30 Apr 2017

An Open Letter to Emmanuel Macron - Future French President?

Dear Monsieur Macron

In a weeks time, the French will vote to choose whether you or  Marine Lepen should be their next president. Many people will probably vote for you simply to prevent an extreme right Front National candidate getting into power. But many others, including myself, remain unconvinced that your brand of neoliberalism is really what we need. I would be reluctant to see you elected with more than the minimum support to beat Lepen, because I fear that your program is just going to be more of the same neoliberal policies that we have had with Hollande. I see little in your program that has any chance of fixing the real problems that face us.

That is why I am writing to you to argue that in fact there are a large number of alternative ideas that I believe you should be considering. You seem like an intelligent person, capable of listening. So please, listen for a bit. You might find something you like.

To start with, I think that most people can understand that almost all taxes are intrinsically bad. Income tax reduces the incentive to work. VAT reduces the incentive to buy products and services. The cost of social contributions discourages companies from employing humans - and pushes them to replace workers with robots whenever possible. And taxes on Company profits encourages businesses to relocate to places where the tax rates are lowest, with the result that there are entire industries devoted to minimising taxes for international corporations, biasing the playing field against the small entrepreneur.

For some years, I have been convinced that we could easily scrap Income Tax, VAT, social contributions, and taxes on profits. The solution would be to introduce a simple flat rate transaction tax on all financial transactions. Figures from the Bank for International Settlements show that transactions in 2015 totalled $9.76 quadrillion, and if you count the last 10 years, the total reaches $105 quadrillion. That's a one with 14 zeros after it ($105,000,000,000,000).  Here's a summary table, but you can find the original data on a Google Sheet here.

OK, I would agree that France only contributes a relatively modest amount to this eye-watering total (3.4%) - the bulk taking place in the US and UK, with a massive 10.9% being handled by multinational groupings like CLS which handles roughly half the world's $5.1 trillion in Foreign exchange transactions that occur EVERY DAY.

Nevertheless, even if we count just the numbers that are purely French, you will see that France's total over 10 years has been €2.745 quadrillion - or about €275 trillion a year on average.

So, just imagine what would happen if you were to impose a flat rate transaction tax on all electronic transactions in France of 0.2%. That would potentially generate up to €550 billion of revenue - enough to abolish every other tax!

I'm sure that your banker friends would say that a 0.2% tax on transactions would make the sky fall in. But it's 100 times less than the 20% VAT that the rest of us currently pay when we buy many things. It's also 100 times less that what many individuals and companies pay to the government in the form of income tax and profits.

Sure, the ridiculous and pointless frenetic activity on the financial exchanges would slow done, or move elsewhere. But imagine if France was the first country to scrap taxes on profits entirely. Multinationals would be swarming to Paris to be able to use their profits legally, rather than stashing them away in some taxhaven in the Caymans or Panama.

A second reform that goes hand in hand with abolishing income tax would be to set up an alternative way of restributing wealth. People say that they like Income tax because it provides a way a redistribing wealth from the rich to the poor. But what would happen with no income tax? Well, one way that produces a roughly equivalent redistributive effect would be to replace the redistributive tax system with direct payments to all citizens in the form of an unconditional basic income. I suspect that you think that this is a dangerous lunatic leftist proposal. But I would argue that it is quite the contrary.

Suppose that we have a system where you have scrapped taxes on company profits and abolished social security payments. This would already give a fantastic boost to French industry, because their costs would be slashed, making it substantially cheaper to produce goods in France than elsewhere.

But what few people seem to realize is that when an unconditional basic income is combined with a citizen's salary, this will also produce a massive boost for French industry. Someone with a family and kids would have basic income that would cover some percentage of their basic living costs. Additional money paid by the employer would add directly to the family's revenue, especially if we have also managed to scrap income tax. With the extra direct revenue from the basic income, the employer could manage to provide a decent living for less cost - thus again driving down the costs of producing in France.

In many respects, the same thing happens with any services that are provided as a basic citizens right. If people get free health care, free child care and free public transport, these are all things that they don't have to pay out of their salary, meaning that employment costs for the employer can be reduced.

It's odd that in the US, people still fail to understand that having an extortionately expensive health system that effectively has to be paid for by the employer means that US industry could never really compete on equal terms with industries in places like China.

Moving to a system where there is a basic unconditional income would not be a leftist fantasy. On the contrary, it should be seen as move that would greatly simplify the employment rules. If combined with the elimination of the vast majority of existing benefits schemes, it would result in a much simpler and understandable system in which everyone would know that whenever they work, they would be be guaranteed to increase their revenue. Under the current system with its labyrith of support measures, many people find that working ends up being unattractive because if they earn more than a given amount, they run the risk of losing the benefits they currently have. Such poverty traps are something that you could eliminate by simplifying the entire benefits system.

