Funding a basic income in the US

I've written articles on other blogs as guests before in funding a basic income. I won't post them here as I want to remain anonymous. Rather, I'll simply rewrite the article with updated data and all and post it here.

So, basic income is a very ambitious proposal. To give everyone enough money for them to live off of at around the poverty line is expensive, and it's arguably the strongest practical hurdle to implementing the idea. The proposal I will explain here will not be perfect, but I will try to show how this hurdle may not be as great as one would think.

How much should basic income be?

 In practice, we can be flexible with the basic income amount on the basis of practicality, but for the purposes of this demonstration, I'll aim for around poverty level, say, $12,000 per adult, and $4,000 per child. This should be enough to provide for basic needs without causing excessive disincentives to work, or excessive incentives to reproduce, etc. In reality, it might be lower, it might be higher. But this is a simplistic demonstration, so let's stick with this for now.

According to the Census's estimates, there are 324 million people in the US. It's hard to know how many illegal immigrants are among them, but the estimates are close to 11 million or so. So this knocks it down to 313 million. Then if we ignore the 2 million people in prison, that's down to 311 million people. It's estimated 23% of people in the US are children, and that leaves 77% as adults. This means there are 71.5 million children in the US, and 239.5 million adults. This means the adult program would cost $2.874 trillion, and the childrens' program would cost $286 billion. All total, it would cost $3.16 trillion. This sounds insanely expensive. But let's work through trying to fund it to see what it would take.

The federal budget as it exists - $3.964 trillion

Looking at table S-4 of this summary of the budget found on the White House website, we are spending $3.964 trillion on the federal budget. This includes $631 billion on defense, $563 billion on other discretionary programs, $938 billion on social security, $585 billion on Medicare, $344 billion on Medicaid, $680 billion on other mandatory programs, and $283 billion in interest on the national debt.

Budget cuts - Approximately $1.077 trillion

Basic income will be able to replace many social programs that exist today. I would get rid of most welfare, unemployment insurance, and parts of social security. I would keep Medicare and Medicaid as they are, or roll them into universal healthcare eventually. This sounds steep, but considering how generous basic income would be, the average person on these programs would not be impacted too negatively, or if they are, it would be worth the cut in order to make these programs universal and give people economic stability instead of precarious bureaucratic safety nets that are difficult to navigate and can be revoked at any time for various different reasons.

According to usgovernmentspending.com, we will spend about $401 billion on various non-healthcare welfare programs. These can be cut to help fund basic income.

Social security is a bit more complicated to figure it out. We do not want to leave seniors worse off here and simply cutting social security and replacing it with UBI would be extremely unpopular. We want to ensure that people on social security get at least what they have now. As such, I propose modifying the formula on which social security is disbursed. Currently, social security takes 90% of the first $826 of an averaged amount of earnings per month earned over your lifetime. It takes 32% of the next $4980, and 15% over that. By the time you get to the 15% "bend point", you will have earned $2337. Let's cut this to $1337, since these people will be getting a $1,000 UBI. $1337/$5806 = 23%. We could have a formula of 23% up to the first $5806 of earnings, followed by 15% for whatever above that up to the current maximum payment minus $1000.

It's hard to know exactly how much this will save. I caught in error in my original post in which I assumed that mean would be lower, but I ignored how the extremes could still shift the mean. I will say this though. There are currently 66 million people on social security. Social security currently costs $938 billion. This means the mean payment is $14,212. That's $1184 a month. The median is around there too. So let's imagine that we can cut the social security payments by $12,000 (1,000 a month) for at least half population on social security. I mean, the top half of the population will be cut $1000 outright because they're getting basic income, and the bottom half will see more modest cuts. That in itself is $396 billion among 33 million people. On the bottom, imagine that we just assume the 23% model instead of the 90% model, which would save a lot of money there and cut funding by over two thirds. Of course, many people at the bottom will go into the 32% category, so we can't just cut their benefits by over 2/3, but imagine we cut it by 1/3, which is likely extremely conservative (32% minus 23% almost gets there, so I'm likely underestimating if anything). We cut 1/3 of the remaining social security for the bottom 50% of the population, roughly. We take the $938 billion and subtract $396 billion. So we're down to 542 billion. Then we subtract 1/3 from that. That's an additional $180 billion. So say we save a total of $576 billion on social security by implementing a UBI and introducing a new platform. It could end up being more or less.Realistically, I would estimate it would be more and we could save upwards of $700 billion, but I'd rather err on the side of underestimation here.

This means we're up to $977 billion in spending cuts. Say we cut an additional $100 billion from smart military cuts, and we're up to $1.077 trillion.

