How to Reform Welfare and Taxes to Provide Every American Citizen with a Basic Income
A detailed funding plan for cross-partisan implementation of universal basic income in the United States
Some of the most common questions ever asked in regards to the idea of a universal basic income (UBI) are in regards to the details. “How much income? Who gets it? Who pays for it? How is it paid for? What does it replace?” These are all great and important questions, but the answers vary from person to person, because the answers are a matter of personal and political preferences when it comes to fine-grained details. With that said, after years of studying basic income, below you will find what I currently believe in May of 2017 are the details of an optimally designed UBI blueprint.
First, how much are we talking about? In the United States, I suggest starting with the definition of poverty we already use, and eliminating poverty entirely. According to 2017 federal poverty guidelines, this means if we were to pass legislation tomorrow, it would need to be $12,060 per adult citizen and $4,180 per dependent under 18. The amount for kids is imperative so that income floors scale according to household sizes. A child basic income is also in large part a revenue neutral consolidation of existing expenditures presently unequally distributed. However, for reasons I will explain below, I suggest adding 10% to each amount, so $13,266 ($1,105/mo) per adult citizen and $4,598 ($383/mo) per citizen under 18.
Taking into consideration that we are talking about US citizens only (which would also incentivize legal immigration) who comprise an estimated 92.8% of the population, this particular basic income design requires finding about $3.4 trillion in total (not net) revenue. This may sound like a very big number. It is. Some people even just stop right there or decide we have to eliminate ALL government programs to do it. But it’s not as big as you may think, and we don’t have to eliminate everything to use a great deal of existing revenue.
Welfare state reform
First, there are welfare programs we can eliminate entirely once basic income is enacted into law. Food and nutrition assistance programs ($108 billion) and temporary assistance for needy families ($17 billion) for example would both be better accomplished by simply giving people money without conditions. TANF especially needs to be fully replaced for reasons I’ve described previously. It’s important to note my plan will not touch health care, child care, or housing, although we will still spend less on all of these for reasons I’ll explain further down.
Basic income revenue pool: $125 billion | Remaining need: $3.27 trillion
Invisible welfare state reform
Second, there are welfare programs in existence that we don’t tend to see as welfare because they are targeted mostly toward those at the top of the income and wealth spectrum. They’re called tax expenditures. Such invisible welfare programs that disproportionately reduce tax bills are essentially the same thing as not reducing taxes and just giving people money, and so they too can be entirely replaced by basic income. They include: the earned income credit ($73 billion), the child tax credit ($56 billion), home ownership tax expenditures ($340 billion), married filing jointly preferential tax treatment ($70 billion), the tax break on pensions ($160 billion), fossil fuel subsidies ($33 billion), and treating capital gains differently than ordinary income ($160 billion).
Basic income revenue pool: $1.02 trillion | Remaining need: $2.38 trillion
Social Security reform
Next, there are existing programs that can be considered as proto-basic incomes that are mostly achieved through the Social Security system like retirement pensions and disability incomes. I believe these programs should be reduced because they were designed without basic income in mind, but should function supplementally in a way that shifts some revenue to the basic income revenue pool, in a way that leaves all recipients better off. This can be achieved by replacing just one of every three dollars with basic income.
For example, someone receiving $1,500/mo in Social Security right now would instead receive $1,000/mo in Social Security in addition to their $1,105/mo in basic income, for a new total of $2,105/mo leaving them $605/mo better off. Someone receiving $2,100/mo in disability income would instead receive $1,400/mo in addition to their $1,105/mo in basic income for a new total of $2,505/mo leaving them $405/mo better off. Applying this method yields the following revenue shifted to UBI: Social Security ($324.2 billion), SSI ($20.6 billion), veteran pensions ($29 billion), and unemployment insurance ($13 billion). I also recommend lifting the cap on Social Security so that everyone pays in no matter how much they earn, which would raise an additional $380 billion.
Basic income revenue pool: $1.78 trillion | Remaining need: $2.25 trillion
At this point I’d like to introduce some new taxes, none of which involve raising any tax rates on ordinary salaries and wages, and all of which are highly progressive when combined with basic income.
Carbon tax (fee and dividend)
The most important new tax for the survival of our species is in my opinion a revenue-neutral carbon tax. I suggest starting at $50/ton with annual increases of $15/ton. The result would be an immediate $150 billion in the first year that would grow annually in a way that results in a basic income that also grows annually, and carbon pollution that shrinks annually. Using a model provided by the Carbon Tax Center, I’ve calculated that In just five years, it could be providing everyone over $100 per month and have reduced CO2 pollution levels to a third of what they were back in 2005, while going on to cut them in half by 2030. By 2040 it could be distributing $1.5 trillion to all citizens as co-owners of the sky they’re paying more to pollute 60% less.