Monsieur Macron, don't you think that there are better ways out there that are worth considering. In the short message, I have talked about just two of them - fundamental tax reform and specifically the idea of replacing the majority of conventional  taxes with a universal transaction tax, and the basic unconditional income. If such ideas could be included in your program, I am certainly that many people would end up voting for you because they actually like what you have to offer - and not just as a way to prevent LePen gaining power.

29 Apr 2017

Eurozone Public Sector Debt and Interest payments 1995-2016

Here I provide more details of the way Eurozone Public Sector debt has soared since 1995, and the extent to which increases in debt relate to the interest payments that we have been forced to pay. The full set of data can be found in a Google Sheet File that you can download and consult freely. All the numbers come from the latest set of figures from the EuroStat office.

First hes is a graph of how debt has increased by over 135% since 1995, from €4.07 trillion to €9.59 trillion at the end of 2016.

Now let's look at the figures in detail.

Debt has increased by €5,518,180 million, corresponding to an average increase of around €263 billion a year.

In the same period, Eurozone taxpayers have paid almost €6 trillion in interest on that debt - an average of over €280 billion a year. The figure is amazingly constant, with a peak value of €318 billion in 1996, and a minimum of €246 billion in 2004 and 2005. This contancy is despite an almost continuous drop in the effective interest rate, from 7.37% in 1995 to a "mere" 2.46% in 2016.

But that "mere" 2.46% level, helped no doubt by the massive purchasing of government bonds by the ECB, has not appreciably reduced the drain on Eurozone taxpayers. Despite Mario Draghi's efforts, we still forkd out over €236 billion in interest last year - corresponding to 2.2% of the Eurozone's GDP.

Over the whole period, an average of 3.4% of the Eurozone's GDP has been used to pay interest charges on Public Sector Debt. Given that roughly 19% of Eurozone GDP is taken in tax, this means that roughly 18% of all taxes in the Eurozone gets used to pay interest charges.

Where does all that money go? Well, to start with, you have to realize that only selected players are allowed to buy Eurozone government bonds - and those players are essentially all commercial banks. They are thus the ones that are first in line to benefit from all that taxpayers money.

And where do the banks get the money they use to buy government bonds? Well, they would no doubt like us all to believe that they are just acting as intermediaries for armies of grannies who want to use their savings to buy safe government bonds.

But this image is, in my humble opinion, a complete myth. When Commercial banks want to buy government bonds, they can just invent the "money" they use out of thin air. They can then sit back and cash in the taxpayers money that is being siphoned out of the economy. Alternatively, they can flog the bonds to third parties that include US and Canadian Pension Funds.

Whoever benefits from the money, it seems very likely that  roughly €6 trillion of Eurozone Taxpayers money could have been used for much more useful purposes.

There is thus a very strong case for completely scrapping the current insane system in which our governments are forced to borrow from commecial banks with the result that we are effectively all slaves to the financial system. That system was made binding by the treaties of Maastrict and Lisbon, but desperately needs to be overturned.

What is needed is a system where the European Central Bank can provide funds to Governments directly, preferably with no interest charges to pay. Or even better, Governments could simply create their own debt free money as with the N-Euro scheme that I have been proposing.

Spain : Over €500 billion in interest payments on Public Sector Debt since 1995

I'm continuing my analysis of the latest Eurostat Figures on European Union Public Sector Debt and Interest payments since 1995. Following France,  the UK and Italy, let's have a look at Spain - another of the countries under heavy pressure from the troika. All the figures I used to do the analysis can be found in a Google Sheet document that you can find here.

First, take a look at the graph of how Public sector debt has increased. It was incredibly stable from 1995 to 2007, increasing from just under €300 billion to less than €400 billion. But then, starting in in 2008, debt levels have tripled to over €1.1 trillion at the end of 2016.

The next table allows us to look at the details.

First, over the period 1995-2016, debt levels increased by €811,348 million, an average of €38,636 million per year. But note that Spain actually decreased its debt levels in 2003, 2006 and 2007

The amount paid by Spain's taxpayers as interest on that debt totals €509,730 million. It was less than €20 billion a yaer from 2002 to 2009 but has now been substantially over €30 billion a year for the past 5 years.

The amount paid in interest charges averages 2.9%, which, when you compare that figure with the value of 14.5% of GDP corresponding to taxes in Italy provided by the World Bank,  means that roughly 20%  all Spain's taxes gets used to pay the interest on Public sector debt.

This is frankly criminal. As with all European Union governments, the Maasstrict and Lisbon treaties oblige governments to borrow from the financial markets - essentially commercial banks. But, because of the way that banks work, they don't have to have pre-existing money to buy Spanish Government bonds - they can just invent the money out of thin air, and then sit back and enjoy the benefits of getting billions of interest payments every year, or flog the bonds to third party investors, including US and Canadian Pension Funds.
What would a typical Spanish Citizen say if he or she found out that a substantial proportion of their   taxes gets used to pay for pensions in the US? Would there be a revolution? I think there should be.

Italy : €1.72 trillion in interest paid on Public Sector Debt since1995

I'm continuing my analysis of the latest Eurostat Figures on European Union Public Sector Debt and Interest payments since 1995. Following France and the UK, I now turn the spotlight on Italy. All the figures I used to do the analysis can be found in a Google Sheet document that you can find here.

First, take a look at the graph of how Public sector debt has increased from just over €1 trillion in 1995 to over €2.2 trillion in 2016.

Next, lets look at the details.

First, over the period 1995-2016, debt levels increased by €1,147,338 million, an average of €54,635 million per year.

The amount paid by Italian taxpayers as interest on that debt was particularly impressive, totally no less that €1,720,306 million. The amount has varied substantially from year to year, peaking at an eye-watering €114,239 million in 1996. It's been dropping slightly over the last five years, but was still no less than €66,272 million last year. Over the whole period, taxpayers have been paying an average of over €78 billion every year - that's 5.8% of Italian GDP.

When you compare that figure with the value of 23.7% of GDP corresponding to taxes in Italy provided by the World Bank, this means that roughly one quarter of all Italian taxes gets used to pay the interest on Public sector debt.

OK, the interest rates have been dropping somewhat, and are now quite a bit lower that the 9.32% effective interest that Italians were paying in 1995. Indeed, the effective interest rate dropped below 3% for the first time in 2016. But that doesn't make this situation any less ridiculous.

Why on earth are Italians forced to pay 25% of all their taxes to a Financial System that creates money out of thin air to purchase Italian Government bonds and then sits back and rakes in the interest charge. The €1.72 trillion that Italians have paid is, in my humble opinion, a total racket. I would suggest that someone in Italy should press to (a) end this insane system, and (b) ask for the €1.72 trillion back- please.

UK : Nearly £750 billion in fraudulent interest payments on Public Sector Debt since 1995

Given that the UK also has elections coming up in the next couple of months, I thought it would be useful to use the recently updated EuroStat Figures on Public Sector Debt and Interest Payments to have a look at just how catastrophic the current system has been for UK taxpayers.

First, here's a graph of how UK Public Sector debt has gone trhought the roof in the last decade.

From 1995 to 2000, debt was fairly stable at around £400 billion. But then its started climbing gradually, and then shot up with the arrival of Cameron's Conservative Party in 2009 and George Osborne as Chancellor. It has now reached a very impressive £1,731,402 million - call it roughly £1.7 trillion.

The following table provides the gory details.

First, debt has increased by £1,253,157 million since 1996. But that debt has increased most in the period 2008-2011. In 1998, 2000 and 2001, debt levels actually decreased!

At the same time, the UK government has been generously paying out tens of billions every year in interest payments on that debt. The total over the period was £747,343 million - and average of very nearly £34 billion a year.  Last year, depite the claims of the Conservative Govenment that it was trying to get levels of debt down, debt actually increased by over £65 billion, and UK taxpayers handed out nearly £48 billion in interest charges.

The right hand column show the effective interest rate on Public sector debt has tended to drop and currently stands at 2.76%. But the average interest over the entire period has been 4.91%.

As a percentage of GDP, those interest payments account for 2.5% (both in 2016, and as an average over the period 1995-2016), which corresponds to about 10% of the total UK tax take (25.4% of GDP according to the WorldBank).

The bottom line is thus that 10% of UK Taxpayers money has gone to feed the parasitic tapeworm that came up with the wonderful scheme that allows Commercial banks to lend non-existent money to gullible (or complicit) governments, and then sit back and either get the interest, or flog the bonds that they have bought to third parties such as the US and Canadian Pension funds. Effectively, UK taxpayers are paying for pensions in the US. How generous.

How about Labour or the Lib Dems challenging this insane system that, thanks to the policies of Cameron and Osborne have put UK citizens massively in debt, through no fault of their own?

France : Over €1 trillion in interest paymnents on Public Sector debt since 1995

The latest Public Sector debt and interest payment figures from EuroStat make for sobering reading. Yesterday, I gave the headline figures for the the whole European Union - €12.4 trillion in public sector debt, with in interest payments €317 billion in 2016 alone.

Today, I want to look at the specific case of France, particularly in the light of the next week's Presidential run off between the Extreme Right wing candidate Marine Lepen and Neoliberal Emmauuel Macron.

