The idea of a Universal Basic Income (UBI) in place of existing entitlement programs (Social Security, Medicare, Medicaid, food stamps, unemployment insurance, etc.) that is financed by a flat rate income or consumption tax calls for a deeper discussion of its financing. “Our-social-safety-net”
For purposes of illustration, lets assume a UBI of 18,000 dollars per year for adults and half that for children (under 20 years old). This is somewhat above the current average Social Security benefit for someone retiring at age 65. The current American population of 330 million consists of about 82 million children and 248 million adults. Thus, the total cost of such a UBI would be about 5.2 trillion dollars. This would exceed total expenditures in 2019 of 4.4 trillion dollars, of which 2.7 was for the social safety net (entitlements–social security and welfare). Total Federal tax revenue in 2019 was 3.5 trillion dollars of which 36% or 1.26 trillion dollars was from payroll taxes (social security and Medicaid and Medicare). This left a staggering deficit in 2019 of almost one trillion dollars that had to be borrowed from China and others when our economy was at full employment and should have been in surplus. And now look at our shocking deficit in this pandemic year! But that is another story.
The goal of this note is to illustrate the significant progressivity that would exist with a flat rate consumption tax in place of the corporate and personal income taxes and the payroll tax when replacing existing safety net expenditures with a UBI.
The original rational for the regressive payroll tax to pay for social security pensions was that social security was a traditional retirement program funded from the savings of each pensioner. The assumption was that the pension it paid reflected the money that each worker paid into the so called but misnamed social security trust fund. In short it was characterized as what we call a defined contribution system (you get what you saved) when it was in fact structured as a defined benefit system (you get a defined amount no matter what you actually paid in). In fact, as Americans lived longer and longer, thus enjoying more and more retirement years, the system collapsed into a basically pay as you go system (today’s workers were paying for today’s retirees’ pensions). The trust fund has very little savings in it. So instead of the payroll tax funding the worker’s future pension it became a regressive tax funding current retiree pensions. The payroll tax should be abolished. “Saving Social Security”
A flat tax (whether on income or consumption) has many economic virtues, with simplicity at the top of the list. But a flat rate rubs some people the wrong way who think that the wealthier should pay more tax than implied by a flat rate. My sense of fairness calls for someone with twice the income (if we are focusing on an income tax) to pay twice the tax. That is exactly what a flat rate tax (the same tax rate for everyone whatever their income level is) provides. Whether we go for an income tax or a consumption tax we should forget about the corporate income tax. It is more trouble than it is worth in a world in which many if not most companies operate globally (i.e. in many different tax jurisdictions). It only contributed 7% of total Federal tax revenue in 2019 and unfairly taxes the company incomes of company owners twice. “Principles of Tax Reform”
A flat personal consumption tax that would raise the same revenue as raised by all Federal taxes in the U.S. in 2019 (3.5 trillion dollars) would require a 24% rate. But that revenue did not cover all of the government’s expenditure as noted above. In addition, replacing existing safety net expenditures of 2.7 trillion dollars with a UBI of 18,000 dollars per adult and 9,000 dollars per child (5.2 trillion dollars) would result in total Federal government expenditures in 2019 of 6.9 trillion dollars or 2.5 trillion dollars higher (5.2 – 2.7). A flat consumption tax rate of 47% would be needed to raise 6.9 trillion dollars. This seems very high for two important reasons. First it assumes a balanced budget for the actual level of defense and other non-entitlement expenditures in 2019, i.e. it raises almost one trillion dollars more than the government actually collect in 2019. Secondly it is financing the additional 2.5 trillion dollars for the UBI from which the higher tax would be paid, i.e. the net tax would be lower.
Though the marginal tax rate would be flat (the same for everyone), the resulting tax burden would actually be quite progressive. To provide a rough idea of the net progressivity of the UBI with a 47% consumption tax, assume that all income is consumed (this would overstate consumption some for higher income families). The poorest families, those who have no income other than the UBI, and assuming a family of two adults and two children, would pay no net tax and receive a net income subsidy of $28,620 or $2,385 per month. For the median family in 2019 (50% income level) the average income was $63,030. But including their UBI their total tax payments would be $55,004 or an excess of $1,004 over their UBI for a tax rate on their (pre UBI) income of 1.6%. For the family at the 80% income level, the average income was $130,000 and their total tax payments would be $86,480 or an excess over their UBI of $32,480 for a tax rate on their earned income of 25%. This is a significantly progressive outcome while preserving the flat marginal rate.
