A Way to Pay for Basic Income
There is much variety in Basic Income proposals. Here I consider a U.S. national plan that pays every citizen without discrimination by age or any other condition. This plan replaces all federal programs that make transfer payments or provide individual benefits. For example it replaces social security, medicare, medicaid, disability, food stamps, supplemental security income, and everything else.
There are many kinds of taxes: income, consumption, property, capitation, excise, import, etc.
A large purpose of Basic Income is to reduce poverty. For healthful living, both production and consumption are important. Therefore, I consider equal taxing of income and consumption to finance a Universal Basic Income.
In the following presentation, the numbers help make the idea more concrete. The numbers are only rough approximations. One number is a magic number, 0.1 or 10%. Varying this number affects the progressivity of the result. I chose the value of 0.1 because
- It is an easy number for doing arithmetic.
- The 80/20 rule is common; and 0.1 puts the system 80% in the domain of free markets and 20% (from 10% of income plus 10% of consumption) in the domain of equal distribution.
- The result is not far from what we have now — though transfer payments may be somewhat larger than at present.
In any case, if you favor more or less progressivity, you can apply the general idea by choosing a different magic number. There is no best number for every time and place. If you are a French Canadian fur trapper (intro image) working solo in the 17nth century, 0 may be better. If you are a monk in a Trappist community praying 8 times a day, making beer, and serving the poor, 0.5 may be better.
Steps 1–4 below are about Basic Income. Steps 5–8 are about making a transition.
- Throw out all federal tax code.
- Implement a 10% tax on all income of every sort.
- Implement a 10% VAT on all consumption of every sort.
- Distribute all revenue to citizens per capita.
- Create Mandatory Savings Accounts.
- Liquidate the Social Security Trust Fund.
- Pay for non-transfer spending.
- Reform health care.
Step One: Throw out all 70,000+ pages of the existing tax code.
Let’s start over. Taxes may or may not be too high or too low, but they are too complicated.
- Complication is a significant drain on the economy and on life and leisure. It is good for special interests; but we are all special; and no person needs to be special by law.
- Complication tends to be regressive because higher income people use it to more advantage.
- Complication provides a smoke screen that abets tax avoidance.
- Complication is expensive in time and money and is difficult to administer. It fuels an entire industry focused on minimizing taxes.
- More simple taxation will decrease employment dealing with taxation, which will decrease GDP. ~UBI in Step Four will ease employment changes.
- More simple taxation will diminish ‘rent seeking’ income for some special interests.
Step Two: Implement a 10% tax on all income of every sort, personal and corporate.
- With UBI in Step Four, this flat tax is effectively progressive. [effective tax rate at an income of $1,000 = -531%, at $10,000 = -36%, at $100,000 = 13.5%, at $1,000,000 = 18.45%]
- Calculation is easy. Do your taxes on a postcard.
- A base as broad as possible produces the most revenue for a given low rate. No exemptions, no deductions, no tax-free income, and no untaxed benefits help keep the rate low.
- A low rate minimizes avoidance and evasion and minimizes disincentives to production. A low rate will make seeking and offering work more rewarding; and it will increase productivity and wages in our economy. A low marginal rate will draw people out of the underground economy and enable their greater productivity in the regular economy. A low rate will help US production be more competitive in international markets, which will be good for employment and the balance of trade. A low rate will decrease the incentive for corporate inversions.
- The law is the same for everyone in every type of endeavor. The marginal incentive to work is the same for everyone. All dollars are equal and have the same standard of value for every transaction.
- There will be temptations to make the rate too high. Too high rates will lead to adverse effects on compliance, economic growth, and employment. ~Economic growth is essential to a rising standard of living for most people. Life is much more than GDP. But typical people living today are beneficiaries of past growth and live better than elites in former times with much smaller GDPs.
- People are used to deductions, exemptions, and untaxed benefits.
- Income taxes are common features of state and local governments; so there will be competition for revenue.
Step Three: Implement a 10% VAT on all consumption of every sort.
- With Step Four, this tax is effectively progressive. [effective tax rate at an income of $1,000 = -531%, at $10,000 = -36%, at $100,000 = 13.5%, at $1,000,000 = 18.45%]
- Calculation is easy; and VATs are typically included in posted prices; so shopping is easy.
- The rate is the same for every type of consumption: the base is as broad as possible to raise the most revenue at a low rate.
- The rate is low to minimize avoidance and evasion and disincentives to consumption.
- A VAT will harmonize US tax practice with much of the world and enable business to be more competitive in international markets. This will be good for employment and the balance of trade.
- A VAT captures revenue from production in the underground economy.
- A large problem is the problem of ‘a camel getting its nose under the tent’. This is a new federal tax. There will be temptations to make the rate too high, leading to adverse effects on economic growth and employment.
