The Swiss Plan to Throw Money at People
by Benjamin Studebaker
The Swiss are apparently going to hold a vote on a rather radical proposition–giving every Swiss citizen a universal monthly income of 2,500 francs (about $2,750), for an annual income of 30,000 francs (about $33,000). For perspective, this amounts to about twice what an American working for the federal minimum wage would earn annually if he were to work 40 hours a week every week without any breaks. I very much doubt that the Swiss will vote for this proposal due to how very radical it is, but I’d like to discuss the implications it would have for Switzerland if they were to do so and contemplate what a similar program would do in the United States.
Firstly, can the Swiss government pay for this? The legislation calls for all Swiss adults to receive the payment. Switzerland has a total population of 8 million of which approximately 6.3 million are eligible. This means that the Swiss government would need 189 billion francs (about $208 billion) per year to pull this off. Switzerland’s current GDP is about $632 billion, so this program would require about 33% of Swiss GDP. At present, Swiss revenues currently only account for about 10.4% of GDP, so revenues would need to triple. Assuming (rather unrealistically) that Switzerland would pay for this program entirely through revenue increases with no cuts to current spending, Swiss revenues would need to account for around 43% of GDP. It’s more likely there would be some cuts to state spending elsewhere, but in any case, Switzerland would almost certainly see its revenues increase to Scandinavian levels.
How would this look in the states? About 226 million Americans would be eligible for this program, so it would cost about $7.4 trillion per year. This is about 47% of US GDP. It’s more costly for the United States because the the US has a lower per capita income than Switzerland. At present, US revenues only account for 10.1% of GDP, so revenues would need to quintuple. The United States could certainly make some reductions in spending to offset these costs–for instance, it wouldn’t need social security if it had a universal basic income, but next to this system, social security is small potatoes–it only paid out $713 billion in 2010, a tiny fraction of the cost of a universal basic income. As such, a UBI system in the United States would likely pay out much less than $33,000 a year. To make the burden comparable to the one the Swiss are considering, we’d need to make our hypothetical payout proportionate to the size of our per capita GDP. By my calculations, the United States could pay a universal basic income of about $20,000 per year while facing a similarly sized fiscal burden. This would still be about 33% larger than what an American working for the minimum wage earns if he works 40 hours a week every week of the year without stopping.
So the obvious observation is that this kind of program requires redistribution, and lots more of it than we presently have. Needless to say, wealthier portions of the population would very likely oppose a UBI program strongly, and for that reason I very much doubt that any state will create one. Nonetheless, it’s still interesting to ask what would happen if a state were to provide this kind of large universal free lunch through a redistributive system. The biggest difference is that by doing this, the state would eliminate a significant distortion in the labor market. At present in the United States and many other countries, potential workers are at a significant disadvantage when negotiating wages and salaries with employers. Workers are under significant societal compulsion to work–if they choose not to work in perpetuity, they will eventually experience an extraordinary level of hardship. The state will eventually refuse to extend unemployment benefits to them, and they will be on the street. This gives employers a significant negotiating advantage over workers. In effect, workers are negotiating under the threat of a kind of economic violence.
Generally, we do not consider agreements binding if they are made under coercion. That is to say, in order for an agreement to be meaningful, an individual must have a credible alternative to acceptance. If I demand to have sex with you and credibly threaten to beat you senseless if you do not comply, I am in a very important sense raping you, even if you comply to avoid the beating. At present, workers do not have credible alternatives to taking a job, because the consequences of prolonged joblessness are acute physical sufferings–lack of food, lack of housing, and so on. As a result, the job market is a coercive institution. A universal basic income that provides people with an alternative option eliminates that coercive element and puts the worker on a level playing field with the employer.
