Basic Income

Recently the Swiss voted no on their referendum to implement basic income. Personally, I think that we should strongly consider implementing a basic income in the United States. At the minimum, I think that we deserve a national conversation on poverty that should include a serious discussion of the pros and cons of basic income. Therefore, I got really pissed off by this recent piece in the New York Times (or this, etc).

The author dismisses basic income out of hand for two major reasons:

  1. Cost (proposal of $10,000 to everyone over 21 for a total of $3 trillion)
  2. Negative effect on the poor (through government cuts due to the cost of implementing the above basic income)

I’ll go through the details below, but some rudimentary math shows that basic income could be paid for in the United States by tax increases that would not be a burden on the poor (or even most of the middle class). Thus, no government programs would need to be cut.

The purpose of this exercise is not to propose a foolproof implementation of basic income. Instead, I want to show that dismissing basic income due to cost is incorrect. If you want to debate basic income, the real issue is how our employment-centered economy would be changed by altering people’s motivation to work.

Here is a the conclusion of the calculations, please read on for all the details. I estimate that $11,500 (ie the US poverty line) could be paid to every non-Social Security receiving adult and $5750 (half the adult payment) to every child by adding a new flat tax on income (adjusted gross income) of 26.6% (see the appendix for alternative proposals that include a lower flat tax). This means that any individual that makes less than $49,500 would get MORE money from the government under this simple plan. Therefore, around 70% of non-Social Security US adults would get more money from the government.

 

Simple Calculation

Estimate Cost

I will start off by calculating the cost of basic income. First, how many people do we need to cover? I am going to ignore the 65 million that are on Social Security. My reasoning is that Social Security is almost a basic income (or could be with a few reforms) and that it is financially secure if we eliminate the cap ($118,500) on the payroll tax but do not increase benefits (see here and here for details).

Looking at the US census facts, there are 74 million children under 18, leaving 183 million US adults not on Social Security. I’m propose paying a half-adult benefit for children, so that means adult benefits will be paid to an effective population of 220 million.

Therefore, if each individual approximately gets the US poverty line, ($11,500), this would result in a total cost of $2.53 trillion.

Estimate Flat Tax

So how could we pay for this? The simplest possible mechanism would be a new flat tax on personal income.

The total US personal income in 2014 was $14.7 trillion. However, not all of that is taxable income (standard deductions, mortgage interest deduction, etc), so the actual taxable personal income is the adjusted gross income (AGI). Using some old numbers on AGI, I estimate that the total US AGI was $9.5 trillion in 2014.

Since the cost is $2.53 trillion, and US AGI is $9.5 trillion, that gives a flat tax rate of 26.6%.

Estimate Break Even Point

For a single individual, the standard deduction is $6300 (this amount of income is not taxed). It would take a taxable income of $43,180 to have a flat tax burden equal to the new basic income. Combine that with the standard deduction, and rounding a bit, leads to the conclusion that anyone making under $49,500 would gain money from the basic income/flat tax proposal.

 

Conclusion

Please don’t dismiss basic income purely out of cost. As the estimates above show, one could introduce basic income and pay for it with a new tax in a manner that preserves all other government programs.

I think there are two major reasons to embrace basic income:

  1. Fairness
  2. Needed security due to potential changes in employment

Maybe the fairness argument doesn’t fit with everyone’s political leanings, but I think the future of employment is strong motivation. Each new technological revolution seems to require fewer and fewer workers (compare Ford’s workforce vs Google’s). Since I don’t see that trend reversing and machine learning / artificial intelligence should actually accelerate it, I think we need to be proactive and provide a floor for people before we have large unemployment.

However, I recognize that basic income is a very controversial idea. That is why I am interested in seeing experimental implementations of it. While this experiment is nice, it really is too small to truly learn anything from. Instead, I would love to see a national trial. Why not start at a very small number, and slowly increase it over time? That would allow us to adapt to the changing culture (ie potentially NOT work centric) and make sure that there are no adverse incentives. For example, my dumb proposal of a half benefit to children needs to be more carefully monitored to ensure that people do not have children just for the sake of getting their share of the benefit.

No matter what you think, the debate isn’t going away. So we might as well start examining it now.

 


Appendix: Other Possible Tax Plans

Here I outline my own personal preferences for tax reforms (in addition to a flat tax) that could be used to pay for basic income. Note that all dollar amounts are per year.

Tax Reforms Within Current System

All numbers listed below are the estimated cost per year of the various deductions.

These are some tax reforms that many economists support:

I think this program is superseded by the introduction of a basic income:

And here are some additional reforms I support:

  • Tax capital gains and dividends as regular income ($85 billion)
  • Limit deductions for the wealthy ($25 billion)
  • Variety of corporate tax reforms ($40 billion) (I don’t understand depreciation so only the others on the list)

This comes to a total reform of $335 billion.

Note: I could have included food stamps or unemployment benefits in the superseded cost savings, but I’m going to assume that the benefits get reformed, but the money still is diverted towards health and employment initiatives respectively.

VAT

I would propose adding a federal value added tax as is common in Europe (see here for pros/cons). Bloomberg estimates that a VAT of 10% on a broad base of items would raise $750 billion per year. For ease of collection, this should be accompanied by a local/state replacement of the standard sales tax (which generates around $500 billion per year, or effectively a 6.66% VAT). I propose a 15% VAT (similar to European rates) that is split evenly between local/state governments and the federal government. This would generate $560 billion additional federal revenue (as a bonus the states get an additional $60 billion).

Financial Transaction Tax

This would impose a small fee on all financial transactions. If we implemented a 0.05% transaction fee (ie 50 cents on every $1000), this would raise an additional $90 billion.

Estate / Transfer Taxes

Currently $1.2 trillion is inherited per year, but estate taxes only bring in $8 billion in revenue. I suggest an estate / transfer tax reform to collect more revenue from this. I would structure it in a progressive manner (ie increasing with wealth), but I again just want to estimate the necessary average rate. If an average rate of 25% was applied to estates, this would lead to an additional $290 billion.

Personal Income Flat Tax

In the end, we still need $1.255 trillion in new revenue. And since the US AGI is $9.5 trillion (it would be slightly higher after the above reforms, but I will ignore that), that implies that we would need to implement a 13.2% flat tax to raise $1.255 trillion.

Summary

If one does a similar flat tax break even point, for people below $93,400 would receive more in basic income than in the flat tax. However, this is misleading since I no easy way to estimate the increase taxes due to the VAT. A worse-case scenario would be that people spend their complete income every year on VAT taxable items. Since there is currently an effective VAT of 6.66%, this is a VAT increase of 8.33%. So a break-even point for the combined flat tax / VAT rate (21.55%) would be $59,600. All the other taxes are much more complicated so I have no easy estimate for them.

The main point of this detailed appendix is that one could replace the flat income tax with a diverse set of taxes that again would not be an unfair burden on the poor or middle class. Additionally, the tax base would be diversified and less prone to swings in the economy.

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