If you recall, my last post was all about a plan I have, which was:
- We have a flat tax of 30% on all income. This new tax is very straightforward: No deductions, no tax breaks, period.
- We eliminate all welfare, unemployment insurance, food stamps, social security, and basically every other “safety net” program that we currently have in place.
- We pay every American adult 21 and older ten thousand dollars a year, tax-free.
How would this wind up affecting people? Under the present system, a single adult earning $25,000 per year pays $2781 per year between federal income taxes and social security tax. Under the new system, that same person would pay $7500 in taxes, but would also receive $10,000 tax-free in basic income, for a net gain of $2500 per year.
A married couple making $80,000 per year (and contributing 5% of their income to a 401k) pays about $7829 between social security and federal income tax. Under the new system, that family would pay $24,000 in taxes and receive $20,000 in basic income, which would mean the net tax payment would be $4000, which is $3829 less than they presently pay. (For both of the above estimates, see here).
Naturally, the question you should be asking yourself right now is: How could this be? How could a massive welfare state wind up being so good to the working and middle class, instead of only being good for the very poorest of Americans? You can’t get something from nothing.
Indeed you cannot get something from nothing, and there’s a very simple answer about where all this money comes from: the rich. I know, I know, the top tax rate stands at about 35%, but the blunt truth is that most rich folks don’t pay anything close to 35% of their income in taxes. They game the system by exploiting tax loopholes and by stashing their money into tax shelters where it will not be taxed until it is withdrawn (and even then, they often withdraw it a little at a time to avoid having to fully pay for it, plus much of it is not even used within their lifetimes, as it gets passed to their children, who do the same thing).
How do I know that? The following is a quote from economist Thomas Sowell:
“The facts are unmistakably plain, for those who bother to check the facts. In 1921, when the tax rate on people making over $100,000 a year was 73 percent, the federal government collected a little over $700 million in income taxes, of which 30 percent was paid by those making over $100,000. By 1929, after a series of tax rate reductions had cut the tax rate to 24 percent on those making over $100,000, the federal government collected more than a billion dollars in income taxes, of which 65 percent was collected from those making over $100,000.
“There is nothing mysterious about this. Under the sharply rising tax rates during the Woodrow Wilson administration, to pay for the First World War, fewer and fewer people reported high taxable incomes, whether by putting their money into tax-exempt securities or by any of the other ways of rearranging their financial affairs to minimize their tax liability.” (Source: Thomas Sowell, “Tax Cuts for the Rich and Trickle Down Theory,” p.3)
Ripping out tax-exemptions would effectively result in the wealthy paying more than they do presently, and a thirty-percent flat-rate would not be “unfair” (everybody would pay it) nor would it wind up putting the rich in the poorhouse. Somebody making a million dollars a year would come out with $700,000. Someone making $250,000 would come out with $175,000, plus the basic income they would be entitled to.
And the end of tax-exemptions would not hurt the middle and working class. Let’s return to the family with two kids making $80k that I mentioned previously: this family would longer get to deduct the money they put into their 401k, but the net amount of taxes they would pay would be less, which means they could afford to put more into their 401k than they do now.
What effects would Basic Income have on the incentive to work?
Let’s look at a few different groups of people: First, there are the people on welfare, food stamps, and all that. Would they have less incentive to work? Unlikely. I have known numerous people who receive government benefits. One guy, who taught at a trucking school, commented that he declined overtime at work so as not to wind up losing all his food stamp benefits. With universal basic income, there’s always an incentive to work, as working always results in making more money than you would otherwise. I have known two people on unemployment insurance who pretty much told me they could have a job if they wanted, but as long as unemployment insurance was there giving them money, they would choose to stay unemployed. Unemployment benefits mean there’s little incentive to go back to work until the money runs out, universal basic income means there’s always plenty of incentive to go to work. Based on my personal experience with those who are on government programs, I am forced to agree with conservatives that many (though certainly not all) have the ability to work. Perhaps not full time, but part-time, at least. Universal basic income provides the incentive to work as much as you can, and also the guarantee that even if you can’t work, you’ll still have enough to live on.
An experiment with universal basic income was done in Dauphin, Canada, and here are the results:
“Only two segments of Dauphin’s labour force worked less as a result of [basic income]—new mothers and teenagers. Mothers with newborns stopped working because they wanted to stay at home longer with their babies. And teenagers worked less because they weren’t under as much pressure to support their families.”
This makes a lot of sense to me. I think most men have the desire to bring in as much as they can, and so basic income probably doesn’t much stand in the way of these people working. I know it wouldn’t for me.
How is Basic Income better than the welfare programs we have now?
Besides the increased incentive to work, it is a much more efficient program than we have now. The cost of distributing food stamps is between 13 to 16 percent of the money we put into the program, the cost of distributing social security is around 4.6 percent of the amount paid in, and other programs, such as WIC, are even more inefficient, clocking in at over 40% administrative costs (meaning for every dollar taxpayer’s put in to the system, over 40 cents of that dollar get sucked up by admin. costs).
All that, of course, raises the question of how much Universal Basic Income would cost. I suspect the answer is zero. After we simplify the tax code, we could use the man-hours that we are already paying for with the IRS to focus on enrollment, distribution, and fraud-prevention for universal basic income.
