Wednesday, February 27, 2019

The overall tax burden and savings of medicare for all and UBI on "average" earners

So I recently looked at Andrew Yang's UBI proposal and medicare for all in terms of funding. With Bernie Sanders' medicare for all proposal, I found that the numbers added up for the most part and that it was sufficient as it is. With Andrew Yang's UBI, I found the numbers did not add up and offered corrections that should come close to bringing in enough revenue, most notably a 10% payroll tax and income tax on other forms of income in addition to Yang's 10% VAT and spending cuts.

Now I want to look at how different people and families will be impacted across the spectrum. I won't focus on the top income earners as there are too many taxes to keep track of, but I can probably get a good idea of how it would impact people in the bottom 90% of the spectrum. So here I will analyze people at the 10th, 30th, 50th, 70th, and 90th percentile of earnings.

Taxes on average earners

Average earners would would face a number of higher taxes with UBI and medicare for all. Most notably, they would face a 10% payroll/income tax on earnings, and an additional 10% VAT from the UBI. They would also face an additional 7.5% payroll tax paid by employers for healthcare, and a 4% premium they pay based on their earnings.

Savings by average earners 

Individual adults over 18 would receive a $12,000 UBI, with 2 adult households getting $24,000. While medicare for all would tack on an additional 7.5% payroll tax paid by employers, this replaces a 7.6% premium already paid for health insurance. That said it cancels itself out and breaks roughly even and will not be counted. I will count the additional 4% tax paid by households, but it should be noted that the average household spends 8% on healthcare right now, so this would cut household expenditures in half in practice, effectively shifting the burden to the rich. That said while I could account for an extra 4% in taxes households pay, I could also deduct 4% in practice due to the extra spending power they should have. I understand household costs are asymmetrical across households, with some paying very little and some paying a lot, but this is a model for looking at the overall big picture so your mileage may vary vs my calculations.

That said, I will account for 6% effective extra payroll/income taxes on households in practice, and an extra 10% on top of that in terms of a VAT, as this will be the extra overall money coming out of peoples' paychecks. I will also apply the $12,000 UBI to income between the payroll tax deduction, which would apply here, and the VAT deduction, which would apply to the UBI itself.

10th percentile income

Now, before I begin I will cite my sources and point out for individual and household incomes I am drawing my sources from here and here. I will assume 1 adult for individual income and 2 adults for your average household.

At 10th percentile, your individual income is $7000. With an effective 6% payroll tax accounting for healthcare savings, you will pay in $420 and make a total of $6520. You will get a $12,000 UBI bringing your income up to $18,520. You will then pay 10% in VAT bringing your income down to $16,722. This will leave you 164% better off compared to where you would be under a laissez faire system. It would effectively lift you out of poverty.

For households, your income would be $14,280, which would be brought down to $13,423 after the effective payroll tax. You would then get $24,000 bringing your income up to $37,423. Paying the VAT, you would have a total of $33,680 at your disposal in net. You would be MUCH better off than under the status quo, a whopping 135%. I can't comment on how and whether welfare would make you better off than this at all, but I'm guessing probably not.

30th percentile income

 At 30th percentile income, an individual would make $24,001 a year. After the payroll tax they would make $22,561. With the UBI they would get $34,561. With the VAT they would get $31,105. This makes them almost 30% better off than they are now.

For households they make $35,495. After payroll taxes they will make $33,365. UBI would then bring them up to $57,365. The VAT would bring them back down to $51,629. This makes them 45% better off than they would be right now.

50th percentile income

Now we are getting into medians; true "averages." This is what your actual average joe would get under this plan.

At 50th percentile income, an individual would make $39,048. The payroll tax would bring this down to $36,705. UBI would bring this up to $48,705. The VAT brings this down to $43,835, which is 12% more than one would make now.

For households, they would make $61,822. With the payroll tax it would become $58,113. The UBI would bring this up to $82,113. With the VAT, it would go down to $73,901. They would be roughly 20% better off than they are now.