- Consumption taxes are a common feature of state and local governments; so there will be competition for revenue. ~Consider replacing part of the federal VAT with a revenue neutral carbon tax. A low tax rate will displace little industry to other countries.
Step Four: Distribute all revenue from steps two and three to citizens per capita and end all other benefit programs.
Let’s simplify benefits. The taxes in Steps Two and Three capture approximately 20% of GDP; so, each person’s Universal Basic Income will be 20% of average income.
This will not end poverty, but it will mitigate poverty’s worst features. (First dollars received have greater marginal utility than subsequent dollars.) There will be need and opportunity for states, ‘the laboratories of democracy’, and other non-federal actors to address a much smaller, but still challenging problem. Like cancer, poverty is not all the same. We need research and experiments and innovation.
Per capita GDP is approximately 50k$; so UBI will be approximately 10k$ per person per year. Two or more people living as a family will be above the official poverty line. The average household has about 2.5 members; so an average household will have an income above 25k$.
[See UBI Calculations. In the table, dollars are in thousands. Begin in the left column with gross income. The second column is income tax on column one. The third column is per capita tax from Step Seven described below. The fourth column is each person’s Basic Income. The fifth column is each person’s spendable income from the preceding columns. The sixth column is the effective tax rate so far. Column 7 is each person’s VAT assuming they spend all their spendable income in column 5. Column 8 is the total of all taxes from preceding columns. Column 9 is each person’s net income after all taxes, including the VAT. Column 10 is each person’s final effective tax rate.]
- The budget for transfer payments is automatically balanced. There is no time shifting or need to consider generational accounting. This UBI is a Universal Social Security. It avoids the funding uncertainties of our existing programs.
- This UBI is unconditional. It does not categorize anyone to create any internal or external stigma. Stigma has subtle but real and unhealthful effects for individuals and the economy.
- Everyone has needs; and nobody falls through the cracks as happens in the present complicated hodgepodge of programs.
- The costs of administration for UBI will be low relative to current programs.
- There are fewer incentives to fraud with UBI. Everyone is a beneficiary. There is no need to manipulate one’s affairs for eligibility.
- There are fewer disincentives to work with UBI. Everyone has the same marginal incentive to do work that is compatible with their needs, abilities, disabilities, and interests. There are no high marginal tax cliffs for beneficiaries with UBI. There is no loss of benefits for any person who earns income. There will be no designated age for retirement. Many older people and others who do not currently work will work at least a little and contribute to the economic pie. Helping to make the pie is important for both economic and social reasons.
- This UBI will encourage, not penalize, family formation.
- This UBI will be an employee resource against unfair wage offers and other employer abuses.
- Innovation and global trade are usually good in the aggregate but hurt many individuals. UBI will buffer people from various kinds of ‘creative destruction’.
- UBI is a promise to share part of what we have at any particular time, whether that time is good or bad. UBI is not a fixed guarantee for a distant, unknown future time. The future may be some robot/AI enabled nirvana. There may be catastrophic global warming or nuclear winter. Whatever the future is, UBI can be a share for each person.
- UBI will facilitate sabbaticals for career changes and refreshment.
- UBI will help our economy be more flexible and productive. Rigidity is the enemy of structural strength in a modern economy. The pyramids are strong and rigid, but modern skyscrapers need a more flexible technology. Just so our modern economy needs flexibility.
- UBI will help people have more freedom and choices about their lives.
- 20% of GDP (10% income tax + 10% VAT) is a tax increase. Currently Social Security is 12.4% of income up to a limit and Medicare is 2.9% or more for high earners. A wide variety of smaller safety net programs spends approximately 2% of GDP. The proposed taxes to finance UBI are at a higher rate and over a broader base than current taxes for the same purposes.
- By itself this UBI will not entirely replace Social Security for many retirees. ~Steps Five and Six address this issue.
- Many retirees not currently participating in Social Security will get an unexpected benefit. These tend to be people with retirement benefits better than typical Social Security benefits. (Many of these programs have funding uncertainties.)
- When the economy contracts, UBI will shrink which may cause the economy to shrink still more. ~To counter this unhelpful feedback, during periods of economic growth, deposit part of UBI in the Mandatory Savings Account of Step Five. Make this deposit spendable when the economy is in recession.
- This UBI will need less administration than current programs, which will decrease employment in the short run. ~UBI will ease employment changes; but in some areas, this will be a large problem.
- UBI only affects income inequality for those in the lower quintiles. It little affects the upper percentiles; although, it does avoid cases of high income people using a complex tax code to pay little or no tax. ~The low tax rate in Step Two will facilitate economic growth, which will benefit every quintile.
- UBI may or may not tend to encourage parents to have more children, which may be good or bad.
- State and local school authorities may take advantage of UBI to change school finance, which may be good or bad.