Basic income revenue pool: $1.93 trillion | Remaining need: $1.47 trillion
Robin Hood tax (FTT)
I suggest a financial transaction tax starting at 0.34% based on a microsimulation by Urban-Brookings which concluded it as the maximum rate before changes in behavior result in revenue decline. This would be a tiny but very progressive tax on the financial transactions of mostly the wealthiest (the top 1% own about 50% of all financial investments and the bottom 50% own about 1%) that would raise an estimated $75 billion and make financial markets more stable by putting a price on destabilizing and rent-seeking high frequency trading.
Basic income revenue pool: $2.01 trillion | Remaining need: $1.39 trillion
It may come as a surprise to learn that money itself is a public good that’s now almost entirely created into existence not publicly by government “printing” but privately as digital accounting entries on commercial bank ledgers. Since this money creation is free for banks, and interest on it is charged, the interest is essentially a private tax that serves as a tool of upward redistribution. It’s welfare for bankers. By replacing debt-based private money creation through seigniorage reform with debt-free public money creation, and simultaneously removing the ability of banks to create new money, we could not only fund basic income in a way that requires no taxes, but it could also help prevent future bank-created market crashes. Considering that the M1 money supply has been expanded by $2 trillion since 2008, that’s about $213 billion per year we could have instead just created ourselves in the hands of all citizens equally, no taxes required.
(Note: worried about inflation? Read my deep dive analysis of that fear.)
Basic income revenue pool: $2.22 trillion | Remaining need: $1.18 trillion
Value-added tax (VAT)
Whereas income taxes are direct and unavoidable as long as earning income through work is required to live, consumption taxes are indirect and avoidable because they’re only paid upon purchase. We are familiar with this in the US in the form of sales taxes, but sales taxes are only applied on the final product. A value-added tax is applied at each step along the chain of production, and thus is a tax far more difficult to evade paying.
A 10% VAT could generate around $750 billion per year in new revenue. It would also function as a clawback mechanism for basic income similar to a negative income tax with a 10% clawback rate, where individuals consuming more than $132,660 per year would pay more in taxes than what they receive in UBI, while all those consuming less would receive more in UBI than they pay. Essentially, with a 10% VAT, everyone spending more than $132,660 would be funding their own $13,266 basic income and thus carry no cost to any other taxpayer.
A 10% VAT applied to all purchases in the US would also raise the poverty line about 10%, which is the reason the basic income I recommend is 10% above the existing federal poverty line. Also, for those who fear the idea of people taking their basic incomes and earning no additional income, it would mean that aside from the other 90% that gets transformed into wages and salaries through purchases of goods and services, 10% of their basic incomes would go right back into funding everyone else’s basic income.
(Note: an alternative to VAT could be a tiny tax on all electronic transactions)
Basic income revenue pool: $2.97 trillion | Remaining need: $428 billion
Land-value tax (LVT)
Last but not least, in fact in my opinion most important of all economically in the long-term as a new tax to increasingly replace existing taxes with, is a tax on the unimproved value of land — aka land-value taxation or LVT. Not to be confused with property taxes that tax what’s built on land, LVT taxes the total value of real estate minus what’s built on it. The owner of a high-rise apartment building providing homes to hundreds of families would pay the same tax as an identical adjacent lot that stands empty, thus providing a disincentive to idle speculation and an incentive to develop unused and underused space.
The value of land is perhaps the best example of all of the wealth we all co-create, because the value of land depends entirely on everything and everyone that exists around it, not on it. If all your neighbors burn down their houses, your house will be worth less. If all your neighbors fix up their houses, your house will be worth more. The increase in value is clearly collectively (not individually) generated.
Since the 1980s, housing prices in the US have increased by 5% on average (minus the real estate bubble creation and burst), which means a 5% tax levied on land values and distributed to all as basic income would be distributing the value created by everyone to everyone. It would raise an estimated $750 billion and function as an entirely unavoidable tax on both corporations and individuals alike. It would also serve alongside the VAT as an additional clawback mechanism, where all owners of land totaling more than $265,320 would pay more in LVT than received in basic income.