First, lets just plot a graph of the increase in Public sector debt from €696,291 million at the end of 1995  to €2,147,418 millon at the end of 2016. 

Now lets look a some more details. This table can also be found as a sheet in a publicly avaible Google Sheet file that you can examine and download here (go to the folder called "France").     

The table reveals that, over the period 1995 to 2016,  French public sector debt levels inceased by €1,451,126 million (€1.45 trillion). Of that, €1,017,375 million was due to the interest payments, i.e over €1 trillion. 

The right hand column shows that the effective interest rate paid on French public sector debt has dropped from 5.79% in 1995 to a "mere" 1.96% in 2016. 

Does this mean that the French taxpayer has been gettting a better deal? I don't think so. If you look at the actual amount of interest paid, it has remained remarkably stable, averaging €46.2 billion over the whole period. The minimum was around €40 billion in 1995, peaked at €56.2 billion in 2008, andhas dropped back to roughly €42 billion last year. How interesting. Effectively, as the levels of debt have more than tripled, the markets have magically adjusted the interest rates to ensure that the amount of money extracted from France's taxpayers has remained roughly stable.

For info, the Agence France Tresor (AFT), which manages French Public Sector debt, is currently prediciting that for 2017, the interest payments will stay pretty constant relative to 2016, with a total of €41.55 billion

The system reminds me of a parasitic tapeworm that skillfully avoids killing off the host.

The column that gives the interest paymnets as a percentage of GDP shows that the percentage has indeed tended to drop - from a peak of 3.4% at the start of the period, to a "mereé 1.9% in 2016.But the average over the entire period was 2.7% of French GDP.

That parasitic tapeworm has siphoned off a very sizable proportion of the tax revenue of the French governments revenue. According to World Bank figures, France's tax system took about 23.4% of French GDP in 2015. Shall we say that roughly 10% of that was used to keep the parasitic tapeworm happy? 

Who profited from this? In other words, where should we looking to find that tapeworm? 

Well, unfortantely it is difficult to have clear information about who gets the interest payments. We know that around 60% of the debt is held by non-residents - the historical details are available on the Banque de France's website which demonstrates that the percentage held by non-residents has dropped a bit from a peak of  over 70% in 2010.  But who are these "non-residents"? It seems quite plausible that a major holder could be  US and Canadian Pension Funds. That would mean that a substantial proportion of the 2.7% of GDP that gets used to pay the interest on French Public Sector debt has been used to pay pensions in the US and Canada. One might reasonably ask whether it might not be better to use French taxpayers money to pay pensions in France!

No doubt the defenders of the status quo will argue that the French government has no choice but to borrow from the financial markets. But I would argue that this is simply false. Until the infamous "Loi Pompidou-Giscard" in 1973, the French government could simply ask the Banque de France for funds, and actually had no debt at all. 

For some reason, the idea that only commercial banks should be allowed to lend "money" to governments subseqently became the norm, and was finally sealed into the Maastrict and Lisbon treaties. The result has been total disastrous for French Taxpayers who, in the period 1995-2016, as  have effectively handed over more that €1 trillion of hard earned cash to Banks who, in case you didn't know, don't even have to have the money they lend. They can just create it out of thin air by buying up French government bonds with non-existent money, and then either sit back and collect the interest payments, or flog the bonds on to Pension Funds in countries like the US and Canada.

Is this insane? You bet.

If Emmanual Macron would really like to be elected in one weeks time as France's President, why doesn't he say that he will fight to (a) end this racket, and (b) ask for out €1 trillion back please. Now that would be a really popular move!

28 Apr 2017

European Public Sector Debt and Interest payments for 2016

On the 25th of April, Eurostat published the latest figures for European Public Sector Debt and Interest payments for 2016. I've extratcted all the numbers and posted them in a Google Sheet file that you can find here.  I have arranged that file so that you find both the Debt and Interest numbers in three different forms : in euros, in units of the national currency, or as a percentage of GDP.

I've extracted the key figures are in the following table

Public sector in the 28 European Union countriees is nearly 12.4 trillion euros. For the 19 Eurozone countries, the total is 9.6 trillion euros. Four countries now have well over 2 trillion euros of debt each. Italy tops the list with 2218 billion, followed closely by France and Germany with 2147 billion and 2140 billion each, and the UK with 2022 billion.

The other impressive figures concerns interest payments on that debt. For the entire European Union, those payments topped €317 billion in 2016, of which €236 billion was in the Eurozone. The effective interest rates being paid by each country vary, with Hungary, Romania and Slovenia all paying over 4%. On average, the interest rate was about 2.5%.

2.5% might not seem too bad. But remember that the figure refers to compound interest. And since European Public Sector has been climbing almost continuously for decades, the total amount of interest paid out has reached staggering numbers.

