Funding Universal Basic Income

Question: If a universal basic income is adopted, how will it be funded?

ABSTRACT:

In this essay we will be looking at how a universal basic income will be

funded if it is adopted. We will be taking the United States as our case study.

We will look at the arguments against the forms of funding I suggest and the

counter arguments to these as well as conclude if a universal basic income is

feasible.

WHAT IS A UNIVERSAL BASIC INCOME?

Firstly, I think it is important to touch on exactly what a universal basic

income is. According to the basic income earth network it is “a periodic cash

payment unconditionally delivered to all on an individual basis, without

means-test or work requirement” (BIEN, 2019). The idea and the concept is

quite a simple one; give a set amount of money to everyone, unconditionally.

WHY HAVE A UNIVERSAL BASIC INCOME?

Although this question deserves a separate essay entirely, I feel it is

important, again, to just briefly touch on some of the reasons people believe

we need a universal basic income. The idea of a universal basic income has been around since the beginning of the sixteenth century however the main reason many feel there is a need for it now more than ever is due to the progress of automation in the workplace. Since 1973, workers’ pay has stagnated while productivity and overall wealth have continued to rise. Average household incomes today are roughly the same as they were twenty years ago, even though our economy has doubled in size (Hughes, 2017). This means the people at the top are taking a larger percentage of the gains than they previously had been and automation has played a huge role in allowing this wage/productivity gap to widen. According to 2020 presidential candidate Andrew Yang, we are “in the third inning of the automation process” (Yang, 2019). Automation of jobs is happening and it is happening now at a faster and more impressive rate. As this happens and more people become unemployed because of it, many U.B.I advocates believe that people should share the spoils of the productivity increase from automation and receive a U.B.I of some form. This is the main argument towards initiating a U.B.I currently, however, there are many other factors which also stand as good arguments for having such a system. This leads us to the topic of the essay, what would something like this cost and how would it even be funded?

HOW MUCH WOULD IT COST?

As stated in the abstract, we’ll be taking the United States of America as our prime example and case study. To calculate the cost of a U.B.I many people assume that you just multiply the size of a monthly income, let’s say $1000 for example, by the population, and that is it. You get a number that seems expensive and unfundable (Fouksman, 2018). This, however, is wrong and misleading. It is important to understand who will be contributing and who will be gaining from a U.B.I. The people who will contribute, the wealthy, do get a U.B.I however they end up giving it back with more on top in the form of increased taxes. Therefore the cost of giving a universal basic income to those who contribute should not be counted in the overall cost of a U.B.I like many people do. Understanding this is crucial in calculating the true additional cost to the government. Also it entirely depends on the policy of the person implementing the U.B.I. For example, if U.B.I was to replace all means tested social welfare and any medical care or disability care provided by the government then the net cost to the government would be quite low. Different forms of U.B.I coupled with different policies will give a different cost each time. It’s important for this essay to understand we will be more so looking at potential availability of different ways of funding and the pros and cons of these suggestions.

FUNDING A UNIVERSAL BASIC INCOME:

1. A value added tax:

Most OECD countries get about one third of their tax revenue from taxing consumption through a value added tax. The U.S, in comparison, only makes about 18% of its levies through state and local sales taxes (Birnbaum, 2017). A V.A.T of around half of the average European rate would generate around $800 billion in the U.S. In fact, even a V.A.T rate of 5% would raise over $3 trillion in ten years for the U.S economy. This would go a long way in providing funding for any type of U.B.I policy (Tanzi, 2019). However, many see a V.A.T as regressive as it hits everyone at the same rate, regardless of what they can actually afford. Also, many critics suggest that it is not visible enough for consumers. On the other side of it, many economists believe it to be a great way of effectively raising revenue. As for the concerns that's it is not progressive enough. Economists suggest that we adjust the income tax rates to offset the burden between the rich and the poor (Birnbaum, 2017).

2. A Robot Tax:

Roughly 80% of all federal tax in the United States comes from income and payroll taxes. If a section of workers are displaced by robotics and artificial intelligence then this could seriously disrupt the tax system and the revenues of the U.S. Many suggest we tax the robotics and A.I systems replacing workers at around the same rate as we tax workers. This, in theory, generates revenue to cover a U.B.I and slow down the speed of the technology while giving society more time to adjust (Walker, 2019). The trucking industry is a great example of this and one which looks soon to be displaced by A.I and robotics. By replacing truck drivers, many who are earning around $50,000 dollars a year, with self-driving technology which does not need to rest, sleep or eat, results in massive cost savings for trucking companies. The savings from this alone amount to around $168 billion a year. Taxing these companies for using robotics like this would help move some of the money back towards the people losing out in the form of a U.B.I (Yang, 2019). The department of the bureau of labour statistics says retail salespersons, cashiers, office clerks, food preparation workers and nursing are America's most popular jobs. Most of these jobs are under serious risk of being replaced by automation (Madden, 2010). A robot tax would ensure that the automation replacing these jobs would help generate revenue which could help fund the cost burden of a U.B.I. The critics of this tax bring up the point that defining exactly what a robot is provides challenges. What separates a robot from a tool provides difficult to pinpoint as well as the question of what type of human replacing automation should be taxed. Do we tax vending machines? Also, unless all countries adopt a robot tax, you run the risk of robotics companies moving their operations from countries with a tax to ones without (Walker, 2019).