70th percentile income

At 70th percentile, an individual earns $60,020 a year. The payroll tax would bring this down to $56,418. UBI would raise this up to $68,418. The 10% VAT would reduce this to $61,577. This means that someone at this level, which is where you start getting into the bottom of the upper middle class in my opinion, would be 3% better off than they are now.

For a household, they would make $98,823 a year. The payroll tax brings this down to $92,894. UBI would bring this up to $116,894. The VAT would bring it back down to $105,204. This would make people 6% better off than they are now.

90th percentile income

At 90th percentile income, an individual earns $114,068. The payroll brings this down to $107,224. The UBI brings it up to $119,224. The VAT brings it back down to $107,301. This would leave such an individual 6% worse off than the status quo. That really isn't bad at all considering how much money that is.

For households, 90th percentile is $178,793. The payroll tax brings them down to $168,065. UBI brings them back up to $192,065. The VAT brings it back down to $172,859, which leaves these guys 3% worse off. Again, not bad.

Discussion and conclusion

So, I do want to keep in mind this analysis is a little deceptive. I did not include what these guys currently pay in taxes. I did not include the full extent of the extra taxation burden here, which would be closer to 24% rather than 16%. HOWEVER, also keep in mind you will not have to pay for health insurance. That expense is GONE. Those hundreds, if not thousands, you spend every month on insurance? Off your back. Copays, deductibles, medical debt? Don't worry about it. All taken care of. That's where that extra spending power comes from.

Relative to the status quo, while a UBI and medicare for all would raise taxes nominally on working families by as much as 24% on the end that they would actually face (ignoring the employer premium that they already pay), the extra spending power and freedom it brings would leave the vast majority of Americans much better off in practice. I'm almost stunned how well the numbers work out. Almost 80% of people would benefit from this shift to my knowledge. You would have more spending power in your pockets at the end of the day, not less. People at the bottom would obviously benefit the most. At the 10th percentile you would be 2.5x as well off as you are today roughly. At the 30th percentile, still a good 30-45% better off. At the median, closer to 12-20%. At the 70th percentile, a modest 3-6%. People at the 90th percentile would be 3-6% worse off in contrast.

UBI costs a lot of money on paper. But that deceptive. It pumps a lot of money in and out of the economy, taking it from some and redistributing it to those who need it most in practice. Such taxes on paper should be economy destroying but they're not because all of that income is being pumped back into the economy like a massive stimulus. And best of all it does it in a way that should not greatly discourage work effort, as marginal tax rates for most Americans would likely remain below 50%. Medicare for all seems astoundingly expensive too, but in practice, removing healthcare off of peoples' backs actually leaves them better off. It is a weight around their necks that threatens to send them into financial ruin.

Don't let the massive costs of these programs dissuade you, you might be thinking, oh my god, $8-9 trillion federal budget, how are you gonna pay for that? Well, we already discussed it over 3 posts. While the taxes would take tons of money out of the economy, it is not like it goes into a black hole never to be seen again. It ends up being redistributed back into peoples' hands via UBI and being freed from the burden of high medical costs. I mean if we go by the graph here from the CBO, the nominal rates will go up. Lower income households will nominally be paying 28% of their income in taxes vs the 4% or so they do now. Second quintile people will be paying 32%. 3rd quintile people around 37%. 4th quintile around 42%. Top quintile anything from 45% on up, with the top really getting hosed due to Bernie's tax increases on them. I cannot comment on whether these high rates can be achieved or if the rich will hide their money or what, but on paper, this plan seems to work at least. And lots of people will be getting lots of money back offsetting this burden and leaving most better off for it. This reminds me of what a European nation charges in terms of taxes. Those nations are the most prosperous on earth and have the most expansive safety nets. We can be like them. UBI and medicare for all would make us like them. I think this is a worthwhile goal. This is, in my opinion, what our vision should be going into 2020, and what I would support in an ideal world where I could magically have a candidate with Yang's UBI plan (modified to my specifications) and Bernie's medicare for all plan.

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