Since the Eurostat office provides  figures for most places since 1995, I was able to calculate the increase in debt over the 21 year period, and compare that figure with the total amount of interest paid over the same period (see the fourth and fifth columns in the table).

For the Eurozone, public sector has ramped up by over €5.5 trillion in that 21 year period. Over that same period our governments have paid out €5.95 trillion in interest payments, meaning that effectively, ALL the net borrowing of our governments has gone to pay interest on public sector debt.

This is a truly ridiculous situation when you realize that the banks that lend money to our governments don't need to use pre-existing money to make the loans. They have the right to simply create money out of thin air, meaning that the nearly €6 trillion of money that taxpayers have paid the banking system since 1995 was effectively a complete fraud.

Essentially, if banks can find a bunch of politicians sufficiently gullible to take on extra debt, those banks are then guaranteed to be able to earn of very comforable stream of unearned income, amounting to well over €300 billion every year. Europe's taxpayers are really being ripped off by this system. Could France's probable future president, Emmanuel Macron, be someone motivated to end this scam and save the French taxpayer nearly €42 billion a year? It would be great if he did. But given his background at Rothschild's bank, he may not be particularly interested in ending the bankers' gravy train in a hurry. We'll see.

17 Apr 2017

Moi president..... introduce the N-Euro

In less than a week from now it will be the first round of the French Presidential Elections (23th April 2017), with the final run-off between the two highest scoring candidates two weeks later (7th May).

We are spoilt for choice, with no less than 11 candidates covering the full gamut of options from two Anticapitalist candidates (Nathalie Arthaud and Philippe Poutou) to the extreme right wing Front National (Marine Lepen). According to the latest polls, only four candidates have any real hope of making the second round : Lepen (currently credited with around 22-23% the vote), François Fillon (18.5-21%),  Emmanuel Macron (22-24,4%) and Jean-Luc Melenchon (18-20%).

One of my favorite candidates, the Parti Socialiste's candidate Benoit Hamon, who was proposing the idea of an unconditional basic income (Revenue Universal d'Existence, or RUE in French) seems to be pretty much out of the running, with between 7 and 9.5% of the vote, according to recent polls.

Yesterday, I  went to listen to Jean-Luc Melenchon yesterday in Toulouse where he spoke to an open air rally in front of some 70,000 people according to the organisers! - 40,000 according to the police.  Melenchon is really impressive. He can talk for 2 hours on end with almost no need to refer to notes, and his speeches are really entertaining. I'm seriously tempted to vote for him, but although he has some pretty radical ideas in his program, there are a number of points where his program is simply not radical enough.

So here, to give Melenchon and the other candidates some additional ideas, I would like to propose some of my own ideas for a truly radical reform of the system. They are nearly all ideas that I have put forward previously on my blog and via Youtube presentations, but I thought it worthwhile to give them another airing at the critical moment.

My first proposition is that  we have to  end the current insane system in which essentially all the money that we use every day is money that has been created out of thin air by commercial banks as interest bearing debt.

I would love to simply wave a magic wand and make it illegal for a bank to lend money that it doesn't have. But I am perfectly aware that the banking lobbies have so much power that no politician would ever be able to do that.

But I propose a simple way to get around that. We can let commercial banks continue their current system of lending non-existent "money" to gullible citizens, companies and governments and paying those banks interest. However, if I was president (moi président, as François Hollande said) my government would set up a parallel, debt-free, parallel system called the N-Euro - an idea that I originally proposed back in 2012. Every French citizen and every French company would be given an electronic N-Euro account that they could use to make payments to other citizens and companies. There would be no charges for running the system.

Where would the N-Euros come from? Simple. Whenever a citizen or a company receives a payment from the French goverment, they would be able to choose between payments in conventional Euros on a conventional bank account and a payment in N-Euros on their N-Euro account. Thus, all public sector workers (including myself - I am a Research Director with the CNRS) could be paid in a mixture of the two types of currencies.

You might say, why would anyone want to be paid in N-Euros when they have the option of getting "real" Euros? Well, the key is that the government would make it clear that they would accept N-Euros for the payment of taxes at parity with conventional Euros. That means that one N-Euro is worth exactly one standard Euro - by definition. And even if have no taxes to pay, I could use my N-Euros to pay someone else who does have taxes to pay.

Obviously, there are some cases where having some "real" Euros is actually a necessity. For example, if you are on vacation in Greece, you would be lucky to find a restaurant or hotel that would be interested in your N-Euros (at least to start with). At that point you would have to get our your trusty Euro Visa or Mastercard - or draw out some conventional Euros from a cash dispenser. But in France, where essentially everyone has to pay taxes at sometime or other, one N-Euro really will be worth one conventional Euro. I doubt you would any problems finding a shop or restaurant that would take an N-euro payment - especially as the N-Euro payments could be made at no cost. Why would a merchant prefer to be paid in conventional Euros using someone's Visa or Mastercard if they have to hand over 3-4% of the sum to the credit card company as a "merchant fee".