3. Social savings of a U.B.I:

Something I believe that is not considered enough is the actual social savings we would get if a U.B.I was implemented. Taking the idea that we give people just enough money to cover rent and food which is roughly $1000 a month in the U.S, we take a huge burden off of people’s backs. Life expectancy, for the first time in decades, has been declining in the U.S and other high income countries. Drug overdoses and suicide have been labelled as the main reasons for this. The lack of economic security and stability is extremely stressful and this, among other minor factors, is driving people to overdose on drugs or take their own lives (Chodosh, 2019). Finland's basic income experiment showed that a U.B.I can in fact make people less stressed and happier. “Participants said they felt happier and less stressed” (Nagesh, 2019). This would have a bigger impact on the economy than one imagines. People who are happier and less stressed tend to live longer and healthier lives, will look after themselves more, take care of and educate their children better and be more productive at work among other things. The fact that someone has a guaranteed $1000 a month for them also means, on the margins, you may help stop someone from committing a crime they would have otherwise committed or from reoffending if they get out of prison. These social costs could save the state up to $200 billion a year (Yang, 2019). Critics would agree that this kind of foresight and prediction is wishful thinking and that we cannot truly know the social impact and cost savings of a U.B.I until it is implemented and working and they would have a valid point.

4. The black economy:

The black, or underground economy, includes transactions like illegal immigrants paid in cash for work, drug deals or any cash-in-hand jobs that involves money changing hands that is not reported to the IRS. The underground economy in the United States is set to be at around 5% of its gross domestic product or around $900 billion (McCarthy, 2017). The IRS also reported that around $500 billion in taxes were lost in 2012 due to unreported wages. Imagine you are an illegal immigrant working in the U.S. Many do not even want to try become citizens as they will then have to pay taxes on the small wages they are earning. A U.B.I available to all citizens may incentive many undeclaring immigrants to look for citizenship and in the process begin paying income tax, adding a huge amount of new revenue to the government's coffers. Another huge part of the underground economy that adds to this huge number is the drug trade. Legalising the sale of narcotics and therefore getting a slice of the sales through taxation could again bring huge amounts of new revenue to the government without even considering the cost now saved on no longer having to incarcerate and police drug sales and drug users. We are seeing many states move towards this idea with states like California and Colorado, to name a few, legalising marijuana as of late. According to a report from the Colorado department of revenue, taxation from legal marijuana sales topped $200 million alone in Colorado last year (Rubino, 2018). This is only the start however. Plugging the hole in the black economy could bring a huge windfall for the government which would again help fund any U.B.I policy. Critics would argue that for one, the means to which we calculate the underground economy is not reliable enough as people are either afraid that they are giving themselves up when answering these questionnaires or are just ashamed and lie about it. More importantly, the legalisation of narcotics is a touchy subject that many would be against doing. A policy like this would probably be even harder to pass through congress than a U.B.I would in the first place (Johnson, 2016).

5. Tax the wealthy:

The most obvious form of extra funding which is likely to be employed is raising the tax rate on the wealthy. As mentioned at the beginning of the essay, workers’ wages have stagnated since the mid to late seventies while productivity and growth have continued their upward trajectory. The ones benefiting most from this are the businesses, their owners and their investors. Raising taxes on the wealthy ensures that U.B.I is not wealth creation but instead a wealth shift, moving the wealth back towards middle and low income America and, in turn, closing the widening gap between the rich and the poor. According to an article from the Washington post “ American households that earn more than $600,000 annually currently pay a 37 percent tax rate, down from the 39.6 percent rate they paid before the Republican tax law passed in 2017”. This has been a common trend in the U.S as high taxes on the wealthy have been decreasing for decades. Tedeschi, the former Obama official, found a 0.5% wealth tax on the top 1% could raise at most $3 trillion over 10 years. Also, a 1% wealth tax on the wealthiest 1 percent of households above $10 million could raise about $200 billion a year (Stein, 2019). There are many advocates for a tax increase on the wealthy however we should also address the criticism. One problem with this is that it may encourage Americans to shift their wealth overseas to avoid paying these new taxes. Also, it would require Americans to give the internal revenue service a full accounting of all the assets they own under law, however, this is trickier than one thinks. Another problem to note is that a high tax on the wealthy works in places like Sweden because people have trust in the government. They know the money will go towards public services like hospitals, transport and schooling. Americans , however, one would imagine, would have far less trust in their government to do the right thing, for an abundance of obvious reasons (Agbonlahor, 2015).

CONCLUSION:

Whether a universal basic income policy is a good idea or not is a topic for another essay. However, at least from my research, it seems as though, no matter what type of policy and at what cost, a U.B.I is in fact viable. There are viable ways for the U.S, and in turn most OECD economies, to find the funding necessary for a universal basic income. Again, the cost of implementing such a system depends on what public services you cut, if any and also how much you will give to each individual among other factors. For me, what is important is that there are numerous ways to find the money to support most U.B.I policies. U.S 2020 presidential candidate Andrew Yang is running for office based almost solely on providing a U.B.I for the citizens of the U.S. He is labeling it a freedom dividend as he believes the people of America are shareholders in the world’s biggest economy and sees there is enough money to go around. From doing this essay I have realised that there does indeed seem to be a huge potential of ways to generate the necessary income for a U.B.I system from various sources such as the huge companies in the U.S that Yang wants to tax. Whether we will see a U.B.I and whether it will be viable financially however remains to be seen.

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