This combination would be hugely progressive, not only economically but racially, because the top 10% own 78% of all non-home real estate, and where the median white household has around $76,000 in home value wealth, the median black household has only around $1,500 in home value wealth. In other words, under this plan, median white households (not counting any other taxes but LVT) would potentially be net receivers of $9,466 in basic income and median black households would be net receivers of $12,966 in basic income. For those hoping for a UBI that provides extra as reparations, this plan achieves that by clawing back less from African Americans, not for being African American, but for being systematically excluded from property ownership for centuries.
Basic income revenue pool: $3.72 trillion | Remaining need: -$322 billion
This proposed basic income plan is not only fully funded at this point, but has surpassed the mark by over $300 billion. However, I’m still not done, as I firmly believe basic income needs to (aside from being indexed to inflation) grow as productivity grows, so now we need to look at ways of accomplishing what is effectively indexation of basic income to the automation of labor.
As I’ve written about previously, Alaska points the way forward as a model to expand upon. Economic rent should be diverted from rentiers and back to citizens through recognition of citizen co-ownership of natural common assets like water and minerals, and social common assets like big data and patent royalties, with that revenue feeding into a national fund whose purpose is universal dividends. There are some very clever methods of achieving this already being proposed. Renowned economist Yanis Varoufakis has suggested that because taxpayer money has funded so much of the technology around us, like for example the iPhone, the process of filing for every new IPO should involve a percentage of those shares being added to a giant sovereign wealth fund, like in Alaska, whose dividends will pay into the total basic income pool. Robert Reich has suggested that because governments are the ones providing patent and trademark protections for the technologies that are eliminating jobs, that a share of the profits from that protection should go to citizens as the condition of such protection.
Just as an annually rising carbon fee could be returned to us all as a dividend for our co-ownership of the air, I suggest that an annually rising intellectual property fee could be added to any intellectual property wishing to be monopolistically excluded from the public domain, with the revenue returned to us as co-investors of the government granting such protection. I also suggest that big data should be seen as a new form of property being digitally created by everyone through everything we do, and that as a result, citizens should see a percentage of the money derived from it as a big data dividend. Companies like Facebook could pay into the basic income pool a percentage of what they earn from selling our data as a royalty for mining us like oil fields.
There are a lot of ways to grow basic income from something that just covers the purchase of essentials into something more like a prosperity dividend that covers far more than the basics over the decades to come. Let’s figure them out. The automation of human labor demands it, as does human flourishing.
One of the main points of division among supporters of basic income is the choice of eliminating the welfare state or supplementing it. I’ve already covered how this is a false choice with my suggestion of a partial transformation of the Social Security system into a top-up program of payments of reduced size, but there is I think a key point to consider as a grand compromise. If considered identical to ordinary income for the purpose of welfare qualification, the basic income will raise people’s total incomes above the point of qualifying for many existing welfare programs due to their very means-tested nature. This would greatly reduce the benefits many programs provide, some even to nothing, just as working a job would, without actually eliminating anything at all.
Take Medicaid for example. Right now to qualify, one must be earning less than 138% of the poverty line. This means that if we treat a basic income set at the poverty level as an increase of everyone’s earned incomes, only those earning 38% of the poverty line right now will still qualify for Medicaid after UBI, just as they would no longer qualify after getting an equivalent raise through their employer right now. That could effectively lower the total Medicaid bill from $650 billion per year to under $200 billion. Those earning more than 38% of the poverty line who previously received Medicaid would instead receive ACA (assuming it isn’t repealed and replaced) subsidies to afford private health insurance in their state market exchanges, and those currently receiving subsidies who are earning more than 300% of the poverty line right now would no longer qualify for them.
Looking beyond Medicaid at all means-tested programs designed to help those living in poverty, lifting everyone above the poverty line would result in many programs becoming entirely pointless based on their own existing definitions of deciding who is deserving of help and who isn’t. If the only people deserving of help are those earning less than $12,000 per year, then after UBI is enacted, no one is deserving of that help anymore having newly joined the ranks of the undeserving.
With that said, when it comes to Medicaid in particular, I think the money we no longer spend on Medicaid should instead be used to help fund true universal health care, but when it comes to all other non-healthcare-related programs that people no longer qualify for, that is money already being raised that I think should instead go to lowering taxes, paying down the national debt, increasing the basic income, or some politically palatable mix of all three.