My prediction is that, within a few months, many civil servants, pensioners and others receiving payments from the state will be perfectly happy to sign a document to say that they would like 50% or more of their money paid in N-Euros.

Just imagine what that would mean for the my government. In 2017, the French government will have to find over €427 billion to cover its costs. Since its income from taxation and other sources is insufficient to cover this, it is currently running a budget deficit of nearly €75 billion. It covers that gap by borrowing "money" from the commercial banking system. Those commercial banks are happy to oblige - they create the "money" out of thin air needed to buy government bonds, and happily claim the interest.  That's why the French government now "owes" over €2200 billion.

But let's suppose that instead of borrowing "money" from the commercial banks to pay those civil servents, pensions and benefits, it simply paid them using its own home produced and debt free N-Euros. Imagine that the average citizen was happy to take 50% of their payments in N-Euros. Given that a subsantial proportion of French government expenditure goes in such payments, the amount needed per year could be virtually halved.

Obviously, since people would now be able to pay some of their taxes in N-Euros, this would mean that the tax income in "real" Euros would drop and you might think that this could be problematic. But since the government would have saved hundreds of billions in expenditure, it will be able to cope. Indeed, even in the case where the money injected by the government into the economy in the form of N-Euros simply returns later in the form of tax, that money will have been circulating within the economy for months in the meantime. The need to borrow on the financial markets would be reduced and, with a bit of luck, that terrifying €2200 billion figure for gross public sector debt would start to drop. It is not inconceivable that within a decade or so, the entire national debt could have been wiped out.

Why is such a plan so radical? It's simply because there have been very few cases in the history of humanity where a government has actually succeeded in creating its own money. Abraham Lincoln was one of the few to have attempted such a thing when he simply printed €450 million greenbacks to pay for the Civil War. Those greenbacks were worth $1 each, simply because you could pay your taxes with them. That is really all that is needed for a publicly created money to have value.

But let me point out one other amazing consequence of such a shift from commercial banks producing the money supply as interest bearing debt to a state generating currency with no debt. Currently, the economic system needs growth. Why? Because you need roughly 2% inflation to be able to pay off the interest every year. Switch the system to one where the N-Euros are created debt-free, and you no longer require either inflation or growth in the economy to keep the system afloat. We could move to an ecological responsible world in which there would no longer be a need to exploit our limited natural resources simply to feed the financial monster to whom we are all slaves.

Fixing the fundamental nature of the system is thus a key to fixing everything. And that is why, if I were president, my number one measure would be to introduce a parallel debt free currency - the N-Euro. For more information about the N-Euro idea, check out the Info page here or the N-Euro Cyclos site here, or a You-tube video dating from 2012 that you can find here.

19 Feb 2017

Basic Income and Flat Rate tax - a viable solution

Following up from my recent suggestion that Benoit Hamon could finance a Universal Basic Income by a radical reform of the tax system, I've been trying to put some hard numbers on the calculations. A few years ago, Camille Landais, Thomas Piketty and Emmanuel Saez published a book with propositions for a reform of the tax system in France. Their propositions were interesting, but not very revolutionary (in my humble opinion). They nevertheless did a very useful service by providing a website including a simulator that allowed people to try out their own reforms for the tax system.

The website includes a very useful table that provides the mean annual revenue for each percentile of  the French population over 18 years of age. This shows, for example, that the bottom 7% of the popuation has no income at all and that the median value for annual income is about €20,000. It provides an even more detailed breakdown for the top 1% of earners in the population.

Such information is very useful, because it allows anyone to work out how much revenue would be raised by setting the tax rates for different income levels at different values. Indeed, the authors invite readers to see if they can come up with a good way to set the tax rates. They give the example of a truly flat rate income tax system where everyone paid 13% tax on all their income which would raise as much revenue as the current one involving multiple tax bands.

But I was interested in seeing what would happen if all citizens recieved a fixed unconditional basic income of say €400 a month, and then paid a flat rate income tax on all addititional earned income. My original suggestion from last week proposed a rate of 25%, and I was able to use the data in the table to calculate that with such a system, 48% of the population would not only pay no income tax, they would receive a net payment from the tax authorities. Those payments would range from €400 for the 7% of the population with no income at all, to zero for someone earning around €1600 a month. The remaining 52% of the population would make net payments to the tax authorities, increasing to virtually 25% of income for the top earners.

