Tuesday, March 23, 2021

Funding a basic income in the US, 4th edition (2021)

So, it's that time again. I've been thinking about my last basic income plan recently, and I feel like it needs an overhaul in a post Yang environment. I've been really doing a lot of thinking and soul searching lately, and I'm kind of regressing to my 2014-2015 beliefs again post 2020 election, essentially accepting Karl Widerquist's "indepentarianism" as my main ideology. And that being centered around basic income, I feel like it's time to really think up a new plan. The thing is, I want to write this for first time readers of my plans, and lay out the ideas in as basic of a way as I can, without expecting people to rely on my past works much. That said, without further ado, time to get into it. 

So what's the target amount for this basic income?

Well, previously, I had my basic income at the same level as Yang's, $1,000 a month, $12,000 a year. However, I came up with that in 2014, back when the federal poverty line was like $11,700. Today, the poverty line is $12,880 with an additional $4,540 per extra member of a household. That said, the basic income needs a raise. For the purpose of this article, the amount will be set at $1,100 a month, or $13,200 a year for adults, with an additional $400 a month, or $4,800 a year for children.

Who gets this basic income?

Every adult citizen or long term legal resident over the age of 18 gets the full basic income, and any child who is a citizen or dependent of a citizen or long term legal resident will receive the partial basic income for children. 

As of 2019, there are 255,220,373 adults in the US, and 73,039,150 children in the US. There are roughly 11 million illegal immigrants in the US. Let's assume 8.5 million are adults, and 2.5 million are children, roughly. In addition there are 2.3 million people incarcerated in the US. This means roughly 244,420,373 adults and 70,539,150 children would be eligible for basic income.

How much will it cost?

Based on the above information:

244,420,373*13200 = $3,226,348,923,600

70,539,150*4800 = $338,587,920,000

Basic income will cost a total of $3,564,936,843,600, or to put it simply, $3.565 trillion

So how will we pay for it?

Unlike my previous plans, I'm not looking to fund the entire federal budget. Given the volatile conditions from the Trump administration's fiscal irresponsibility, and the fact that we're currently spending trillions to dig ourselves out of the COVID recession (although on that front I would posit that perhaps a basic income would be money better spent than what Biden wants to do), I'm not interested in touching the entire federal budget with a ten foot pole. Although I may take some spending cuts from it and redirect them toward UBI. Moreover, it would be better for me to focus on funding UBI than coming up with a grand flat tax scheme like I did with my original UBI plans. I would rather focus on just solely funding UBI.

Basic income will be funded primarily from tax increases and spending cuts. The model provided below is a basic median model of around five different models I cooked up with different assumptions. Some models were far more optimistic, including progressive taxes on the rich and a wealth tax with a slightly larger tax base, but others were much more pessimistic. All in all, I estimated the flat tax required to raise revenue would range between 14% on the low end and 26% on the high end depending on the assumptions and funding mechanisms used, with the median estimate used being 20%. The one provided below should be a fairly simple and conservative take on basic income that doesn't take too many assumptions into account and should give you an idea of how it turns out. Actual results may vary depending on actual implementation.

Spending cuts

$291.3 billion from welfare cuts

$323.7 billion from social security cuts

$156.1 billion from military cuts

+                                                          

$771.1 billion from spending cuts

Taxes

$187 billion from carbon tax

$2.658 trillion from 20% flat tax on all earned and taxable income

+                                                         

$2.845 trillion from taxes

Together

$771 billion from spending cuts

$2,845 billion from taxes

+                                                        

$3.616 trillion to fund a UBI (around $51 billion surplus)

Spending cuts

Many spending cuts can be drawn from the existing social safety nets. I know this will be controversial for a lot of people, but I want to ease peoples' fears here. These numbers will be drawn in a way to ensure we only cut programs that are worth less than basic income, and to cut programs larger than UBI only in ways that would make people on those programs at least as well off as they are today. I want to take a scalpel and do surgery to the current safety net, not just hacksaw it to death in some right wing neoliberal plot like some progressives think. I want this basic income to make people better off, and not worse off.