This means our total federal budget can be reduced to $2.887 trillion. With basic income, this means we need a federal budget of $6.047 trillion.

How to raise $6.047 trillion - a 43.5% flat tax, among other things

Looking at taxes back on the white house charts I posted above, we get about $280 billion from a combination of excise, estate, and gift taxes custom duties, deposits from the federal reserve, and other miscellaneous receipts. This means we would only need $5.767 trillion for a balanced budget.

Say we also implement a capital gains tax of 30%. This should theoretically be close to the Laffer Curve (rate of maximized revenue) based on historical trends for capital gains tax rates. It's hard to know how much we would raise every year since it varies based on whether the economy is in boom or bust, but imagine the average year we bring in about $50 billion, which is fairly conservative. So this means we only need $5.717 trillion.

I would reform much of the rest of the tax system into a flat tax. This sounds horribly unfair, but we want the poor and middle class to pay higher taxes assuming they get a basic income. After all, much of their tax increases will be offset by the basic income itself.  Moreover, keep in mind this flat tax would replace almost all federal taxes, including payroll taxes. It would also offer much lower rates than the welfare traps of the current system, for those who need social services. It would be better for the poor to pay, say, a 40-50% tax as they start working, over getting their benefits cut by 90% for every dollar they earn due to these traps. So basically, a basic income with a flat tax would actually be modeled similarly to a negative income tax, which is the kind of welfare system pro safety net conservatives typically support. That being said, any taxes that would otherwise sound unreasonably high and unfair would actually be quite reasonable and not hinder work effort all that much. It may actually be less of a disincentive than our current system. 

In order to find the exact rate that would need to be paid, we need to look at what can be taxed. Looking at table 2.1 of this page from the Bureau of Economic Analysis, we see the estimate for the total income in this country is around $15.742 trillion. Of course, not all of this can be taxed. Let's see what can be. We have $9.960 trillion in various forms of compensation for employees. This includes pensions and contributions to social insurance, which I assume would be taxed one way or another, since some of those contributions would be replaced by either more going to the employers, or more going to the employee. It will turn up somewhere as taxable income hopefully. "Proprietors income with inventory valuation and capital consumption adjustments" refers to revenue acquired from small businesses, and not all of this is taxable. You only want to tax profits, not raw revenue, since heavily taxing revenue could put them out of business. In 2010, the amount was $1.196 trillion total, and they figured $929 billion was tax deductible. This means only about 22.3% was taxable. If we apply that to this year's amount of $1.412 trillion, that means we can tax a total of $315 billion is taxable here. Rental income of persons with capital consumption adjustment refers to income landlords get from tenents as well as things like royalties, patents, and and land rights. I'll assume it is taxable and accounts for $685 billion. Personal income receipts on assets seems to more or less be the equivalent of corporate profits, and accounts for $2.195 trillion. Beyond that, you have government transfers from the current safety net and that should not be counted at all. 

All in all, this amounts to a total of $13.155 trillion that can be taxed. Seeing how we need to raise $5.717 trillion, this means that we can acquire the revenue, in theory, with a flat tax rate of 43.5%. This is lower than my older estimate, which was closer to 45%. This probably accounts for my original article being from almost 2 years ago, pushing for the same guaranteed income amounts, and having economic growth.

Now, to be fair, none of this accounts for any economic disincentives that might arise from the program, nor does it count tax dodging. Reductions in productivity and black market underground economies might be something to keep an eye on. We might need to deal with lower amounts and lower taxes in practice for practicality reasons, since the larger the program and the tax rates, the more disincentives will be implanted on the economy as a whole.

Modifying the model 

If we mess with different basic income amounts with different spending cuts, we can see various changes to how the model plays out. 

If we reduced the amount to $9,000 for an adult and $3,000 for a child, we could lower the flat tax to 37.5%. Going down to $6,000/2,000, we would see a reduction to 31.5%, although lower taxes with lower benefits tend to help the rich at the expense of the poor. On the other hand, a $15,000/5,000 model would require 49.5%. I would not recommend going over 50% as that's higher than most industrialized nations tax, even the generous European ones. All in all, each $1,000/333 a year seems to add or subtract from the tax rate by 2%, based on these calculations. 

Sticking with the $12,000/4,000 model, if we totally cut social security, we could reduce the tax rate to 40.7%. So that's an additional 2.8% reduction by eliminating social security. 

