate steps, such as small businesses, non-profit organizations, and business contractors, but they only change the rates of flow, not the big picture. |
If you work at a for-profit company, your wage comes from your employer. But the employer has to get the money from somewhere. That money comes from those who buy the company’s products, consumers and other companies. A for-profit company’s goal is to make more money than it spends, so it is going to pay its workers less money than the workers make the company.
If you are self-employed, your money comes either from consumers or companies. But again, for-profit companies will only pay you if they believe your product or services will earn them more than they spend. I often hope I can make some money on Patreon with this blog, or with my new YouTube channel, but then I remember that any money I earn will come from its entertainment value to other consumers, who are for the most part, like me, struggling to get by. It feels like asking others to go hungry so that I may be fed.
There are currents, swirls, and eddies in the flow of money through the economy, but on the largest scale it is unbalanced, flowing from the consumers to the companies. What companies give back in wages and expenditures is necessarily less than they earn in profit, which is inevitably going to result in the long run in company owners getting richer, and consumers and workers getting poorer.
The Economic Engine
The motivations of consumers and companies are different. Consumers spend money to keep themselves fed, clothed, and entertained. Companies invest money with the intention of earning more money from it, as often from the consumers as from other companies. Just look at the number of ads we are bombarded with as consumers. On TV, websites, magazines, the side of the road, junk mail and spam. There are ads everywhere, manipulating consumers into buying their products.
Because of this, a capitalist economy is like an engine. An engine runs as fuel is fed into the combustion chamber, releases its energy, and its waste leaves via the exhaust. So too, as consumers put money into the market and company owners take it out, the economy runs. The difference is that once money has been used, it can be used again, still as full of economic potential as it was before.
One of the main claims of the virtuousness of capitalism is that consumers have the power over which companies succeed by voting with their money. This only works if the consumers have money to vote with.
The fuel of a capitalist economy is money in the hands of consumers.
How can we replenish the consumer side of the economy? Wages aren’t enough, because the reason companies pay wages is as an investment in order to extract more money than they put in. Philanthropy isn’t enough, because the more a company gives away, the less advantage it has in the arena of the market. The way to replenish the gas tank of the economy, then, must lie in government redistribution.
The government cannot just print money and give it to the consumers. Or it could, but that would destroy the economy with inflation. To avoid inflation, the government must take out from the economy an amount comparable to what it puts in, through loans and taxes. Loans must be repaid, so it’s really just taxes.
Americans are notoriously allergic to taxes, and not entirely without reason. There are two major problems with taxes: when the money goes to unjust places, such as politicians’ pockets or agendas or broken programs, and when the taxes are uneven in such a way as to artificially and unfairly choose winners and losers in the market. In order for taxes to work, these problems must be accounted for.
One of the simplest solutions would be to implement a flat value-added tax (VAT), which is put directly into a universal basic income (UBI).
Sustainable Capitalism
A value-added tax is a tax taken from every transaction that contributes to the GDP. “Flat” means the percentage is the same, no matter who is doing the buying or what they are buying. This would have the advantage of not interfering with the market competition. No company would gain or lose economic status relative to other companies, which means this tax would not negatively affect the top of the economy at all. The government would not be taking wealth from the wealthy, just rescaling the value of money to keep it stable rather than inflating.
Wealth is not in the number of dollars someone has. It is in their property and purchasing power. The scaling of money via a flat VAT does not affect one’s wealth, as long as that scaling is even across the whole economy. Generous company owners could breathe in good conscience, as they would finally be able to give money without losing their competitive standing.
A universal basic income is exactly what it sounds like. Every adult citizen receives a fixed rate of money from the government, no strings attached. That money is theirs to spend as they see fit, be it for necessity, investment, charity, entertainment, luxury, or vice. To many, this would be a tremendous relief, as they no longer have to live paycheck to paycheck in fear of going hungry or losing their homes, but suddenly become valued members of the economy.
In this renewable economy, money flows through the markets from the consumers to the companies. The government taxes the profits, and returns the money to the consumers, so that the cycle can continue. Because money continues to flow, the total wealth as measured in property and standards of living increases. The rich get richer, but so do the poor and everyone in between as rising GDP causes the guaranteed income to increase. And for the first time in fifty years, the GDP per capita will actually reflect the prosperity of the average citizen.
