A Universal Basic Income Part III – Cost

So I’ve talked about what a UBI is, and about some benefits. Now let’s get down to the crunchy bits. I’m hoping to show here in a fairly clear way that a UBI is not a Utopian pipe dream, but an affordable, sensible alternative to the status quo.

Numbers

For the purposes of this article I’ll be setting the population of the United States at 316,176,000 persons. According to census data, about 12.4% of them are over 65 and 25.7% are under 18. I’ll also be using all budget, spending, and other numbers from 2012, as they are the most recent for which I can fill in all necessary blanks.

The United States’ GDP is estimated at 15.7 trillion dollars, just for scale. That’s about $49,655 per man, woman, and child. The US federal government spent $3.54 trillion, or $11,196 per person in 2012. 20% of that goes to defense. 20% goes to medicare/medicaid. Another 16% is for other vital government programs (transit, federal parks, science research, education, etc) and about 10% is to pay interest on the national debt.  That leaves us the 34% of federal spending that roughly corresponds to what currently is dedicated to Social Security, welfare programs, food assistance programs, and unemployment benefits.

So we’ll consider $1.23 trillion of Social Security, welfare, food stamps, and unemployment available to us for our UBI, as it will be replacing those programs, or about $3890 per person per year. That’s not quite enough to build a useful UBI from, though, so let’s take a closer look at the federal budget.

Hidden Money

Tax expenditures are loopholes in the tax code that the US government uses to incentivize certain private sector purchases and practices. It’s “free” money the government gives to some people and not others, just like social security, welfare, and food stamps. Instead of giving the money to people for being elderly, poor, or out of work, they give it to people for making money on investments, paying interest on a mortgage, or paying for health insurance through their employer. There are a whole bunch of reasons. This money isn’t reflected in the federal budget numbers we see, because the tax revenues are not collected and they don’t record this action as spending. Rest assured this is a government outlay. Think of the government taxing the full amount and sending a refund check to the people who meet the criteria.

I want to make this clear: this is money the government is already taxing and spending, it’s just hiding the receipt of taxes and outlay of money using the tax code as a screen. Economists agree on this, and they generally do not like tax expenditures. Tax expenditures warp the economy and are an inefficient method of allocating resources or incentivizing behavior.

The amount of money we spend on these items may stun you if you’ve not heard about tax expenditures before. We’re looking at an additional 1.2 trillion dollars spent in 2012. That’s about 25% of the total spending of the US government. It’s an additional $3795 per person per year. So we’re at $7685 per person per year that the government already hands out to individuals. This is just a calculation, no taxes have been raised or spending amounts increased.

Changes, Not Additions

This is the heart of my argument for a UBI: we already have one, it’s just very poorly implemented. We already hand out 1.23 trillion in assistance plus 1.2 trillion in tax expenditures; all money for “nothing”. Instead of a twisted tax code that incentivizes behaviors in unknowable ways and a safety net that creates Cliffs of Success, let’s distribute the money more fairly. Let’s give everyone a regular, dependable UBI and reap some of the benefits. We don’t need to raise taxes to do this, or to deficit spend any more than we already are. This money is already being divvied out to people, we just need to spend it in a smarter way.

What isn’t smart about tax expenditures? That’s a topic probably far beyond this UBI proposal, but I’ll give some bullet points.

  1. They incentivize bizarre behavior, skewing markets. While no one would buy a house for the mortgage interest break, the difference the tax expenditure causes people to buy who otherwise would not. This can contribute to negative events like the housing bubble from 2000 to 2008.
  2. They’re hidden in the tax code. It’s easy to see how much the government spends of defense, just go look at the budget numbers. If you want to know how much it spends on a tax expenditures, though, you need to dig a little deeper into tax receipts and make a calculation yourself (or use another third party number).  As such it’s easy for the government or politicians to pretend that this is not spending.
  3. They’re regressive, overwhelmingly benefiting the rich. Since you have to make money to get a tax break on it, tax expenditures naturally benefit wealthier individuals. It’s using loopholes like this that some very wealthy persons are able to get their tax rate very, very low.

In addition to these direct problems, we miss out out on many of the benefits of a real UBI when we use tax expenditures for certain behaviors instead of distributing the money equally to all Americans. Things like the Cliff of Success and workplace injustice are not addressed without a reliable UBI.