Individual states may well choose to provide assistance for individual specific purposes, as they do now, for example, for education at various levels. But at the Federal level every effort should be made to prevent such add-ons to our social safety net. If as we become richer as a whole, we choose to be more generous, the amount of the UBI can be raised (or lowered) but only for everyone equally. This would prevent individual interest groups from tacking on special assistance for themselves. The ability of such special interests to gain special favor is a major reason for the slippery slope of the creeping welfare state we now enjoy.
It is important that policies, whatever their good intentions might be, also provide good incentives for outcomes that are desirable for society as a whole. A danger with progressive marginal tax rates, is that the majority of taxpayers have an incentive to raise the rate on those with incomes greater than their own. Or at best there is no incentive for them to resist such a temptation. Soaking the rich is not only an unfair treatment of those who have prospered inventing and delivery goods and services we liked enough to buy, but it will drive them away to tax jurisdictions that better respect their property rights. One of the many virtues of a UBI financed with a flat rate consumption (or income) tax is that the only way to increase the average tax rate on the wealthy is to increase the UBI for everyone.
A UBI would fulfill our desire to help those in real need but would return the responsibility of individual decisions of how that assistance is to be used to the individuals involved. It would simplify and depoliticize the determination of who gets help and how much and would remove the burden of determining our proper tax obligation for most of us. It would thus greatly simplify the administration of such a combined program. It would better align the political incentives for the level of assistance with the preferences of society as a whole. While most people work for more than the income it generates–the self-esteem of being a useful member of society is also important–a UBI would remove the economic disincentive of many current welfare programs of working resulting from the loss of benefits when income reaches a modest level.
Warren's space 
While I also often jump to the idea of most people acting rationally with money (subject to a budget constraint), much of the current “social safety net” spending is through concealed prices for the beneficiaries. Medical care is phantom-priced at a small “copayment” instead of the hundreds of dollars actual cost, paid invisibly to the beneficiary. This practice seems to be the dominant way, to conceal the true costs to those who are “needing” them.
(My personal physician of many years tried to go “concierge” in 2010 and failed to bring along ANY of his prior patients (other than me) to make his payments, due to their belief it should still be almost “free.” Look at the “Explanation of Benefits” you get from insurance providers.)
Replacing “free benefits” with a cash grant will fall flat.
The iron rule of democracy is that “Government cannot reduce any benefit formerly provided.” Too many voters live outside any “market consciousness” about these “human rights” things, which are invented by Socialist propagandists (viz. Socialist Security, 1937).
As noted in my previous blog on UBI, I support requiring a minimal amount of the UBI be paid for health insurance.
Yes, but how much of the UBI will be paid directly to providers of anything, so as to give the beneficiaries all the Expected ‘Free’ [zero priced] services and goods they are used to? The entire basis of the “Medical Care is a Human Right” and “Food, Housing et al. are Human Rights” is based on believing that “pricing” these things is immoral, or is over the education level of the beneficiaries (typical elitist view of the poor).
So what approach do you prefer?
I hesitate to proffer any “solution” (cf. T.Sowell) but I do like in general the UBI idea. My own utopian solution would be precisely a proportional, flat consumed income method. There could be many techniques, but any tax should carry the idea of “Equality of Individuals” without distinction. This probably is measured in “money received” during the year and how it was spent, although it could be measured only the point of sale and collected/remitted by the sellers. Enforcement, or the information problem thereof, is the crux.
To keep “prices” hidden in a socialist-illusion mendacity, the providers would need to be paid directly after providing zero [invisible] priced services. That begs the questions of rate of pay, etc and a barrel of corruptions. Witness the problems in Chile last year because a subway price was being increased by a nugatory sum, but “zero [concealed] price” has created a philosophy of entitlements.
A tax and subsidy system that side stepped inflation would be nice. I wonder if Biden will promptly reverse Trump’s order that the basis of capital assets disposed in 2020 will be indexed by a factor for inflation? Big news; but not well communicated by anyone so far. I think it is a good example of justice, which happens to be social and economic too.
I would not mind a universal basic income for people on the lower end of the economic rung and using a consumption tax or a tax on financial transactions for the purposes of funding said programs and all other government functions. Just my thoughts.
Retirement from companies and Social Security, you worked and saved for it. Univeral income could not compare to what I receive with both. In this regard, I would not want Univeral income I would lose all that I work for and saved for along with medical benefits provided to retired employees who worked for years.
You would not loose anything you saved. UBI would be additional.