The fear is that if we put workers on a level playing field, it would be impossible to persuade many of them to work. This is quite interesting–those who hold this view believe that we need a system of coercion in order to get people to perform labor, that no other incentive aside from the threat of acute physical misery will suffice. In other words, without making workers dependent on their wages for survival, they will not value wages enough to take them, at least not at the previous rate. This causes me to recall the argument made by southern plantation owners in the 19th century, who argued that their system of forced labor was not morally different from the wage system used in northern factories, because in both cases the worker only labored in order to avoid physical penalties. They called the northerners’ system “wage slavery”.
I have no doubt that some number of people would decline to work, or at the very least, would demand a larger wage. It is also reasonably likely that they would demand different, more satisfying work. That said, limited experimentation with universal basic incomes on the local level has indicated that declines in work are typically not very large. A Canadian town gave the system a shot and found that men worked an estimated 1% less, wives 3% less, and unmarried women 5% less. These relatively modest reductions in work reflect a tendency among human beings to be ultimately dissatisfied with whatever level of wealth they achieve. $20,000 or $30,000 is enough to avoid disaster, but citizens still find themselves wanting more and more out of life, and correspondingly still find themselves desiring employment.
Nonetheless, it is likely that if this system were implemented, businesses would need to adapt. Instead of hiring large numbers of workers at very low wages, businesses would hire fewer workers at higher wages and increase the rate at which they used automation to replace jobs they no longer wished to pay the wages to fill. All stores would fill with automatic check-out machines, all phones would be answered by robots, and so on. In the short-term, this would likely increase their costs and push up prices. In the long run, however, it would lead to increases in productivity.
I’m struck by another thought about all of this. So long as the total amount paid out by the state in basic incomes exceeds the amount of money that citizens fail to earn through not working (and with only a 1 to 5% reduction in work hours on average, this would presumably be the case), poor citizens would have more funds available for immediate consumption. The redistribution necessary to achieve this would of course simultaneously leave the rich with less money available for private investment. This creates an interesting shift in how private businesses acquire funds. Instead of attempting to please and satisfy investors, a universal basic income leaves businesses with an incentive to first and foremost appease consumers, who would now control a much larger portion of available funds. It would also cause businesses to fund themselves less by borrowing and more by making sales. With stronger consumption, sales would increase, and businesses would consequently be able to fund expansion with less reliance on credit markets. This introduces a somewhat stabilizing force into the economy. It not only reduces private sector investment, it reduces the need for private sector investment, putting the power of success and failure more firmly in the hands of the purchasers themselves, whose purchasing power is quite literally greater.
In sum, a universal basic income would eliminate one of the last bastions of serious, heavy-handed coercion we have in developed states. It would also stabilize the economy by making it more reliant on consumer purchases and less reliant on debts and borrowing. That said, it would be quite costly. It would require a lot of redistribution, and in so doing it would marginalize the wealthy, not merely by reducing their wealth, but by reducing their capacity to use their wealth to influence the economy via investing. In aggregate, I think societies might well be better off with a universal basic income, but I certainly would not expect the rich to endorse such a system. In the long-run, the economy as a whole might grow faster and with greater stability, and the population might well be happier and more contented, but the rich would see a reduction in their relative wealth and power (even if their absolute wealth might, in the long-run, rise). That would understandably make them quite uncomfortable, and so they are likely to use their considerable influence to ensure that such a system does not come into being in Switzerland or elsewhere.
Benjamin Studebaker 
A thoughtful post, thank you!
You’re very welcome!
I prefer a citizen’s dividend to a basic income guarantee. Then it would rise and fall according to the economy but still alleviate poverty and allow people to, if they want, live on that modest income.
A citizen’s dividend funded by land value tax would lower rent and food prices which would increase the buying power of the dividend.
A citizen’s dividend is itself a kind of UBI, albeit one that is dependent on the state having large amounts of natural resources per capita. It’s difficult to raise sufficient funds to make a CD competitive with other kinds of UBI in achieving the same objective, but it certainly could provide for a very small income at relatively little cost (compared with the vast system of redistribution the Swiss system calls for).