Other means of taxation

I will not go into the details of all of these, I'm just pointing them out for explanatory purposes, but there can be all different kinds of methods of taxation too. In addition to a payoll/income/corporate tax, we can implement consumption taxes. These are reliable sources of revenue but tend to disproportionately hurt the poor, and guess what, they're inefficient in this context because the basic income itself would be taxed as it is spent. You would need to overcompensate for the basic income, which leads to even higher taxes, and yeah, it's only good in small amounts. There are land value taxes, which are efficient, but tend to disproportionately hurt home owners and may end up undercutting anyone who owns land in terms of a safety net. Again, we want to avoid the problem of people who need the basic income paying it in taxes. There's the possibility of a carbon tax too.

You also don't just need to stick to one tax, you could tax based on a combination of different taxes and even have a more complicated tax code, although I would recommend some level of simplicity.

Between the spending cuts, the methods of taxation, basic income can be tailored into a near infinite number of plans, and could be made to appeal to those on the left, the right, or the center. Lower taxes and lower benefit amounts tend to have fewer economic impacts but also may not solve poverty or wage slavery. Larger plans may be too impractical as they put too much strain on the economy. Balance is key.

Conclusion

All things considered, I hope I at least helped convince you that basic income may not be so unreachable after all. Yes, funding is probably the single biggest hurdle for a basic income to pass, but assuming it can be overcome, it will be perhaps the strongest, and most socially just anti poverty program we could have. I would argue a basic income is truly necessary if we want to really fix the core problems of capitalism. A basic income around the poverty level would likely require a 43.5% flat tax or so as I implemented it. This may be high, but considering how everyone paying taxes would get $12000+ a year back, I don't think many of them will find many reasons to complain. It actually would not be a huge tax increase on most people, and might actually be a reduction for many. Only the relatively well off will actually pay more under this plan.

An addendum: How the taxes and social security would work

So I got some criticism in which some comments mentioned in the article were taken grossly out of context and my plan was described as "cutting social security and taxing the poor." While this is, on some level, true, it's also incredibly misleading in the same way pointing out someone who wants universal healthcare wants to repeal Obamacare to implement it. It is technically true, but if you only point out "repeal Obamacare" without looking at the benefits at all, you get a much different and more negative picture of the matter.

On social security, I explicitly modified the formula ensure that people get the same amount of money. If you're at the 15% bend point, getting $2337 on social security now, I modified the formula to ensure that people get $1337 instead. This assumes that they are also getting a $1000 a month check on top of this. So really, they're getting the same exact amount of money, it's just that it's coming from different sources. Anyone earning more on social security would break even, and some who make less would actually get more, if you include basic income. Someone currently getting $500 a month might be getting $200 a month (note this is just an off the head estimate) now, plus $1000 basic income. So that's $1200 a month. Would you rather get $200+1000, or $500? I think the first benefits you more.

If you want to figure this out yourself, say, you're on social security, here's a formula:

23% of the first $5806 you made in a month, plus 15% for everything above that up to the current benefit cap. Keep in mind you will also receive $1000 as a basic income on top of this number.

Onto taxes. The reason I said the poor and middle class need increased taxes is because it is necessary to fund the program, and the negative income tax like model would offset the extra costs.

If you're making $20,000 a year, and you're paying in 43.5% in taxes, that sounds like a lot. You're paying $8,700 on a $20,000 paycheck. This would sound horribly unjust...until you realize, wow, I'm getting a $12,000 check from the government back! So really, my net tax burden is....-$3,300! All the high taxes are here is a way to claw back the money in an efficient way. As you earn more money, you pay it back, without facing those nasty welfare traps of the current system. Accounting for family size, a basic income like this would make many people at the bottom much better off. Even people in the middle would benefit quite handsomely. Say you have a middle class family of three (2 adults and 1 child) making $60,000 a year. Under my plan, they would pay in $26,100. Once again, it sounds like a lot. But 2 adults would get $12,000 each, and the child would get an additional $4,000. So they would be getting $28,000 back. Once again, their net tax burden would actually be slightly negative.

The only people who would pay significantly more in taxes are people who, for their family size, make an above average amount of money. You might pay more if you're making $45,000 as a single person, or you might see families starting to pay more in net around the $80,000-100,000 mark. People making six figures or more would actually be the net tax payers under this idea. It ultimately gives a reliable safety net to the poor, an income boost to the working poor, a tax break or refund to the middle, and a net tax increase on the "upper middle class" (which is a misnomer since these guys are nowhere near the middle of the actual income distribution) and the rich. It's actually an extremely progressive tax structure in terms of the benefits and costs. The poor are not getting a raw deal here at all. The middle class (as in, those in the actual middle of the income distribution) is not going to suffer at all.

If you want to figure out how my tax structure would effect you, here's a nice formula for you:

Earned income - 43.5% * earned income + $12000 per adult in household + $4000 per child in household

Essentially, take your earned income, subtract the taxes, and add the basic income your household gets.

I hope this clears up any misunderstandings my article may have caused.