- There will be cases of misuse, abuse, and disability. ~In these cases, state agencies may need to serve as guardians to manage individual UBIs.
- There is a free-rider problem, which will tend to increase the natural rate of unemployment. ~Most other effects of UBI will tend to reduce the natural rate of unemployment.
- UBI may affect immigration. For non-citizens, make payments the same as for citizens but limit the total over time to twice their total income tax payments. (This assumes that non-citizen VAT payments are about the same as their income tax payments.) So non-citizens would have social security limited by their contributions. Treat citizen children of non-citizen parents as other citizens. This may or may not tend to encourage non-citizen parents to have more children than otherwise.
Step Five: Collapse all tax advantaged savings plans for retirement, education, medical care, etc. into one Mandatory Savings Account (MSA).
This account will hold part of each person’s UBI from Step Four and any deposit from Step Six below as well as any other mandated contributions.
- Existing savings plans are complicated. This makes them more regressive, less efficient, less fair, less flexible, and less useful than they might be.
- The assets of Mandatory Savings Accounts belong to individuals and not to any company or government with a potential conflict of interest.
- MSAs may be a countercyclical tool to help manage the economic cycle.
- Without a tax advantage, there will be less incentive to use an MSA. Who loses and how much do they lose? What kinds of investments would be allowed? The people who currently take advantage of these programs tend to be more wealthy than average.
Step Six: Liquidate the Social Security Trust Fund and make deposits into each person’s MSA in proportion to the present value of each person’s contributions.
(This could also be done with other uncertainly funded public and private pension plans.)
- UBI plus MSA avoids Social Security’s long term funding uncertainties. Each retiree’s MSA could be annuitized to supplement their UBI.
- Those who die early will have a legacy for their heirs. Currently those who live longer and collect more benefits tend to be those with higher socioeconomic status.
- People will be able to choose their own retirement times depending on their own situations.
- For employers, separating retirement from employment will remove significant interest conflicts from hiring and scheduling decisions. Employers will more easily match business needs with employee abilities. Reduced fixed costs will enable more flexible employment arrangements.
- With employees in possession of their own funds, there will be no need to worry and debate about “rates of return” for public and private pension programs. Employment negotiations will be on the basis of current pay for current work without all the shenanigans (principal agent problems) inherent in making contracts for a distant, unpredictable future.
- In the short run, there will be some losers. Who loses and how much do they lose?
- Owners of Mandatory Savings Accounts (for retirement, health care, education, etc. ) won’t be totally free to spend as they like. ~Make the rules as simple and flexible as possible.
Step Seven: To pay for federal, discretionary expenses (administration, defense, research, etc.), implement a head tax.
This is not part of UBI. Because the proposal in Step Four dedicates federal income and consumption taxes to fund UBI, there needs to be a tax to fund discretionary federal government expenses. Therefore, fund all non-transfer spending with a per-capita tax in each congressional spending bill.
- Each person will pay the same capitation tax. If the population is 300 million, and Congress wants a 300 million dollar highway, each person will pay 1$.
- Separating UBI payments and taxation from discretionary spending and taxation will enable separate consideration. UBI will have its own tax rate control knob. (Early radios needed several, fiddly adjustments to tune a station. Modern radios have just one.)
- The budget will be automatically balanced. Government borrowing will not crowd out other borrowers in the economy. As per Step Two above there will be no federal tax free income to help high income individuals avoid taxation.
- Everyone will have an interest in government spending. With everyone’s interest, logrolling and pork barrel funding will be less likely. With everyone’s interest, gridlock and unsavory parliamentary maneuvering will be less likely.
- Voters who are more strongly part of the current system will need to engage more with those who are more alienated. Greater participation by lower quintiles will reduce the political influence of higher earners. This will promote more equality in representation.
- Costs and benefits will responsibly go together. We will move away from the system of “Don’t tax you, don’t tax me, tax the person behind the tree.”
- Separate Crazy Notion: Register everyone of voting age to vote when registering everyone for UBI. To advise Congress, conduct a Dutch auction poll of every voter for each spending bill. This would be like getting your monthly credit card bill with a box by each line item to show your desired spending. The default for each line item would be Congress’s number. Most people are too busy living to participate in polling. They will trust Congress and by default vote the congressional appropriation. However, if a majority of voters chooses a number more (or less) than the congressional number, then the auction would clear at a different number which would become the appropriation and tax. Every voter would have “skin in the game”. One of the reasons for representative democracy has been that it was difficult for people to get together to make decisions. With modern communications that reason is less valid. It would be challenging for congress to structure line items so they are easy to understand. Could we use internet blockchain voting?