I may be more cynical in my approach to this, but I think that, as Americans, we have a marked tendency towards laziness. I’m not necessarily saying that a UBI is a bad idea, but where the Canadians continue to work, I think that a significant number of Americans would accept this as their just due and NOT work.
The influence of culture is nebulous. It’s very easy to overestimate or underestimate on inspection. I’m inclined to think that Americans are more similar to Canadians than either group would care to admit, but we’d need corresponding studies to verify that.
“You can’t be informative if you are not informed” This aspiring political philosopher is informed and above all insightful.His posts are not only worth reading but also sharing, recommending and CRITICIZING.- If you don’t constructively criticize this aspiring political philosopher you won’t get unique insights out of him. Its the constructive criticism that draws out the best in great philosophers.
I recommend all his readers to highly critic his ideas.
Absolutely–only through rigorous intellectual engagement with contrasting views can we further fortify and develop our own positions.
One of your commentators refers to the idea of funding a citizen dividend via a land value tax. The importance of this is that such a tax would fall on what economists call ‘economic rent’ which is another way of saying unearned income the taxation of which does not penalize productive activity of the person pocketing the income. The value of land collected via land rent and sale price is 100% economic rent as recognized by economists from before Adam Smith. There are many other things that give rise to economic rent although the economic rent of land and resources continues to be the bulk of all economic rent. Even the monopoly of capital does not touch it nor do the ill gotten gains of our dysfunctional financial sector. All told economic rent is estimated to be 40+% of GNP.
Economic rent is unearned because the underlying economic value and activity represented by income that is properly called economic rent is created by others and usually by the entire society as a whole and not by the person pocketing such income. The value of land and consequent rent is entirely created by the community of all people worldwide. All economists agree. Monopoly of capital gives rise to economic rent. It is funded by imposition on the community of all people. Chattel slavery was (and still is) the most egregious source of economic rent. It was legal but it was obviously a form of coercion and theft. All economic rent bears this taint despite the fact of being legal and time honored. The financial sector is engaged in creating new avenues of economic rent collection often creating value out of thin air which can disappear like any other speculative value over night. Those folks are good at what they do and they are getting way with it as have the elites who historically have gotten away with ownership of the right to collect economic rent for centuries, even millennia.
Taxing land value and economic rent in general when properly focused is the only form of taxation that does not cause unintended consequences or disincentives because it does not penalize productive activity of the kind that gives rise to earned incomes such as wages and profit from investment of real capital in the real economy. Our tax systems do tax economic rent but only by accident and not by focused design. The most focused historical example of such a tax is that part of the property tax that falls on assessed land value. The property tax on the value of houses and other improvements is clearly a tax on value created by individuals and by its very nature has to have a negative economic effect. Most modern taxation falls on earned incomes and productive economic activity in the estimated ratio of 15% to 85%. Yes truth be told there is a disincentive involved to taxing economic rent but it is only the disincentive for pursuit of what one does not earn. It is a disincentive to what is called ‘rent seeking’ and falls on those called ‘rentiers’. This would be an intended consequence that is dearly to be desired. For example land speculation at the heart of real estate investment is discouraged if not eliminated when land values are taxed heavily. Increasing taxation of land values and decreasing taxation of improvement values would no only be just it would change the incentives that where practiced has the power to revitalize cities and end urban sprawl. Thus this kind of taxation is not merely a scheme to raise revenue; it is one of the only ways to solve otherwise intractable economic, social and environmental problems.
All taxation for this reason should come out of economic rent and not out of earned incomes. No citizen dividend would be viable, non-destructive or just if it was funded any other way. The example of Alaska’s Permanent Fund that pays a citizen dividend to every citizen of the State is a good example. It is funded out of royalties on extraction of State owned oil reserves. Sure the wealthy who own a virtual monopoly of the assets that give rise to economic rent will not be happy but they will not be unjustly penalized as in the case of taxation of the kind they so successfully avoid. They will not be happy because they cannot avoid a land value tax but they would be encouraged to pursue productive activity and earn their incomes. Wouldn’t that be the resolution of the centuries old unhappy stand off between the wealthy and the masses of people? We could say to the able and wealthy go ahead and be wealthy just don’t steal from the rest of us. Earn your way by being inventive and honestly productive and you can be as wealthy as you want. But if you own and use our land and natural resources and otherwise enjoy privileges that give you what you do not create pay us the rent. It is our due.
Taxation of community created economic value merely returns to the community that economic value the community creates rather than letting it fall into the hands of those who over the centuries do not create it, earn it or deserve it. Failure of governments to collect this value forces governments to impose on the earned incomes of the people. This gives rise to the kind of animosity toward perceived injustice albeit misdirected that we see in the political realm today. Yes it would be a form of redistribution but it would be just while being non-punitive as are the demands of most tax reformers today. Taxation of economic rent in all its forms is the proper source of revenue for communities/governments just as are wages the proper source of income to labor. Justice flows from the right of the creator of the economic value in question to have and enjoy the value created. Is it not said in the Bible that the laborer is worthy of his hire? This also applies to the economic value created by community. Conversely shifting taxation to unearned income/economic rent allows for the un=taxation of earned incomes and undoes centuries of injustice imposed by governments on the life blood of their peoples. The history of taxation is one of control by those who wanted their unearned incomes to be free of taxation since the days of feudalism when economic rent from land was virtually the only form of what we would call taxation. They shifted the burden of taxation off of themselves onto the productive activity of the rest of us. They then enclosed the commons and thus denied everyone of the age old alternative to wage slavery. Land value and other community created economic value is the new commons and we could have the alternative to wage slavery when we received a properly sourced and funded citizen dividend. Don’t bother otherwise.
This is a very different kind of citizens’ dividend proposal from what we usually see in practice. In practice, the CD usually comes in the form of the state investing profits from the harvesting of some natural resource (typically minerals or oil) and cutting citizens a share of the profits of that investment, e.g. the Alaska Permanent Fund. This kind of CD doesn’t pay enough per person to be sufficient to provide a true universal basic income. To do that, we would need to harvest a lot more revenue.
What would happen if we tried to get enough revenue to bring a citizens’ dividend in line with universal basic income through land value taxes on private rentiers? Unfortunately, I suspect the rentier class would pass the cost of the land value taxes onto their tenants via higher rents, rendering what was at the outset a highly progressive tax de facto regressive. By raising living costs on the poor tenants, we would weaken consumption and damage growth.
If we’re trying to get rid of parasitic rent-seeking behavior, we would need to void the ownership rights of those who exclusively own property for the purpose of renting it and give said property to the tenants. This would eliminate their need to pay rent, lower their living costs, strengthen consumption, and aid growth. The former rentier class would take the money they could no longer invest in idle property and stick it into other meaningful investments, which would then be subject to capital gains tax.
Thank you for your thoughtful reply. I must disagree with you regarding the fact that landlords, the rentier class as you correctly put it, would merely pass the increase of taxes on their land values on to their tenants. I also disagree strongly with the notion that we should void property rights as a way to solve this or any problem. In short landlords cannot pass the tax on land values on to their tenants and confiscating or nationalizing land is completely unnecessary not to speak of the fact that it would set off another civil war. Please bear with me while I explain what you may think is just plain wrong.
All economists* agree that the tax on land values cannot be passed on to tenants. I suggest to you that this is one of the best kept secrets of economics and it accounts for why the property tax part of which falls on land values is so roundly hated. I know this sounds utterly wrong and certainly counter intuitive but it is so. The tax on everything else such as houses is passed on so why not the tax on land values? Why this is so would take pages of explanation and I therefore recommend you research it for yourself. Suffice it to say that the general principle is that the tax on anything that does not have a cost of production like land cannot be passed on even though its owners will attempt to do so while the tax on anything with a cost of production which is everything man-made is and in most cases must be passed. I really do recommend you research this for yourself. The grasping of this was a sort of enlightenment experience for me years ago and ever since has allowed me to see what is really going on and who really controls our governments and ultimately this civilization. It is why I say that what we have is not capitalism but a corrupt form of feudalism.
