How to fund a Universal Basic Income in the USA

This is a guest article written by Jon Wood. If you want to be part of the growing movement for Basic Income, you can Donate to the cause, Join the Mailing List or Join us on Facebook and Twitter.

One of the most common problems for basic income cited is the fact that it is so expensive. I mean, if we are going to give ten to fifteen thousand dollars a year to everyone, that costs a lot of money! This gives many people a reason to claim that basic income is unfeasible. Today, I hope to put a dent in this myth by giving a somewhat detailed plan regarding how basic income can be funded. To give some disclaimers, I will admit, first of all, that I am not an expert on the federal budget, nor on tax policy, and as such, my ideas may have some limitations if put into practice. However, in theory at least, basic income is very feasible and would not break the bank.

Potential Savings

Before we go into funding the actual universal basic income, we need to look at the United Stated Federal Budget and understand how it works. Looking at table S4 of the summary charts for the federal budget on the White House website, we can see how our current federal budget for 2014 is $3.627 trillion. This includes $615 billion for defense spending, $860 billion for social security, $834 billion for medicare and medicaid, $222 billion on interest payments for the national debt, $620 billion on other discretionary programs, and $559 billion for other mandatory programs.

We will want to cut spending somewhat by removing some redundant programs in order to help make basic income more affordable. I would keep medicare and medicaid as they are, since I do not believe healthcare programs should be replaced by a single payment via basic income due to asymmetry as far as healthcare needs go in this country. Looking deeply into what is considered mandatory spending, there is about $264 billion of welfare programs that can be eliminated and replaced with the UBI supplement (see Table 1 of this pdf). I would keep many mundane programs as they are for the purposes of this article.

Social security is a contentious issue as well, because people do not want to lose access to this program. That being said, any reforms to social security should be done in such a way that most currently on social security are at least as well off as they are now. This should defuse the situation in which seniors get angry at cuts affecting them; they should not be affected much at all, and many could benefit from reforms. My idea is to give a basic income to everyone, including seniors, and then reform the formula for social security in a way to ensure they would not feel any pain from such changes.

Calculating how much a complete overhaul of social security would save is difficult, but not impossible. There are currently around 58 million people on social security. The current formula is complex and takes the top thirty-five years of monthly earnings. averages them, and then uses a three step process to figure out one’s social security payments, adjusted for inflation. They take 90% of the first $767 in monthly income, 32% of the next $3,856, and then 15% of anything above that. What I would do is just reform it where it just counts 20% of the first $4,623, and 15% for everything after that. Under the old plan, by the time we get to the 15% bracket, one would get $1,924.22 in social security payments. Under the new plan, they would get $924.60. Assuming the basic income is $1000 a month, these are equivalent in practice, and since the formula switches to 15% after this figure in both models, no one will see less money than they currently do with my social security reforms, and some may get a lot more. The mean annual benefit under the current program is $15,132 a year, which amounts to $1,261 a month. To arrive at that benefit level under the old formula, one would need to earn $2,550.44. Under the new formula, the mean benefit would be $510.09. Assuming 58 million beneficiaries make that as an average, social security would now cost $355 billion per year, which is down from $846 billion according to the breakdown of mandatory spending programs. This means we can cut $491 billion from the federal budget. Combining this with welfare, which would remove an additional $264 billion from the budget, this gives us a total of $755 billion we can remove from the budget, bringing the federal budget down to $2.872 trillion.

How much would a Basic Income be?

Now we need to figure out how much a basic income would cost. There are 313.7 million noninstitutionalized people in the US population. However, roughly 11.5 million of these were illegal immigrants, so the number is closer to 302 million. 74 million are children. assuming the same population demographics within the illegal immigration population, roughly 2.7 million of them are illegal immigrants. This means that we have an adult population of 231 million, and a child population of 71 million who may be eligible for basic income. If we make the basic income benefit $12,000 a year for adults, and $4,000 a year for children, which is roughly based off of the federal poverty line, a basic income program would cost a total of $2.772 trillion for adults, and $284 billion for children, meaning the entire program would cost $3.056 trillion. If we add the rest of the federal budget to it, this means we need to raise a total of $5.928 trillion for a basic income to work if we want to balance the budget. To maintain our current budget deficit of $627 billion, as you can find on the tables regarding the federal budget above, we would need a total of $5.301 trillion.

Raising the money

There are many taxes that could be imposed to raise this amount of money, but I would keep it simple and implement a flat tax on earned income, corporate profits, and perhaps capital gains in place of our current, complex tax system. This is beneficial for several reasons. First of all, in the real world, if we have a flat tax with no deductions except the bare minimum necessary, then that means there are far fewer loopholes that can be exploited in the tax code, which increases compliance. Second of all, it would be simple for most people and would allow the tax to be collected on the spot, rather than needing people to wait until the end of the year to file taxes. Third, for the purposes of this discussion, it is simple to demonstrate how the money can be collected. Finally, it fits my personal ideology. I believe taxes should be placed on those with the ability to pay, and with a basic income, any income above the minimum standard basic income promises would be extra income earned from wages that people could have deducted from their paychecks. Moreover, despite being flat, such a system is progressive in practice, considering how basic income acts like a massive tax refund. Most people would likely pay less in taxes under a flat tax with a basic income than the status quo, and such a plan would also greatly reduce income inequality.