- Currently discretionary spending is approximately 4k$ per person. This will be a large part of each person’s UBI. A four person (1 earning parent + 3 children) household’s net after taxes will be above the official poverty threshold. A three person (1 earning parent + 2 children) household will need to earn 1k$ to be out of poverty. A two person (1 earning parent + 1 child) household will need to earn 3k$ to be out of poverty. A one person household will need to earn 7k$ to be out of poverty. ~Increasing the progressivity of UBI can diminish this problem. What is the tradeoff between national productivity and progressivity? At moderate levels of progressivity, UBI will tend to improve productivity. But at some point, there will be increasing disincentives to production and consumption. Over time UBI will increase social cohesion and tend to move the inflection point up.
- There are many people, especially those who are not currently paying taxes and do not feel part of the system, who will be reluctant to tax themselves for research, defense, administration, etc. Over time the unconditional nature of UBI will tend to decrease alienation. In the short run, it will be difficult to garner support for discretionary spending.
- UBI recipients under 18 and without a vote will still pay taxes. This is contrary to “no taxes without representation”. ~But, their parents/guardians will represent them to some extent.
Step Eight: As an example of discretionary spending, consider health care.
Start over with federal health care policies and programs.
- Make the economy more healthy and productive. A healthy economy and healthy people are mutually reinforcing. UBI will help with this.
- Dismiss the insurance fiction. Because medical expenses are largely predictable for individuals, insurance is not a good model. What we usually call insurance is really prepaid coverage with much cost shifting. For example the Affordable Care Act depends on enrolling younger people to lessen costs for older people. But younger people have real needs, e.g. education, family formation. Subsidizing health care for older people is inappropriate.
- Separate health care from employment. Health care with employment is an artifact of WWII price controls. As a large fixed cost for employers, it is a pernicious conflict of interest that is not good for employers or employees. Separation removes significant conflicts of interest from staffing decisions. Employers will more easily match business needs to prospective employees. Reduced fixed costs will enable more flexible employment arrangements.
- Free meals and small gifts influence doctor decisions. It is important that providers work for patients and that happens better when patients pay more directly. As it is now, the patient pays the government, which pays medicare, which pays the provider, which pays the medical practitioners who do the work. There are many places here for conflicts of interest and many extra costs along the way.
- Personal health care is partly a public good, but it is mostly a private, personal good. Public spending for personal health care crowds out funding for more genuinely public goods like transportation and energy infrastructure.
Health care has a personal health care component and a public health component.
For personal health care, consider a plan with three parts:
- Universal, single payer, catastrophic coverage: For example, each person pays $100 or $200 per month. (This is very roughly 10% or 20% of current health care spending.) Use 80% of revenue to indemnify 80% of expenses exceeding the smallest possible deductible. Use 20% of revenue for administration. With a catastrophic coverage backstop, private health care providers will have less cause to be hyper vigilant concerning higher risk clients. With catastrophic coverage, many individuals will choose to self insure or choose policies with large deductibles.
- Competitive Markets: Regulate health care to foster pricing transparency and competition nationwide. (I hate getting an insurance statement that shows a provider charge of $315 with an insurance payment of $137 and a $10 copay for me.) More effective markets will help manage costs and encourage innovation.
- Personal Resources: Each person will have a UBI benefit and an MSA to help with medical needs.
Public health addresses statistical measures of population health (longevity, infant mortality, etc.). It encompasses immunizations, education, food and drug safety, environmental protection, research, prizes for orphan drugs, etc. For example, a public health plan at current spending levels might be $1 per month per person. Is public health spending really that small compared to spending for individuals? Are there opportunities to improve public health at relatively low cost?
The proposal features fairly simple rules that are the same for everybody. The result is ‘effectively ‘progressive’ and will decrease poverty and increase economic productivity. Since the early 1930s and Huey Long with his “Share the Wealth” plan, benefit programs for individuals have grown by fits and starts. Now they are part of every aspect of life. It is time to refactor the system.
Are any economic models able to analyze this proposal? Most models seem to assume that the system stays the same with numbers changing only slightly. There will be winners and losers. Who are they? Is it possible for Social Security or the IRS to analyze tax returns and discover a UBI tax rate that minimizes some appropriate measure of loss?
My First Nudge on This Path
A few years ago, after struggling with my tax returns, I noticed that I felt OK with my final tax liability, but was really upset that I spent so many hours figuring it out. I could have calculated the final answer directly from my income if I had just known the multiplier.
My Biases (some that I am aware of)
For many people, any sort of unequal result is just plain ugly. For me different rules for different people is usually more ugly than unequal results.
If there is a tradeoff between growth and equality, I lean in the growth direction. As one of five, I prefer 10% of a 10 inch pie over 20% of a 7 inch pie.
I am unable to research everything for myself; so I try to understand the explanations of others. Compared to most, I am more skeptical of authority and prefer to delegate less to my proxies.