As much as I know you probably are probably not convinced of the truth of this matter please just accept the proposition for the moment. Do so for this reason. When the tax on land values increases and it cannot be passed on as landlords eventually come to find out the market value purchase of land is forced down. This is obvious because if the income stream from an investment decreases for any reason its purchase price in the market drops. This is seen in practice where this has been done and to the extent it has been done. Thus in theory the market purchase price of land can be reduced to near zero if the full market rental value of land is taxed. I do not think this has been done completely anywhere in practice but land value has been taxed more heavily in many instances and as the tax rate rises buyers of land find they less and less want to invest for profit and more and more only for efficient use of land. This means the gradual demise of land land speculation. I assume you know that land value appreciation was at the heart of the 2008 so-called housing bust. Land value taxation would have prevented the stampede into the real estate market and the consequent speculative rise in real estate values that led to the crash.
I ask people in presentations I give this question: if you cannot keep the rental value of a piece of land you buy to produce a stream of income how much money are you willing to pay for it? I suggest it is obvious that if you cannot get an income stream from an investment we are not willing to pay anything for it. Thus those who have land to sell where land value is taxed heavily find that there were people desiring to have ownership of their land but they would not be willing to pay much or anything for it. Via taxation we could make it so that ownership of land was associated with a hefty liability in the form of a tax owed to the community which would wipe out any gains to be expected from increase of land value and increased private collected rent in the future. Thus would end land speculation and real estate speculation that is based on it.
If you had to pay the rental value of your land to the community in the form of a tax would you be willing or able to pay significantly more than that amount of rent to the community taxing authority? The answer is no. First it would be unjust and second it would force people to move away from any jurisdiction that tried to get more out land rent than it was actually worth in the market. The rental value of land is related to what it is worth in the real economy. If a landlord or a community charges more than that, it is not worth it for individuals and they seem alternative locations. Thus if you are a tenant of a landlord who wants to charge you double rent for the land he rents to you will you pay it? The answer in the short term you may have no practical alternative but in the not very long term you would move. You would move to another piece of land where the rent was affordable and you would be able to do this because the supply of land is not destroyed by the tax as is the supply of things man-made is reduced/destroyed by taxes on them. Of course this logic applies if the land value tax cannot be passed on to tenants which I again assert and argue here it cannot be.
This is also why I strongly disagree with any notion of abrogating property rights in land. I do so first because it is not necessary when a significant land value tax is imposed. And second I disagree because any such policy would be met with what you would have to expect to be ferocious opposition especially the the U.S. My question to you is why would you want to settle a matter by another civil war when all we had to do was tax land value to the full extent of its rental value in order to have the same effect of making land common property. The land value tax will be resisted strongly enough as an invasion of property rights which it is not but confiscation of land is something else altogether. I will gladly turn over the land rent on land I own to fund my community but will absolutely not support a government taking that ownership from me. If I feel this way you can imagine how my less educated brothers and sisters would feel about. I cannot be whipped up by the kind of demagoguery that would surface but would understand it if others were.
If we were to nationalize land the point would be to charge tenants the land rent and use it to pay for public services and perhaps a citizen dividend. If we did this it would not be necessary to tax improvements on land. There would more than enough revenue from land value alone to allow for the untaxing of improvements. The significant uptaxing of land value and the reduction of taxation on improvements has been shown to give incentive to rebuild cities and communities from the inside out without the necessity of government subsidy. We have also seen the end of urban sprawl where this has been and to the extent that it has been done.
