Thoughts on Universal Basic Income

 Andrew Yang has proposed a Universal Basic Income of $1,000 per adult per month sent unconditionally, with some of the current welfare programs eliminated. https://2020.yang2020.com/what-is-freedom-dividend-faq/

https://2020.yang2020.com/policies/the-freedom-dividend/

 As early as 2011, “CRS identified 83 overlapping federal welfare programs that together represented the single largest budget item in 2011— more than the nation spends on Social Security, Medicare, or national defense. The total amount spent on these 80-plus federal welfare programs amounts to roughly $1.03 trillion. Importantly, these figures solely refer to means-tested welfare benefits. They exclude entitlement programs to which people contribute (e.g., Social Security and Medicare).” CRS Report: Welfare Spending The Largest Item In The Federal Budget

 Thus, at first glance, this looks appealing to help reduce poverty and reduce the bureaucracy of the bloated, complicated welfare system based on qualifying criteria, also known as “means testing”. This is similar to what was proposed by conservative Republicans way back in 1980, including Milton Friedman with his “negative income tax”. This would have the added benefit of eliminating the complex maze of requirements and conditions the current recipients must go through. Also, the current means testing discourages people from working, as for many, earning more from working means losing the welfare benefits, reducing or completely eliminating any incentive to getting a job.

 But, let’s look at whether this is affordable or whether it will further exacerbate our ballooning national debt.

 In 2020, the U.S. Census Bureau counted 331.4 million people living in the United States; more than three-quarters (77.9%) or 258.3 million were adults, 18 years or older.

 258.3 million times $12,000 per year = $3,099,600,000 or $3.1 trillion per year.

 Yang’s view on how to pay for the program:

 

The means to pay for the basic income will come from four sources:

 

Current spending: We currently spend between $500 and $600 billion a year on welfare programs, food stamps, disability and the like. This reduces the cost of the Freedom Dividend because people already receiving benefits would have a choice between keeping their current benefits and the $1,000, and would not receive both.

Additionally, we currently spend over 1 trillion dollars on health care, incarceration, homelessness services and the like. We would save $100 – 200+ billion as people would be able to take better care of themselves and avoid the emergency room, jail, and the street and would generally be more functional. The Freedom Dividend would pay for itself by helping people avoid our institutions, which is when our costs shoot up. Some studies have shown that $1 to a poor parent will result in as much as $7 in cost-savings and economic growth.

My reaction: “In FY 2021 total US government spending on welfare — federal, state, and local — was “guesstimated” to be $2,410 billion, including $762 billion for Medicaid, and $1,648 billion in other welfare.” https://www.usgovernmentspending.com/welfare_spending. So, the elimination of some programs would create some savings. The question is, “How many of the programs will endure once the recipients converge on Congress to demand “their essential program” survive?” Without them all going, you don’t get the savings in complexity or elimination of the expensive bureaucracy.

We need to exclude the cost savings of Medicare, Medicaid, Veterans Administration and all other health care costs as these sources of funding are already fully used and will be needed as well if a national program of Medicare for All is enacted. If these were rolled into one “Americare”, it would drastically cut the huge waste in the administrative costs of the current system with health insurance companies and their billing. But, In this analysis, one must be careful not to count the savings twice, in paying for Americare and UBI.

I like the idea of current Social Security and SSDI recipients being allowed to choose which they would get: Their current benefits or the UBI. One way to cut the cost of the program would be to give the UBI only to those who need it, i.e., the poor. This means testing could be done with minimal administrative costs as Social Security/Medicare does it to determine how much of the annual premium the recipient of Medicare pays, based simply on last year’s 1040 Adjusted Gross Income.

One thing I would not wish to see weakened is "personal responsibility". I strongly believe in the huge potential of (almost) everybody but see us all far short of our potential, and unfortunately, some disastrously far short. Some of that might be attributable to "learned helplessness" due to racial injustice here in the U.S. while I see it a lot among the refugees I work with in the Uganda Refugee Settlements. The environments we experience matter. So I acknowledge that we do not all have equal opportunity with which to maximize our potential. But, for us all to prosper as much as we can, as a country, we must not weaken the idea that people are primarily responsible for the results they achieve.

We want to eliminate destitution but not simply operate a wealth redistribution system. People with higher income and wealth certainly did not need to get the Covid period payments, and in fact, this has contributed to the inflation we see today (along with restricted supply lines and now Ukraine). It is a classic case of more money chasing fewer goods.

So, this could be modified to be a “Guaranteed Basic Income” with the automated means testing.

I fear that “We would save $100 – 200+ billion as people would be able to take better care of themselves and avoid the emergency room, jail, and the street and would generally be more functional.” is wishful thinking. Making forecasts like these are difficult, particularly about the future. Per Yogi Berra.

2. A VAT of 10 percent: Our economy is now incredibly vast at $19 trillion, up $4 trillion in the last 10 years alone. A VAT at half the European level would generate $800 billion in new revenue. A VAT will become more and more important as technology improves because you cannot collect income tax from robots or software.

My reaction: This would be technically feasible. In the long run, the added tax will get passed on to consumers, raising prices. Thus the VAT serves more as a “consumption tax” rather than an income tax, a form of taxation long favored by economists as simpler. A VAT distorts market signals less than income taxes do. This would impose a tax on many large companies that currently escape the income tax due to many loopholes in the federal income tax code. With a VAT added, the U.S. tax system would look more like that of the European countries, which are capitalist or market-based economies, with higher taxation and more robust safety nets.

 

3. New revenue: Putting money into the hands of American consumers would grow the economy. The Roosevelt Institute projected that the economy will grow by approximately $2.5 trillion and create 4.6 million new jobs. This would generate approximately $800 – 900 billion in new revenue from economic growth.

 

My reaction:  I am skeptical, as too many “analyses” estimate the number of jobs created by government spending but fail to estimate the number of jobs lost due to the money being taken out of the economy by the taxation. Only if the propensity to spend is higher with the recipients than with those taxed is there a net gain. Even that is not the end of the story as money not spent by those taxed is saved, which has the effect of keeping interest rates low which encourages investment and capital spending more than higher rates. So, I view this also as possible wishful thinking. So, again I have little faith in this estimate.

 

4. Taxes on top earners and pollution: By removing the Social Security cap, implementing a financial transactions tax, and ending the favorable tax treatment for capital gains/carried interest, we can decrease financial speculation while also funding the Freedom Dividend. We can add to that a carbon fee that will be partially dedicated to funding the Freedom Dividend, making up the remaining balance required to cover the cost of this program.

My reaction: Lots of options for increasing taxes, few of which are popular.

My tentative conclusion: Without any means testing, we could possibly see $1,648 billion (or $500 – 600 billion as Yang says of savings from the elimination of some welfare program) and possibly $800 billion from the imposition of a 10% VAT on businesses. The rest of the potential sources to pay for the $3.1 trillion program are speculative.

 

Obviously, all of these policy changes are HUGELY controversial and complex, but all might be doable. It would be interesting to see objective analyses by reputable think tanks and the non-partisan Congressional Budget Office. I suspect such an ambitious program would only be financially feasible if changed to a Guaranteed Basic Income with automated means testing to reduce the cost of the program.