In order to find out how much money we can raise, we need to look at revenue sources. We collect about $275 billion in customs duties, excise taxes, estate taxes, and other miscellaneous receipts according to table S-4, which I have been referring to for the duration of this article. My plan would also tax capital gains relatively highly, which are not included in the national income figures below. However, it is difficult to determine how much revenue would be derived from them because 1) I have not been able to find relatively recent data on the subject, 2) capital gains realized seem to vary year to year, 3) tax rates heavily influence realized capital gains, and 4) it seems impossible to collect the nominal rate for capital gains anyway. Together, these mean that it is difficult, if not impossible, to know how much revenue will be brought in from year to year. If we assume a very conservative $25 billion in revenue, we can reduce our above budget goals by a total of $300 billion, taking the above taxes into consideration. This means we would need to raise between $5.001 and $5.628 trillion from the flat taxes, depending on how much deficit reduction we want to do.

The most recent numbers from the Bureau of Economic Analysis (table 2.1) claims personal income is currently sitting at $14.801 trillion, as of Q4 2014. However, not all of that is taxable, since some of it comes from government programs that would be replaced by basic income, or should not be taxed anyway. There’s $7.458 trillion in wages and salaries, and an additional $1.811 trillion in supplements to salaries that would be taxed in one way or another. “Proprietors’ income with inventory valuation and capital consumption adjustments” accounts for another $1.387 trillion. This seems to account for small business revenue, and not all of it is taxable, because we would like small businesses to be able to deduct for business expenses and the like. In 2010, when this number was $1.196 trillion, $929 billion of this was deductible, which means only about 22.3% of that figure was taxable. If we apply the same percentage to the most recent number, that means we can only tax about $303 billion of this figure or so. “Rental income of persons with capital consumption adjustment” accounts for another $648 billion, and seems to count profits derived from rental properties and things like royalties, patents, and land rights. I will assume it is all taxable.  Finally, “personal income receipts on assets”, which in previous iterations of this chart seemed to allude to corporate profits, accounts for another $2.138 trillion. Taken together, this amounts to $12.358 trillion. Applying the flat tax, we would need a tax of 40.5% to maintain our current budget deficit, and a tax of 45.5% to balance the budget. This seems like a lot, but it not much higher than the current maximum income tax bracket of 39.6%, and not much different than the corporate tax rate (p. 17) of 35-39%. It should also be noted that despite high nominal tax rates, for most earners, the high tax rates would be offset by the basic income, leading many people paying lower taxes, or even no taxes at all when one takes net gains or losses into consideration, as I explained above.

Effective tax before after UBI
Current effective tax rates from here, average income per quintile from here. Average basic income per household per quintile derived by weighting based on mean household size and mean number of income earners per quintile done by Scott Santens.

Other possibilities

If one wants to modify the proposal or the federal budget a bit, it would be possible to raise more revenue or save more money. On the money saving side, people have proposed a wide array of taxes that could be used to fund basic income. A few more prominent examples are ideas like the  carbon tax, land value tax, wealth tax, or financial transaction tax. It might also be a possibility to make the tax more progressive by raising rates on the rich to 50% or so, while everyone else pays closer to 40%. I do not necessarily support any of those ideas, but they are worth doing further research on.

It might also be possible to cut revenue spending in a lot of ways that I did not include in my proposals above. A reduction in the military budget by roughly $111 billion per year (page 30, which shows $1.111 trillion in cuts over ten years) could reduce the above tax rates by 0.9%. Eliminating social security and supplemental security income completely would lead to about $410 billion ($355 from social security, $55 billion from supplemental security) in savings based on my research above, and could reduce those tax rates by about 3.3%. Reforming healthcare somehow might be another option, since the US healthcare system is very inefficient for what it does, and healthcare does take up a very large part of our federal budget. Again, these are not necessarily ideas I support (except maybe defense spending cuts), but they are possibilities in how my basic income plan may be modified to reduce taxes, if the nominal rates given are too high.

Reducing the basic income benefit or restructuring it somehow is another option, although it would likely lead to higher effective tax rates at the bottom in practice because the benefit cuts would have a larger impact on one’s wallet than the corresponding tax reductions. For example, a reduction of 25% to a $9,000/$3,000 benefit scheme would save about $764 billion, reducing rates by 6.1%, but this does not necessarily mean people would be better off. A family of four (two adults, two children) that earns $50,000 per year while working would see $32,000 in basic income benefits and $22,750 in taxes, giving them a disposable income of $59,250 under the current plan with a 45.5% tax rate. However, with a 25% basic income cut that reduces the tax rate to 39.4%, they would see $24,000 in benefits and $19,700 in taxes, giving them a total income of $54,300, which is almost $5,000 less. On the other hand, a millionaire in the same circumstances would see their taxes cut from about 42.3% to about 37%. That being said, such a plan would mostly help the rich at the expense of the poor and middle classes, and should not be implemented unless one is concerned about capital flight or other negative effects on the economy that would arise from this plan, or unless they want to spent that money on other useful programs like healthcare or education. Another possibility would be to pay basic income to adults only, but this would harm lower income single mothers significantly, and still have repercussions on effective middle class tax rates among families. It would not be worth the 2.3% reduction in overall tax rates.

To be fair, these calculations assume that we can actually collect that amount of money, which could be difficult in practice due to the oversimplified nature of this demonstration and the fact that taxes can sometimes be avoided. However, I hope this demonstration proves that at least on paper, funding a basic income is feasible. Even if my plan would run into unforeseen difficulties in implementation, I am sure alternate sources of revenue could be found to make up for these faults. That being said, I hope this is has convinced you, the reader, that a universal basic income is feasible from a fiscal standpoint.

If you want to be part of the growing movement for Basic Income, you can Donate to the cause, Join the Mailing List or Join us on Facebook and Twitter.

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