Hidden Handouts
One objection I hear when I make a case for UBI (universal basic income) is that it’s unfair for people who don’t work to get money for nothing. But you probably don’t object to your tax deductions, which amount to the same principles.
If I asked you how much government assistance you receive, you’d probably say, “None.” I’m going to argue, however, that you’re getting plenty of government assistance — without anyone accusing you of spending it irresponsibly.
Hardly anyone questions what a person does with money they’ve earned; it’s only when money is perceived as given that people start worrying it will be wasted. Yet we (as a society, through the government) “give” far more money in tax breaks to high-income households than we give in benefits to those with low income, with no metaphorical hand-wringing about whether that money will be put to good use.
Most itemized deductions people claim are tax expenditures, which are materially the same as direct benefits. Some of the most popular are retirement savings, mortgage interest, and gifts to charity, which all seem like good things to reward in middle-class families. But the vast majority of these benefits accrue to the top 20% of households. In fact, over 15% of the value of the ten largest tax expenditures benefit households in the top 1% of earnings. (The total cost of tax expenditures was estimated at over $1T in 2012.)
In a fair system, everyone who earns the same amount pays the same amount. Our system doesn’t have the same tax rate on every person, but it does in theory tax the first $50,000 of income at the same rate for everyone. If someone increases their earnings, they would pay the same rate on the next $50,000 as others who earned that much — except they often don’t, because of deductions.
Tax deductions and special treatment of certain types of income is how Warren Buffett claimed he ended up paying a lower effective tax rate than his secretary (which is more or less accurate depending on what you include in the calculations). But I believe we can agree that at the very least, a truly fair system would not have rich people paying a lower rate than poor people.
I’m going to focus on the deductions, which are very similar to “welfare” (government assistance for the poor), in that they:
- are conditional on specific behavior or circumstances (income maximums, number of dependents, or spending in specific ways), and therefore
- are not available to everyone.
UBI is by definition unconditional and equal—every adult gets the exact same amount, with no strings attached. But is that “fair”? UBI proposals I’ve seen say that it should (or at least could) replace most forms of welfare and most behavior-specific tax deductions that currently favor the wealthy (including all those I mention below). That seems to me a far more equitable distribution of the money the government is already collecting.
The Numbers
Poor households receive on average around $9,000 in government benefits (though of course, that number varies widely based on the number of children, the number of wage earners, and the state the household lives in). In theory, a household could accumulate cash and benefits worth a total of up to around $40,000 in a year, but the typical example is much lower.
As far as deductions, more than half of households earning more than $50,000 a year chose to itemize in 2011 (meaning they would get more money back than if they used the standard deduction), increasing to practically all households for households earning more than $200,000 a year. Households earning between $50,000 and $100,000 deducted an average of $19,000 from taxable income, which is government assistance worth $4,750 (at the applicable marginal tax rate of 25%). Those who took the standard deductions obviously received somewhat less. So it’s clear that the government assists those in the middle-income range less than or about the same as those receiving means-tested benefits.
But let’s say your household has two tech workers in a booming tech area. You could easily have a $500,000 mortgage (considering the price of housing in my area), in which case you would pay around $19,000 a year in interest during the first few years of a 30-year mortgage, even at today’s historically low rates of around 4%. If you and your spouse file jointly and both contribute the maximum amount to your 401(k), that’s another $36,000 off the top of your taxable income (which you receive even if you don’t itemize). My SALT deduction in 2016 — state and local sales and property taxes — was another $11,800 (above the average of $8,000 in my area, but comparable to high-income households). Add charitable giving of $20,000 (10% or less of a top-10% income), and you’ve got total deductions of $86,800, not even counting the personal exemptions.
The value of those deductions? Government assistance of $28,000 at the marginal rate of 33%. These deductions are ostensibly meant to incentivize saving, charitable giving, etc., yet there is little evidence that they change the behaviors of the wealthy they benefit. Charitable giving has historically varied little despite dramatic changes in marginal tax rates (the lowering of which reduced the tax deduction of such gifts). A mortgage-interest savings of $215/year (what a median-income household might expect to save if it itemized) is hardly enough to make the difference in whether someone can buy a home or not, and a tax break seems to be the smallest incentive toward retirement savings.
My Verdict
The value of just a few tax breaks for a high-income household is more than twice the amount a UBI would have to be in order to raise every American citizen above the poverty level. Though there are several ways to define “middle class,” which may or may not include any households in the top 20%, it seems clear that the bottom 80% of households in the US, or those who annually earn less than around $112,000 (the 2015 cutoff), would be better off with a UBI of $13,000 a year per adult.
Does that make a UBI fair? I hope I’ve shown that it certainly wouldn’t be less fair than the system we have now.
