Transaction Tax Dividend

To counter wealth accumulation and fix capitalism, have transaction fees fund a continuous dividend.

In the first post in this series, I showed a simulation demonstrating the low-level problem with free markets - that the rich always get richer: When otherwise identical people trade randomly with each other but can only spend (or gain) as much as they have, wealth shifts quickly from everyone initially being equal to a handful of lucky people having all the money and everyone else being poor. In the second post I showed an example of an attempted solution that doesn’t work - direct inflation through a basic income. Wealth inequality still increases, although this may not be as important as fixing income/consumption inequality. Here we will show a working solution - funding the income with a transaction tax.

The Gini Index: In this simulation I measure and display the Gini index, which is a widely used way of measuring income and wealth inequality in a population. A Gini index of zero means perfect equality - everyone has the same amount of money. A Gini index of 100 means that one person has all the money, and everyone else has none. Europe has a Gini index of about 30, the USA has more inequality, with an index of 43. Considering Wealth instead of Income (the Gini index came computed on either), the USA number is 85!

A Wealth tax works, but only when really high

It is easy to test other things, for example the politically charged “wealth tax”, as most recently presented by Democratic presidential candidates. To simulate an ideal wealth tax in this simulation (which would have the appealing property of being easy to actually enact and impossible to avoid), you simply make money decay and fund a uniform dividend to everyone. To play with different rates in the simulation, adjust the variable ‘half_life’ to set the rate at which money decays, while setting the variable ‘transaction_fee_rate’ to zero. You will find that decay of money does allow you to balance the Gini index at a fairer level, but the rate of decay needed is very high - imagine your savings dwindling by 1/2 every year for example - and seems unlikely to be appealing to a modern society. For example, to get the Gini index down to 47 requires a 6 month half-life for money… corresponding to a 75% annual wealth tax! A 50% tax still only brings it down to 55.

Having such a high wealth tax seems likely to motivate people to shift wealth into assets with a lower rate of decay to avoid the tax - as we see people doing with real estate. Or it might motivate excessive consumer spending and low savings, which beyond a point are also unhealthy.

Transaction tax to the rescue

Transaction taxes funding the dividend have an immediate and powerful effect on the resulting Gini index. A 6% transaction tax brings the Gini index to 50 (by comparison the US Gini Wealth index is 82). A 10% tax stabilizes the Gini index at 44. In the simulation, you can play with different tax rates by adjusting the variable ‘transaction_fee_rate’.

Transaction taxes funding the dividend are effective because they continuously funnel money to everyone, but still taking more from the more wealthy (who are more likely to engage in larger transactions). And a low tax rate (similar to the sales taxes we already expect to pay IRL) is highly effective at dropping the Gini index.

Support from real-world Economists

Using transaction taxes to fund a basic income is supported by real economists as well. This proposal from Economist William Gale at the Brookings institute is to use a 10% VAT tax to fund a basic income, for example. This Cato Institute Study agrees with the idea that consumption taxes are a better way to manage equity than wealth taxes. And political candidate Andrew Yang’s proposed ‘Freedom Dividend’ in funded by a combination of a 10% VAT and a carbon tax.

Possible as a Cryptocurrency

Blockchains are decentralized record keeping systems with some sort of incentive for participants to keep the records and an algorithmic approach to managing money supply and taxes. They have captured public interest mostly as a new kind of investment category that isn’t as subject to central regulation, but future systems can be built with changes to their algorithms that create very different outcomes.

In particular, a blockchain cryptocurrency could be designed to levy transaction taxes and recycle those taxes as a dividend just as described in this simulation. A new cryptocurrency with these rules could be launched, and the appeal of such a ‘community currency’ tested. It is possible that if this new currency better distributed wealth among its members along with providing a basic income, it might enjoy grass-roots adoption. As with the simulation, the minting new coins would be in proportion to the number of people participating, meaning that the system would not disproportionately reward early adopters and hoarding, as is the case with most existing cryptocurrencies. There is a new technical requirement to grant only one account per person, but several good solutions already exist to solve this problem. Furthermore, this new currency would enable per-capita voting (due to the requirement of one account per person), which would enable additional anti-deflationary measures such as voting on system parameters such as the initial new allocation of coins.

Summary

This simple simulation shows that the rich always get richer in a free market, but that a modest transaction tax funding a dividend (per-person basic income) is highly effective at holding wealth inequity at desirable levels much lower than the runaway rates seen in the worlds most inequitable countries, such as the USA, Brazil, and Russia. Additionally, it it is observed that a cryptocurrency could be designed which applies and redistributes these fees, making it possible to test such a system at scale.