Based on USgovernmentspending.com, $365 billion from the federal government includes "other welfare", meaning welfare other than social security and medicare/medicaid. $274.7 billion is spend on "families and children". I'm guessing this is stuff like SNAP, WIC, etc. I will cut all of it. I will keep the 54.2 billion in housing, because let's be honest, section 8 provides much more value than $1100 a month in a lot of cases. Unemployment is tricky, benefits vary by a lot depending on what state you're in, and a lot of money is spent at the state level. Some states offer as little as $200 a week while some offer as much as $1200. Assuming an average of around, say, $500 a week, that's $2200 a month or so, so let's just cut federal unemployment benefits in half here. States can pick up the slack for their own cost of living, and everyone gets a basic income of $1100 a month anyway, so it should end up about the same on average at the high end. We would save $16.6 billion this way, bringing total cuts from welfare programs up to $291.3 billion

Next I will focus on social security. The maximum benefit for someone retiring at the late age of 70 is $3,895 a month. Given UBI is $1,100 a month, we can reduce that benefit to $2,795 a month, which is a roughly 28% decrease in the benefit. This will ensure the maximum benefit remains the same and anyone making less will be better off. Given the social security program costs $1.1562 trillion, a reduction of 28% would reduce it to $832.5 billion, giving us $323.7 billion in savings.

Finally, I want to address military spending. We spent $767.1 billion in defense, whereas in the Obama era, which in itself deserved a cut, we spent $611 billion. Just reversing Trump's military spending increases that we didn't need would give us $156.1 billion. That should still be more than enough to keep ahead of our largest geopolitical foes like Russia and China.

All in all, this means:

$291.3 billion from welfare cuts

$323.7 billion from social security cuts

$156.1 billion from military cuts

+                                                          

$771.1 billion from spending cuts

Raising the rest of the revenue from taxes

At this point, we reduced the amount of money that needs to be raised to $2.794 trillion.

A smaller tax that might be good would be a carbon tax bringing in roughly $187 billion a year.

Beyond that point, we got to look at income, payroll, and VAT taxes. I will not be doing VAT, because I don't believe it's a good way to tax people. Andrew Yang did it, but it's basically a regressive consumption tax that could end up eating into the very UBI we give people. I want to tax people based on what they earn, similar to a clawback mechanism you would find in a negative income tax. So I'm going to go with an overall payroll tax when applicable, where people pay income taxes if they don't pay payroll taxes. I'd prefer payroll as much as possible though because it basically takes the taxes out of peoples' paychecks with minimal effort for them.

To figure out how much income is there, we have to turn to the Bureau of Economic Analysis' "Personal Income and Outlays" chart. I am specifically looking at table 1. In January 2021, total wages and salaries make up $9.967 trillion and should be taxable. However, employer contributions on various public and private funds are not. Personal income receipts on assets seems to be capital gains and income from retirement funds that weren't previously taxed. That said, I would consider it taxable. That's an additional $2.868 trillion. Unemployment benefits are considered taxable, so that's another $285 billion once you account for my cuts to those programs. Proprietors' income with inventory valuation and capital consumption adjustments is small business revenue and not all of that is taxable. As a matter of that they will have to deduct the vast majority of their earnings as business expenses, so their profits are far less than the amount shown. Based on research they normally only pay taxes on roughly 7% of this, so let's say that $114 billion is taxable. I'll do the same for rental income and get $57 billion.

Adding that all up:

$9.967 trillion in wages and salaries

$2.868 trillion in investment/dividend income

$0.285 trillion in unemployment benefits

$0.114 trillion in small business income

$0.057 trillion in rental income

+                                               

$13.291 trillion in taxable income

At this point, we only need $2.607 trillion to fund UBI.

Applying a flat tax across all income, including the parts we just taxed, that's a 19.6% tax on all income. Let's adjust this to 20% for simplicity's sake.

Adding that up:

$187 billion from a carbon tax

$2.658 trillion from a 20% payroll/income tax on all income 

+                                                 

$2.845 trillion in total tax revenue

Spending cuts/taxes that I did not include in this model

There were various spending cuts and taxes that I included that did not make the cut. These are largely because they either were too unreliable to include as I'm not sure the revenue could be gained, or because I did not like what these taxes did to something, either model related or not related. I will discuss each of these briefly, explain why I did not include them, and explain how they impacted my plans. Anyone can take these numbers and modify my plan to get another model.

Elizabeth Warren's wealth tax: Elizabeth Warren wants a 2% tax on all wealth above $50 million. She projects it could raise up to $3.75 trillion over the next decade, or around $375 billion per year. I did not include that in this model because wealth taxes have a horrid track record of working, often bringing in far less revenue than expected. If it worked perfectly, as projected, it would reduce the flat tax by 2.8%, from 19.6% to 16.8%. However, given some projections for it working in practice are far lower, it might not have as much of an impact at all. At the low end it might only raise $100 billion a year, which would only reduce the flat tax by 0.7%, down to 18.9%. It's too unpredictable to include, but it is nice to think about.

Land value tax: I floated the idea of including a land value tax of 1% on all privately held land. While these numbers are 8 years old, the value of all privately held land is about $14.488 trillion. Applying a 1% tax could raise $144.9 trillion. This would reduce that flat tax down to 18.5%, which would be a 1.1% reduction in the flat tax. There are two major objections I had to including this tax. First of all, it made calculating how much people would pay difficult. Home values, and underlying land values vary widely, and while I do not believe the land value tax would be particularly high on the average American family (a rough estimate I came up with would be $1133 a year, assuming a $340,000 home), this could fluctuate wildly depending on how much a home is worth. Second of all, it could unfairly target some vulnerable populations, such as people living on fixed income. Just because one owns a home, does not mean they have liquidity, and safety nets like basic income nor social security should be used to pay for a tax, to fund a basic income. It defeats the purpose. I'd also go so far to say it violates my indepentarian principles, because a core reason I support basic income is because I support freedom from financial coercion, and a tax on all land regardless of circumstance is essentially a tax on existing and a form of such coercion. It might fit a geolibertarian theory of justice, but it does not fit mine.

A flat tax on the top 1% of income earners: I toyed with the idea of taxing the top 1% of income earners (people earning at least $539,000 a year) exclusively with an additional flat tax of 5% or 10%. This would alleviate the burden on everyone else, making the taxes to fund UBI more progressive. It is said that the top 1% earns 20% of all income. And assuming a $1.7 million average in that income range, that means 68% of their income (excluding the first $539,000) would be taxable under this surtax. This amounts to $1.808 trillion, meaning a flat tax of 10% on all income above $539,000 would net us $181 billion, and a 5% tax would net us $90 billion. This would reduce the flat tax on everyone else to 18.3% or 18.9%, meaning a 0.7-1.3% reduction in the tax, while shifting the top 1%'s burden to 28.3-28.9%. I excluded this for two reasons. First of all I viewed it as a bit more complex while I want to make this as simple of a model as possible. Second of all, I'm leery to push the rich's taxes too high for capital flight or tax dodging reasons. Basic income is already a fundamental increase in taxation for them, and they will be paying most of the burden regardless. But they are good at hiding their money if we try to stick it to them too hard, so I kind of want to keep their overall level of taxation to fairly manageable levels.

An additional $100 billion reduction in military spending: In my original basic income plan, I proposed military cuts too. But I kept them around $100 billion or so. Trump has since increased the military budget significantly, for no apparent reason other than to give us a bigger stick (because he wants to measure a word that rhymes). So this plan reflected reversing Trump's spending cuts and reverting to Obama levels of defense spending, but I really don't want to get too greedy. We need a military, and being the world power that we are, we do want to spend more than the other guys to some extent. I feel confident in reducing Trump's budget increases, but I don't feel confident in cutting more than that. I'd rather be conservative with my numbers rather than overly optimistic. But I feel like it's worth mentioning the proposal here. This would reduce the flat tax to 18.9%, meaning a 0.7% decrease.

How different variables affect the numbers

As you can see, I had several ideas I did not include, because I did not feel confident in doing so or did not like something about the proposal. The flat tax as it is, is 19.6%, which I rounded to 20%, but if I was serious about including the above proposals, I could theoretically reduce that flat tax down to 13.6% or so by bringing in an additional $800 billion in revenue. Most of the shifted burden would be to the top income and wealth earners in the country. I just believed these plans added unneeded complexity to my model, created uncertainty, and might have introduced negative externalities that I could not predict.