Such a system would raise about €64 billion a year in revenue, which is not bad for a system that will allow a very clear redistribution of income towards the half of the population on low incomes. However, that €64 billion is less than the current income tax system generates - €148 billion a year. To raise the same amount of revenue would simply require the flat rate tax to be increased from 25% to 32%. In that case, only the bottom 37% of the population would be net beneficiaries from the system, and the point where people end up paying some tax would drop include people earning over roughly €1260 a month.

The interesting thing about such a system is that there are literally just two numbers that need to be determined. The first is the level of the Unconditional Basic Income - in this case €400. The second is the flat rate tax level - in this case 25% or 32%.

But you can easily choose other numbers. For example, if we decide to give everyone a basic income payment of €600, the whole system would be neutral (i.e. it would raise the same amount as the currrent system) if the flat rate tax was set at 42%. In that case, 42% of the population would get a net payment from the tax system. If you decided that you could get the €148 billion raised by income tax from an alternative source (such as a financial transaction tax), a basic income of €600 a month for all over 18 years old could be paid for with a flat rate income tax of a little under 30%. In that case, the 62% of the population with the lowest incomes would pay no income tax at all. Indeed, anyone earning less than about €2000 a month would receive a net payment from the system. The cost of all those payments (roughly €65 billion a year) would be paid for by the 38% of the population earning over €2000 a month, but with big earners paying the lion's share (though never more than 30% of total income).

You would like to offer a basic income of €800? Easy. Just set the flat rate tax at just under 40%, and again, the 62% of the population earning €2000 a month or less would get net payments from the system. Again, the cost of providing net payments of up to €800 to everyone earning less than €2000 a month (about €158 billion) would be paid for by the top 38% of earners.

Let's make the basic income €1000 a month. In that case, a flat rate income tax at 49.5% would do the trick. It would again mean that 62% of the population would receive net payments from the system - those earning €2000 a month or less. The total cost of all the payment (over €198 billion) would be paid entirely by the top 38% of the population. But even someone earning €6000 a month would only end up paying about 30% in tax.

All of this seems very sensible, and seems to completely demolish the idea that a basic income is unaffordable. Sure it is unaffordable if you just say that the cost of the system is €1000 multiplied by the number of people to whom the payments are made. But combine the introduction of the basic income with a radical simplification of the income tax system, and the whole thing can be done with no extra cost.

Indeed, I think that this sort of simple flat rate tax system has lots of other advantages, including the fact that it is much simpler to understand than the current system.

If you are interested in seeing how the numbers work, do have a look at the Google Sheet document that I have uploaded here. Download the file, and you can even play around with the figures to choose the values for the Unconditional Basic Income and the tax rate that you would be happy with!


31 Jan 2017

Benoit Hamon and the Unconditional Basic Income

Things are getting interesting in France with the upcoming Presidential Elections on the 23rd of April and 7th of May this year. Today, it's the second round of the primaries for the Parti Socialiste, with a choice between Manuel Valls,  who until recently was François Hollande's primeminister, and Benoit Hamon who, despite having been relatively obscure until a few months ago, is likely to win.

Benoit Hamon has been stimulating a lot of debate because he has been arguing for the progressive introduction of an Unconditional Basic Income (Revenue Inconditionnel d'Existence). Many politicians and commentators have tried to argue that such a move would be unworkable, because it would not be possible to finance it. Hamon proposes to raise the current RSA (which is conditional on resources) by 10%  to €600 a month in 2018 but to provide the same sum unconditionally to those aged 18-25. Progressively, he would increase the coverage so that the entire adult population would get €750 a month. A quick calculation shows that this would cost between €350 and €450 billion a year, and some people claim that this is totally unrealistic.

Hamon himself has argued that one source of finance would be to recover something like €80 billion a year lost because of tax evasion, or a tax on robots. He has also said that he would not feel obliged to stick to the 3% deficit limit imposed by Europe.  But even I, a staunch supporter of an Unconditional Basic Income, don't find his replies very convincing.

So, here, for anyone who is interested (including perhaps Benoit Hamon himself!) are a few other ideas that can make the whole idea more satisfactory.