Additionally, no discussion of the cost of basic income and the savings it stands to provide is complete without asking the cost of not implementing basic income. How much are we spending right now on the full costs of poverty, inequality, and insecurity in the form of all the crime, poor health outcomes, worse educational outcomes, and reduced productivity for example that would not exist with basic income? I’ve attempted to calculate this myself, and I think the amount, whatever it is, is greater than the cost of this UBI plan. In other words, basic income entirely pays for itself by reducing countless other costs that we currently consider entirely normal to pay, across all of society. Basic income is akin to a vaccine, or a strategy of fire prevention versus fire fighting. It’s an ounce of prevention instead of a pound of cure.
The above combination of revenue sources and entirely new funding methods has the potential to bring in multiple existing constituencies — each already advocating for these ideas albeit separately — while also enhancing the ability to adjust the basic income over time by creating a series of new economic dials. Additionally, by simplifying the income tax code and implementing these new taxes, fees, and royalties universally as part of putting money into the pockets of citizens directly without strings instead of indirectly with strings, citizens may show greater support for further improvements over time, to increase the basic income or further redistribute existing tax burdens.
There is also a purposeful modularity to this plan, where parts can be pulled out and implemented on their own, as strategic steps toward the larger plan. For example, the passage of a national carbon fee and dividend policy should be seen as successfully taking a big step toward a full UBI, as would initiatives to get such policies implemented at the state level. If everyone is already receiving a $100 per month carbon dividend, a full basic income policy is then $100 per month cheaper to implement. Full UBI implementation would then also be less of a shock to the economy with people going from $100 per month to $1,100 per month instead of from $0 per month to $1,100 per month. (Note: phasing in UBI over a matter of say five years may still be wise though.)
A key detail of any well-designed basic income plan is to make sure it is at the very least indexed to rise automatically with inflation so that the value does not erode over time. But an optimally-designed basic income in my opinion will rise with the growth of the economy as a whole. At the moment, this means automatic indexation with inflation-adjusted GDP. However, being that GDP itself needs to start being questioned, especially after the adoption of basic income where everyone is more able to engage in unpaid work untracked by GDP, we will at some point need to index basic income to this new measure, whatever it ends up being, that’s a more accurate reflection of our increasing wealth generation and our growing technological ability to do more with less.
Additionally, a counter-cyclical element is optimal, so that during recessions, the basic income does not shrink along with the economy. This is one of the reasons I believe the citizen seigniorage element to be so important, so that in times of economic contraction or even inability to hit yearly inflation targets due to exponential technological deflation, this component can be ramped up by the Federal Reserve without the need for legislative process, to function as essentially quantitative easing for the people (QEP), and also ramped down in the case of an overheating economy.
To illustrate this, think of a basic income of $1,500 per month where $1,200 of it is indexed to real GDP, $100 is new money, $100 is the carbon dividend component, and $100 is the natural and digital resource-based national wealth fund dividend component. In the case of economic contraction, the $1,500 part may shrink to $1,400, but the Fed could then decide to increase their $100 to $300 to stimulate the economy in time of need. Once the economy is growing again, this amount could then be reduced back to $100, or even $0 if inflation targets are surpassed and it would be preferred to interest rate hikes.
Meanwhile, the $1,500 component could be adjusted at any time by adjusting the tax components. Perhaps the LVT would be seen as especially effective and thus increased from 5% to 10% for an extra $200 per month for everyone. Or the VAT could be increased or decreased to disincentivize or incentivize consumption while adjusting the amount of basic income or other taxes.
And the $100 national wealth fund component? That would be growing year after year as IPO stock after IPO stock gets added to it, such that it would hopefully after decades, surpass the tax-funded component of the entire basic income package. In total, it could all then be considered as far more than basic income. It could be prosperity income.
Hopefully this all helps illustrate what I mean by economic dials and UBI optimization. The basic income should be designed with flexibility and long-term viability in mind. It should operate as a platform we construct above the poverty line, that we can continue ratcheting up year after year ever further above the poverty line, but at any point adjust and optimize through ongoing funding method decisions.
By combining tax reform and welfare reform along with the introduction of new non-income-based taxes, especially those designed to correct for market externalities, where the resulting revenue goes to all citizens equally, I believe basic income can more strongly appeal to both the left and the right, and through its adoption, we can simultaneously introduce long-needed additional improvements like the public creation of money, the reduction of greenhouse gases in the atmosphere, the discouragement of rent extraction, the sharing of naturally created and collectively created wealth, and the predistribution of the great wealth being generated by the technology we all effectively paid to research and develop.
This is my proposal for a better future. What’s yours?