The VAT-UBI combination does not extract wealth from anyone, or pick winners and losers. All it does is rescale the value of the dollar so that the UBI does not cause inflation. It would also restore optimism and faith among the small folk that the economic and political institutions care about them, leading to wiser spending and an increase in employment as people start to believe in the fairness and prosperity of this new version of capitalism once again.
Adjustments and Other Solutions
Of course, real life isn’t simple. The economy is one of the most complex systems known. Therefore, a program as simple as a flat VAT and UBI is not likely to be anywhere near the best solution. So how are some ways we could improve it?
First, a flat tax takes an equal percentage from the bottom of the economy as it does from the top. Small amounts of money have more human value to those who are most in need of it, so we might want to consider a graduated VAT. The greater the wealth of the agents involved, the higher the VAT for that transaction. We could choose not to tax wages or philanthropy, as those are already transferring wealth from the top to the bottom. We would have to watch out for loopholes in these, of course.
On the redistribution side, it might seem unnecessary to have a universal basic income, since it would go to everyone equally, from the poorest to the richest. We could instead elect for a negative income tax (NIT)—which has a terrible name, because it’s a grant, not a tax. An NIT would give a supplementary income to those whose income is small.
We would want to be careful with an NIT not to make a welfare trap, where a person can lose money by getting a higher-paying job. To avoid this, the NIT could be a percent difference between one’s income and the cutoff. For instance, if the cutoff was $40,000 per year and the percent difference was 1/2, a person who earned nothing would receive $20,000, one who earned $20,000 would receive $10,000, one who earned $40,000 would receive nothing, and anyone making over $40,000 would pay income tax. This would ensure everyone had enough to get by, and be cheaper to implement than a UBI of $20,000 for everyone.
The downsides to an NIT are that it involves more bureaucracy than a UBI, and that people who make barely more than the cutoff might feel cheated, feeling like the government values those who are lazy more than it values them.
Objections and Responses
- “Won’t this cause the prices of necessities like food and housing to rise, defeating the purpose?”
Maybe a little. But think about what it would mean if they rose so high it defeated the purpose. It would mean that, under capitalism, it is necessary for a number of people to go hungry and homeless in order for prices to be low enough that some can afford them. If that were the case, capitalism would be broken beyond salvage, and we would have no choice but to tear it down and replace it. I don’t believe that’s true, but either way, a basic income program is worth trying.
- “Won’t this make people not want to work?”
On the contrary. People don’t want to work in the economy we have now, because of the problem of growing inequality. When GDP is going up, but workers are still living paycheck to paycheck, they start to think, “What’s going on? I’m doing all this work, and the economy is leaving me behind.” That is demotivating. On the other hand, if an increase in GDP leads to an increase in income for all, it restores faith in the economic institutions, and make people optimistic and eager to contribute. Instead of making people not want to work, it will motivate people to work better.
- “Won’t this dramatically increase the national debt?”
It would cost several times the current federal government budget, but could make up for that with the VAT. Depending on how successful it is, we might actually be able to use the VAT to decrease the yearly deficit.
- “Isn’t this socialism?”
No. Socialism is a radical restructuring of the ownership of the means of production and distribution, either to the workers or to the government. A basic income program only redistributes money; it does not affect the rules of ownership.
- “You sound like Marx.”
Okay McCarthy.
Conclusion
Faith in capitalism is eroding away. There are many reasons for this, and one of the biggest is the growing economic inequality, where wealth is skyrocketing at the top, while far too many people struggle to keep up with the basic necessities. This can be ameliorated by a guaranteed basic income, paid for by a value-added tax, which if implemented fairly does not affect the competitive standing of the players in the market.
This doesn’t solve all the problems of capitalism. It doesn’t solve pollution and waste. It doesn’t solve global warming. It doesn’t solve plutocratic government corruption. It doesn’t solve overseas exploitation. But it is one step to address one of the major problems. And all these people who find new financial room to breath can contribute to other solutions with the mental energy that used to be taken up by the stress of making it to the next month.
I don’t usually ask this, but if you think the perspective in this post is valuable, then please share it, especially if you know any politicians or kindhearted rich people who might be sympathetic. And if you happen to be one of those kindhearted rich people, a donation to Paypal or Patreon (links in the sidebar) would mean the world to me.
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