Any Other Benefits to Universal Basic Income?
Yes. A good economy is one in which money is constantly changing hands, and the main people who benefit financially from this (the working and middle classes) are people who tend to spend income increases. Moreover, wages for those groups of people have been effectively frozen for decades now, while large corporations and wealthy individuals have continued to grow richer and richer. A universal basic income corrects for this massively unfair income inequality, and it can help stop income inequality from getting any worse than it is already.
Have any economists taken up this idea?
Wikipedia states the following:
“Winners of the Nobel Memorial Prize in Economic Sciences who fully support a basic income include Herbert A. Simon,[62] Friedrich Hayek,[63][64] James Meade, Robert Solow,[65] and Milton Friedman.”[66]
I have not checked all the references here, but I do know for a fact that the late, great Milton Friedman did indeed advocate it (as a “negative income tax” which is effectively almost the same as universal basic income). Moreover, there are some superficially similar programs in place now that do better than ordinary welfare and foodstamp programs, see here. The economist Jeremy Rifkin endorses basic income, and in the same article he also mentions that a committee put together by President Lyndon Johnson was “unanimous in its support” for universal basic income. For what it is worth, Martin Luther King Jr. and Thomas Paine also advocated a form of universal basic income. Of course, the real measure of any idea is not who likes it but whether the facts bear it out. I have argued that the facts bear it out, but I also take a little bit of comfort in knowing that some very smart economists and political leaders have recognized that this makes sense.
Questions That Still Need Answers
Obviously the analysis I’ve given in these two blog posts is incredibly over-simplified. Here are some tough questions that need to be answered in order to justify the installation of universal basic income:
1. I have assumed that the IRS would save lots of labor if they did not have an incredibly complicated tax code to follow, and that they could use the time saved there to focus on universal basic income. Is that assumption correct? If not, how many new workers would the IRS have to hire? If they only have to hire 150 extra people, I think basic income would still be feasible. If they had to hire 15,000 people I doubt it would be. We need a well-researched answer to this question.
2. I agree that investment income should be taxed at a lower rate than other forms of income, because there is a possibility of financial loss and because we’d like to encourage investment. What percentage of all income is investment income? How would this affect the feasibility of basic income, since taxing a fraction of the total income at 15% would necessarily bring in less money than taxing all income at 30%?
3. Would it be a good idea to abolish paper money before we install this system? Many people cheat the tax system, from waitresses not reporting tips (which almost every waitress does, as I know from personal experience) to small businesses (accounting for over $122 billion every year in lost tax revenue) to wealthy folks and businesses stashing money in the Cayman islands. Those with illegal businesses, like drug dealers and pimps, pay no income tax since it’s all under the table anyway. Abolishing paper money would eliminate all that, since there’d be a papertrail on everything (drug dealers, I suspect, would claim their income came from some other activity, but the money would be taxed all the same). A tax on money going overseas equivalent to the income tax we have would probably also help eliminate the Cayman island problem. What are the costs and benefits of doing that?
4. I’ve used the model of a $10,000 basic income and a thirty percent flat-tax, but is that ideal? What are the costs and benefits of having a $12,000 basic income with a thirty-two percent flat tax, or an $8,000 basic income with a twenty-eight percent flat tax? Other models deserve to be looked into, too.
5. A single, widowed mother with four children and a low-wage job would probably not do as well financially under my system as she would under the present system. No system can save everybody. My system doesn’t, and the current system doesn’t either. However, it is important to understand that people like her would be in more trouble than they already are if we had basic income with a flat tax. I think the local community and family would help the rare birds that my system would miss. Would the risk of people like her be worth the many other problems that basic income would eliminate?
6. What other factors need to be taken into account that I may have left out?
Addendum: A More Conservative Approach
If you’d a like a more conservative approach, consider this: If we left social security alone and instead just took the money we now use on Food and Nutrition Assistance, Housing Assistance, Earned Income, and temporary assistance for needy families, and state welfare programs together, we could afford to give every person regardless of age $1753 (which includes a six percent administrative cost for distribution). If someone was under the age of 18, it’d be given to the parent or guardian. A family of four would receive $7,012 per year, which is certainly enough to cover the cost of groceries and would even supplement other costs that the family had. It’d certainly be better than what such a family gets now (a family of four can get about $3600 per year in food stamps,* and if you suppose that income-based housing might save $200 per month, which I suspect is a big overestimate, then it works out to about $6000 for benefits for that family). The savings in administrative costs, the removal of a disincentive to work, and the universal scope of this project (which would benefit everybody, poor or not), is a good reason to favor universal basic income.**
*In the article linked, it says the average family of four can recieve benefits of $275 a month as of 2009. I jacked up the estimate to $300 per month to reflect inflation from the year 2009 to year 2012 (all other estimates I have used come from that year).
**If you want more on how the numbers are generated, at the end of 2012 there were 315 million people (that includes all adults, children, and babies). If you take the percentages of the national budget which all of the programs I mentioned use, add in the $250 billion in state welfare programs, you’ll end up with the number I did when you divide it by 315 million people and multiply that number by .94 to reflect a six percent administrative distribution cost.
For more on Universal Basic Income and the Flat Tax:
