Wednesday, April 21, 2021

Where is the laffer curve really, and what is the maximum possible UBI?

 My experiments into how different UBI amounts would tax the populace got me thinking about laffer curves and what actually would be the maximum sustainable UBI plan. As indicated in that article, France had problems with a 75% marginal tax rates on the rich, with the article claiming the laffer curve was 52% in France. However, I'm not sure how reliable that is, so I decided to do more research into laffer curves. 

What is the laffer curve?

The laffer curve is basically the idea that there's an optimum rate of taxation for collecting revenue. The idea got popularity in the 1970s with the economist Art Laffer, a conservative who later became an integral part of Reagan's economic team. Essentially, he argued that at 0% the government would collect no revenue in taxes, but at 100% the government would collect no revenue either because production would be discouraged. Essentially this means that there is an optimal rate somewhere between 0 and 100% for collecting taxes, and his logic was used to reduce the marginal rates under the Reagan administration from 70% to 28%. Obviously this did not bring in more revenue, because Reaganomics is snake oil. However, I will give credibility to the concept and admit that he was probably just wrong about what the rate is, proving that lower isn't always better.

So where is the real laffer curve?

Well, as indicated above, in France, 75% was too high so they reduced it to 45%. It seemed to have worked. In the article they mentioned two estimates. One at around 52%, and another around 65% for European countries. 

Estimates seem to be all over the place, but for the US seem to range from as low as 50%, to as high as 76%. Most claims converge around 70% or so. 

Other countries also have top marginal rates as high as 76% in practice. The same article puts our current rate at 47%. At the same time, the tax foundation found that we are only taxing the rich at a rate of 33%, hence my plan. However, the 47% figure may include local taxes too, which seems to account for the discrepancy.

So how high can basic income go?

Well, given the 20% rate of my main $13,200/$4,800 proposal, that would put the top marginal tax rate for the rich as high as 67%. I really would not want to push it much higher at this time, especially given I also want to fund a healthcare scheme on top of this and that might require roughly a 11% tax last I looked at Bernie's plan. This would push the rate to 78%, which is just over that laffer curve. If anything given that it might be best to go back to $12,000/$4000, which would require a 17% tax rate if I really want to remain at or under 76%.

Barring healthcare, how high can it go? Well, a 29% tax rate with no other spending cuts or taxes elsewhere would yield $3.854 billion, which is 8% larger than my current UBI. This would yield a UBI of around $14,250 for adults and $5,180 for children.

Of course my UBI plan included $771 billion in spending cuts elsewhere, which would bring the spending up to $4.625 trillion. This would amount to a UBI 30% higher than my proposed amount, which would be $17,160 for adults and $6,240 for children.

Of course, again, this would be assuming we axe universal healthcare as a proposal and I would really want to keep that. I feel like there's more to the economy than just UBI and I would like to fund healthcare and education minimum on top of this. Education only costs like $75 billion a year so I'm not sweating that, medicare for all would cost $3 trillion, including $1.5 trillion in additional spending. The brunt of this would be funded via tax breaks and a payroll tax to replace current private healthcare spending, but he does propose a 4% tax on households, and much higher taxes on the upper class. Given this exercise is about pushing the top marginal rates as high as they go, this would cause problems, as having both UBI and Medicare for all in this form would push the rates too high. I could kind of see why Yang switched to a cheaper public option. Funding both medicare for all and UBI would be hard, and this is also a reason I supported transitioning to M4A before addressing UBI, because then we could get one out of the way and then see what we can do with the other. We could do without the higher taxes on the rich arguably, as they only raise around $180 billion, but the 11% increase in marginal taxes does go against the laffer curve here, and assuming 76%, that means my current UBI is pushing that and the $12,000/$4,000 plan would be better to revert to. 

Assuming a 70% marginal tax rate being the laffer curve, and having medicare for all, it gets worse. We'd be down to a top marginal rate of 59%, meaning only a 12% marginal tax for UBI. My $6,000 plan with no spending cuts pushed 11%, although with spending cuts a $9000/$3000 plan may be possible according to my article on different funding numbers. If we introduced wealth taxes and land value taxes and further spending cuts, we could theoretically reduce my original plan down to a 15% tax rate, putting us only 2 points over, at which rate, we could once again revert to my original $12,000/$4000 plan and make it work as that reduced it by around 3%.

But let's say we went all out, with the 76% limit, with no medicare for all, and those added taxes. At this point we got $4.625 trillion, and then we draw in an additional $620 billion maximum from a combination of Elizabeth Warren's wealth tax ($375 billion), a land value tax ($145 billion), and additional military cuts ($100 billion). At this point, we got $5.245 trillion, which is 47% more than my $13,200/$4800 plan. This would bump that up to $19,400/$7050, which is close to the $20,000 UBI I was messing with the other day. I would not recommend going that high. That's too high. But that is the highest I could see being theoretically passed.

With a 70% laffer curve, we could draw in $3.828 trillion, we could draw in $14,170/$5,150 without the additional taxes. This is the most realistic maximum sustainable amount for UBI. With additional taxes we could raise this to $4.448 trillion, meaning the maximum possible sustainable UBI would be $16,470/$5,990.

That said, what can we conclude?

Well, to refine my views from the other day, what is the maximum sustainable UBI? It depends. It depends what the laffer curve actually is, and it depends how we fund the UBI, and it depends what else we need to fund. Assuming the more conservative and realistic 70% peak rate, funding a UBI and M4A is going to be difficult, and there will likely be a compromise on at least one of those things. Bernie's M4A plan raises the marginal tax rate across the board by 11%, with potentially localized higher taxes on the rich. My basic income plan raises the rate 20%. Given the current top marginal tax rate is 47%, adding both would bring us to 78%, which is too much. Something has to give. My basic income plan would bring us up to 67%, which is fine in itself, and I guess it may be possible to have a public option with it and make it work. That said after doing this experiment, I can actually kind of respect Yang for backing off of medicare for all and toward a public option plan. At the same time, if I stuck with medicare for all, that would make a full UBI unfeasible. I would only have about a 12% marginal tax rate on the rich to play with, and unless I make funding the UBI literally regressive, I would likely need to settle for a partial UBI of around $6,000-$9,000. It may be possible to get higher, potentially up to $12,000 with some really optimistic numbering, but M4A would actually constrain our ability to fund a basic income. I might have to reconsider the public option in the future if I want to maintain support for a full basic income.

But yeah. This is why I always point out, in dealing with proposals from the Bernie or green camps, that priorities are important. There is a limit to how much we can spend and taxes that can be raised. UBI is definitely possible in some form. However, the poverty line is likely about the maximum amount I would want to see it at. Any higher than that and you're likely going to run into sustainability issues.

On a side note one thing I will say that is now calculated here, is that UBI and other poverty reducing measures would likely relieve the burden of local taxes. Imagine how much would be saved on police, on welfare, on healthcare, on homeless services, on prisons, etc. if we could only have a UBI and medicare for all. So it is possible that we could shrink the size of local governments if we have these things. This would somewhat raise the spending ceiling. Yang tried to calculate into his UBI numbers, but I tended to not trust that as I did not deem it as reliable for the exercise of funding UBI directly, but regardless the costs would be there.

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