A Universal Basic Income That Could Work (without raising taxes)

Part of my fascination about economics is peoples desire to oversimplify a dramatically complex system. The reality is that there are 7 billion individual active entities that all act in complex ways. The human mind simply cannot comprehend the motives and interactions between all 7 billion individuals that make up the system. This makes it a fun thought experiment, how many complicating motivating factors can you think of and what are their relative strengths on a human mind across different personalities.

Last night I was pondering a currently popular topic of Universal Basic Income. And it occurred to me that perhaps there is a win-win way that governments could slowly introduce them without breaking the bank.

The most common objection to basic income is ‘who pays for it?’ and certainly the most straight forward answer is to raise taxes on the rich and re-distribute the wealth downwards. This is a tough sell, especially since wealthy people hold sway with the government to protect their wealth, while the lower income earners hope to be wealthy one day and don’t want to experience higher taxes when they are. I don’t think this approach is viable for a substantial UBI scheme.

What is needed is an approach that makes business owners happy too.

Where could the government get the money to pay a UBI if not from increasing taxes?

The wealthy people themselves serve as an example of how to make a income that isn’t tied to work which we can model the government on. Wealthy families put their money to work for them and can live off the dividend payments forever. This is a model that may work at a national level with the government making the investments and passing the dividends through to citizens.

Are there any precedents for this kind of arrangement with other governments around the world? Yes! The Alaska Permanent Fund was established in 1976 as part of an amendment to their constitution. It was designed so that a portion (25%) of revenue from oil royalties flowed into an investment fund for future generations to enjoy. As of 2015 the fund is worth $55B and over the last 5 years the average annual payout has been $1352. That has proven to be a significant boost to the economy especially in rural areas where cash and jobs are scarce. While $1352 is not enough to be considered a basic income, it is a start, and proves that it’s possible to give money directly to citizens without raising taxes.

What would it look like to scale this up to a country like Canada? The population of Canada is 50x bigger than Alaska so a per capita equivalent wealth fund would be nearly $3T. That’s a massive number. It will take a long long time to reach that level, but it’s not as completely insane as it sounds. The execution of this plan would look a lot like Quantitative Easing. The government makes use of it’s ability to borrow at very low interest rates (currently about 0.5%) and use that money to buy assets. Those assets would yield income back and the spread between interest and yield is a profit that could be used to pay down the debt principal initially, but ultimately get passed down to citizens.

Instead of buying bonds and mortgage backed securities typical of the US Quantitative Easing approach, I’d suggest investing in equities and infrastructure as well. Pumping money directly into the TSX should make the elites happy.

Isolation of both the debt and assets into a ‘Canada investment Fund’ that is mandated to provide transparency would, I hope, ease the concerns of the added debt since people can see that there is $xB in debt but it’s offset by $yB in assets which generated $z in profit for all Canadians. If the government continued to finance more and more into this fund it could eventually reach the desired levels.

Quantitative Easing in the USA resulted in $12T worth of assets being bought by the government. Between 2005 and 2015, the Fed generated a profit of $700B for the US Government which is generated through these kinds of investments.

By making an investment directly in profitable businesses and infrastructure projects now, you help spin up the economy as that money gets put to work. And the government gets something in return for the investment (equity) instead of it being a more typical hand-out (grant or tax-break). Equity provides some accountability for an ROI. The fund can pass profits back to the government which could create the base of a universal basic income that is not based on raising tax rates.