At the same time, it is possible that my numbers are too optimistic. I've tried to check them as much as possible, but if my plan introduces tax dodging or economic disincentives, or I am overly optimistic with how I tax certain things and I overestimate the tax base, we might need a tax as high as 24.5%, assuming an 80% efficiency in my numbers. If we forwent all spending cuts, and put the entire burden on the flat tax, it would be 26.8%. And if we added both variables together the tax would be 33.5%. Now, to be fair, that's a really bad, unrealistic doom and gloom scenario. I would estimate the upper boundary of problems with my plan to be around the 25-27% estimate. 

That said, the 20% flat tax is actually roughly in the middle. If things go better than expected, I add more taxes, they work, we could reduce the tax rate down to 14%. If I overshot as is, we might need to increase it to about 26%. In reality, I don't believe either extreme is very plausible and the most likely outcome is going to be something like 17-23% depending on implementation and variables.

How UBI affects real people

Here I am going to provide a handful of scenarios explaining how my UBI works in practice, so that the average person can determine how this plan would effect them. The formula for calculating your own income is simple. Basically, it's UBI + wages - taxes = net income. UBI is the total UBI from all members of your household. Wages is the amount of taxable income you earned from work or other means. Taxes is....taxes on that income. Your net income is the result. I estimate, based on this, that basic income would help roughly 70-80% of the population.

Single adult, no job

UBI: $13,200

Wages: $0

Taxes: $0

Net Income: $13,200

Single adult, minimum wage

UBI: $13,200

Wages: $15,080

Taxes: $3,016

Net Income: $25,264 (68% increase in income)

Single adult, median income ($36,000)

UBI: $13,200

Wages: $36,000

Taxes: $7,200

Net Income: $42,000 (17% increase in income)

Single adult,break even point ($66,000)

UBI: $13,200

Wages: $66,000

Taxes: $13,200

Net Income: $66,000

 Single adult, $100,000

UBI: $13,200

Wages: $100,000

Taxes: $20,000

Net Income: $93,200 (6.8% effective tax rate)

Single adult, $250,000

UBI: $13,200

Wages: $250,000

Taxes: $50,000

Net Income: $213,200 (14.7% effective tax rate)

Family of four (2 adults, 2 children), no job

UBI: $36,000 ($13,200 + $13,200 + $4,800 + $4,800)

Wages: $0

Taxes: $0

Net Income: $36,000

Family of four, median income ($69,000)

UBI: $36,000

Wages: $69,000

Taxes: $13,800

Net Income: $91,200 (32% increase in income)

Family of four, break even point ($180,000)

UBI: $36,000

Wages: $180,000

Taxes: $36,000

Net Income: $180,000

Family of four, $500,000

UBI: $36,000

Wages: $500,000

Taxes: $100,000

Net Income: $436,000 (12.8% effective tax rate)

Two average social security recipients ($3086/month)

UBI: $26,400

Social Security: $37,032

Cuts: $10,364

Net Income: $53,068 (43% increase in income)

Two social security recipients, maximum benefit ($7,790/month)

UBI: $26,400

Social Security: $93,480

Cuts: $26,174

Net Income: $93,706 (0.2% increase in income)

Discussion/Conclusion

All in all, this basic income should essentially eradicate poverty in the United States, ensuring all households of legal status have an income above the poverty line. Despite cutting social programs at times, and imposing a 20% flat income tax on all income, it should ensure that every vulnerable person is at least as well off as they are now at minimum or in a better position than ever, and it should be a net benefit to roughly 70-80% of the population. While the top 20-30% will pick up the slack for this basic income scheme, I see that as fair in order to ensure decent wealth redistribution from the rich to poor. And if we really wanted to, we could shift even more of the tax burden to the rich, even taking some of it off of those upper middle class suburbanites that democrats want to pander to.

I am a strong believer in the idea of UBI. This is my fourth iteration on trying to make one that works. And I believe, more than ever, after running these numbers, that this can work. It will require intense political pressure and will to implement it, but I believe that this program is necessary for the benefit of the American people. No one should live in poverty. Everyone should have income security, without having to rely on unreliable and exploitative jobs. Let's do it, America.

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