The state of Pennsylvania allows cities to do this and there is plenty of evidence to confirm this from practice there and elsewhere. I say let individuals have the right of exclusive USE of land (we are all land animals and everything must be done on land with the right of being able to reap what we sow) as long as they pay us the rent. Let landowners pay us the land rent and let them keep the value and incomes that come from their own efforts as labor and real capital investors in the real economy. The value of land is ours while the value of what I produce is mine. Our system allows some of our kind to take what does not belong to them amounting to $trillions every year while taking from me and my fellow citizens what is legitimately ours. Taxation of earned incomes from labor and real capital investment is the legitimate complaint of those who oppose taxation yet at the same time there can be no legitimate complaint when governments take back the value community gives to land value. All government services have the effect of increasing the usefulness and value of land and thus the economic loop is closed and injustice abandoned when land value is taxed. No more do we need to support the rentier parasites AND pay for government out of our real earnings. When we fail to tax land values we have to in essence pay twice for access to land. We have ot pay once in land rent and twice to pay government services that make our land rent higher. It is a vicious circle. The rentiers are intending to take everything including governments and make us pay for it as if was just and an efficient way to manage our public affairs. I say humanity should take back what the parasitical rentiers have been sucking from us since and before the days of feudalism.
Sorry for the length of this. Would like to hear your response.
* professionally trained economists and certainly not politicians. I am not professionally trained just so there is no confusion. This does not mean that professionally trained economists can be relied upon for much of anything either but if you ask them they will confirm the particular assertion I have made here. You can also ask many real estate operatives and mortgage bakers who understand only too well that they are in a get something for nothing game when it comes to cashing on rising land values. As I say in the body of my comment the fact that a tax on land values cannot be passed on to tenants is one of the best kept secrets in economics. And for good reason. No parasitical rentier ever wanted people to know that what they get from ownership of our earth is unearned, easily taxable the taxation of which cannot be avoided. Please do not take what I have said here as a complete explanation of why the land value tax cannot be passed on. It is just a beginning, bears repeating and takes a bit of persistence to grasp it. That was my experience starting with the handicap of thinking that it was just not true.
If as you say the idea is to make it impossible for rentiers to derive a stream of income from rents, I see no real difference between this policy and nationalization, for in the end we get the same outcome–the rentier is not able to economically gain from holding land.
If you want to avoid de facto nationalization, the tax would need to leave rentiers with a stream of income so as to justify their continuing to hold land. Assuming:
1. All rentiers face the same tax burden.
2. All citizens must rent from a rentier.
It follows that rentiers as a group would raise rents and that citizens would either have to accept these rents or be forced into homelessness. This would depress consumer spending and slow growth. There would be little point to this policy, as it needlessly leaves the rentiers playing a parasitic role.
It seems that however you slice it, the goal of this kind of land value tax is to get the current holders of land (the rentiers) to give it up so that citizens pay rent directly to the state instead. It’s covert nationalization. There’s no obvious reason why rentiers would be more okay with covert nationalization than they would overt nationalization.
I’m replying here because I wasn’t able to reply to your last reply in this string.
The kind of Citizens’ Dividend Wendell mentioned is what has to happen. It is not nationalization because it does not constitute government ownership of land; it constitutes common ownership — by everyone, in equal parts, since that’s who’s receiving the dividend.
The dividend, by basing its revenue on land rent, could set the stage for the abolishment of income taxes if people decide they want to pay taxes out of the dividend down the line. It would be easy — far easier than the process of collecting income taxes — for a system of property assessments to ensure that the proper land rent is collected from landlords. Such a property assessment system already exists. But the beauty of the system is that it doesn’t have to be perfect; as long as some commitment is shown, it will be easy for competing housing providers to enter the market (cheap land, at a price near zero), since they only have to spend money on the improvements. Any landlord who is trying to charge tenants too much will be doing so on the merits of his improvement. As long as the landlord is paying the market-determined land rent (LVT), then it is his right to try to charge as much as he can for access to his improvement; nobody should care.
That is the only source of revenue a private landlord should have: rent based on the merits of what HE has contributed, the improvement. The current system, in which landlords collect income from both their improvements AND land, is the one in which landlords are parasitic.