The first point to make is that Mario Draghi, president of the European Central Bank, has been merrily pumping between 60 and 80 billion euros of freshly created money into the financial markets every month since March 2015. By the end of 2016, the total had reached €1532 billion. The vast majority of this money was used for the Public Sector Purchase Program, essentially buying up government bonds on the secondary markets, which totalled nearly €1272 billion. For France, the total has reached €241 billlion. You might have thought that by buying French government bonds, this might have reduced the level of French Public Sector debt, but you would be wrong. When the ECB's program started in March 2015, the debt was €2089.4 billion. The latest numbers for the end of the third quarter 2016 stood at 2160.4 billion, an increase of 71 billion euros. No, the only real beneficiaries were the financial markets, although I suppose you could say that the ECB's purchases helped keep the interest rates on French Government debt low - they are currently running at 0.75% per annum.
The fact is that this massive injection of fresh money into the markets has done almost nothing to improve the Eurozone economy. It may have boosted the markets, and allowed Companies to pay out massive dividends to sharesholders - totalling €55.7 billion in 2016 for the top 40 companies on the French stock market - the CAC  40. But there is precious little evidence that it did anything to boost the general economy, where inflation was 1.1% at the end of 2016, well below the 2% target imposed on the ECB.

Many economists are starting to say that if Draghi really wanted to use his almost unlimited abilty to create new money to really boost the economy, he should stop pumping money into the financial markets, and instead put it directly into the  economy. For example, he could be funding direct infrastructure projects including renewable energy programs. But he might also simply put money directly into the pockets of Eurozone citizens. The €80 billion a month that he is currently injecting into the markets would, if split between the 340 million Eurozone citizens, provide €235 for every man, woman and child. For a family of 4, the total cash injection of €940 would be considerably more than the minimum wage in several Eurozone countries, including Greece (€579.08 a month Portugal (€530 a month) and Spain (€655.20).

So, that's one place that Benoit Hamon could go to look for ways to fund the Basic Income. And, given the precarious state of Europe at the present time, and the real risk that the whole thing could fall to pieces with the rise of post-Brexit independence movements including Marine LePen's Front National in France, it might be a very good move to force the EU and the ECB to start thinking more about citizens and less about the banks and financial markets.

A second idea that seems to have been almost totally forgotten is the idea of imposing a Financial Transaction Tax. This was an idea that several European Governments had been talking about, but which seems to have stalled. In France, the BIS figures over the past 10 years reveal financial transactions averaging  €275 trillion per year. OK, the figure was down to a mere €213 trillion in 2015.

Such figures are certainly modest compared with the UK which managed £979 trillion in 2015, or the USA which systematically reports around $3 quadrillion a year. Nevertheless, a modest 0.05% tax applied to French transasctions  could raise €100 billion - enough to finance a substantial proportion of the cost of the Unconditional Basic Income.

But the final, and most simple solution to the problem of financing a Basic Income would be to combine its introduction with a radical reform of the tax system. In many ways a Basic Income payment can be compared with Negative Income Tax, an idea that was proposed as long ago by no lesser person than the freemarket proponent Milton Friedman - as you can see in a famous interview from 1968. The idea is that when an individual earns less than a certain critical amount per month, they actually recieve money from the tax system.  Suppose that with no income at all, we fix the negative tax payment at €400. What happens when someone starts earning extra income, for example €400? Well, suppose that additional income was taxed at 25%. Instead of €800, they would earn 400 + 75% of 400 = €700. If they earn enough, the taxation they pay on their additional income would be compensated by the Basic Unconditional payment. In this case, this would happen if their earned €1600, because at that point they would be neutral because the 25% tax on the €1600 would exactly match the amount paid as a basic income.

Above €1600, they would continue to pay 25% tax on any additional income  such that at €2000 they would pay €100 in tax, at €3600 they would pay €500 in tax, at  €5600 they would pay €1000 in tax and so forth. This can be seen int the following graph. The green line provides a reference corresponding to a situation with no tax and no basic income. The red line shows how, for people earning less than €1600 they get a boost from the   system in the form of a negative income tax that reaches a maxium of €400 for someone with no earned income  at all. Above €1600, people become net tax payers.

Functionally, this is something very close to a normal tax system with a tax threshold set at €1600 and a tax rate set at 25%. But an important point is that there are simply no threshold effects in such a system. At no point would anyone be forced to ask whether, by working a bit more, they would run the risk of losing some conditional support only available to people earning up to a certain value. This surely has to be a major advantage. Another point is that the adminstration costs of such a system are almost non-existant - no need to employ large numbers of staff to verify that citizens are indeed eligable for handouts.

The vast majority of commentators apparently fail to understand that all tax systems are just an elaborate way of trying to determine who pays most and who gets the most support. More importantly, it is simply ridiculous to claim that providing an unconditional basic income of €400 would cost €400 * 12* 52 million  =  €249.6 billion a year. Everything depends on the structure of the tax system, which can be set as you wish. If you want 75% of citizens to get no additional money, you just need to adjust the tax rates so that net taxation is unchanged by the introduction of the basic income payments. If you want the top 25% to contribute enough to pay for the 25% who get a net boost by the payments, again it's just a question of setting the tax rates to fit.

Hopefully it is clear that this sort of system doesn't need to cost any more than the current one.