Put simply, right now we’re getting none of the benefits of a UBI and all of the drawbacks.

So let’s get to work. Our starting UBI pot is 1.23 trillion in the budget plus the 1.20 trillion in tax expenditures, for a total of 2.43 trillion dollars.

UBI for Children

Children obviously can’t get the full amount, so let’s allot them less per year – say 20% of what an adult would get. We’ll give it to their guardian, since they’re too young to appropriately handle the money themselves. Yes, that could incentivize families to have more kids, but I’ll cover that issue and other potential problems in a later post.

So we have our pot of 2.97 trillion, of which we’ll take 25.7% (proportion of kids in the population) times 20% (the amount we chose above), or 0.12 trillion dollars set aside for kids, coming out to $1537.12 per child per year or $155 per month.

UBI for the Elderly

Let’s consider the elderly next, meaning those over 65 years of age. The elderly already get a UBI – it’s called Social Security. I don’t believe it’s fair to decrease the amount they are already receiving, so I propose scaling the UBI amount so that as a person ages they receive a slightly larger payment, until we arrive at the current $14760 per year value social security provides to average retiree.

Our pot is at 2.31 trillion dollars since we already reserved some for minors, and seniors make up 16.69% of the remaining adults to provide a UBI for. We’re allotting seniors 150% of the standard rate to get them to the current social security values, giving 2.31 * 16.69% * 150% = 0.58 trillion dollars to set aside for seniors. That’s $14718.48 per senior per year, right in line with what’s currently provided.

UBI for Everyone Else

This part is easy. Our remaining UBI pot after taking care of children and seniors is 1.73 trillion dollars. We have 195 million adults left to provide for, which gives us $8829.50 per non-senior adult per year. This is the standard adult UBI.

Comparisons

Let’s see how this works out in a few real-world scenarios. We’ll compare the way things are currently with how they’d be under our UBI proposal.

Scenario 1 – Poverty

Consider an unemployed single person with no income and a single child.

Current – $8,604 per year

Due to different state laws, the amount of public assistance benefit for which the person is eligible varies wildly. Looking at very rough averages, we’d have $367 in monthly SNAP (food stamp) assistance along with $350 in TANF (welfare) assistance. The total is $8604 per year. As the person we’re considering is unemployed, he or she wouldn’t pay income taxes.

UBI – $10,367 per year

Under our new system, we’d have $8829.50 for the parent and $1537.12 for the child totaling $10366.62 per year, or $863.89 per month. Not a great amount to live on with a child to support, but better than the $8604 per year given above. If the parent is able to find work, her or she would be strictly better off since she’s getting that income no matter what until his or her child is 18 years old. He or she has more stability since her benefits will not run out; she can count on them and things like signing a long term lease become much more viable as potential landlords know he or she will have money to pay.

Scenario 2 – The American Dream

Consider a married couple with a low income, only one of whom has steady employment, with two children. We’ll put their yearly income just above the poverty line, $27660.

Current – $33,676 per year

This family qualifies for SNAP, so we’ll allot them the maximum $668 in monthly assistance for a family of four, or $8016 per year. Their gross total income, then, is $35676. They do pay a small amount of taxes, mostly social security taxes on their income, we’ll call it $2000. This family doesn’t earn enough to do itemized deductions, so there is no change to consider from the removal of tax expenditure handouts for UBI. So their total net income is $33676 per year.

UBI – $46,393 per year

Under our new plan, their yearly income would be the $27660 they make in wages + 2 * 8829.50 + 2 * 1537.12 – $2000 = 27660.00 + 17659.00 + 3074.24 – $2000 = $46393.24 per year. It’s clear that this family is much more financially secure than without the UBI; they can save money if they wish towards educations for their children or to make larger purchases (such as a home). Perhaps most importantly, if they lose their income stream from work for any reason (lay off, medical emergency, or otherwise), they will have uninterrupted access to their UBI and stand a much higher chance and not suffering repossession or foreclosure of their assets.

Scenario 3 – Upper Crust

Consider a married couple with high income and two children. Say they make $300,000 dollars per year, and they have a mortgage on a large home. They have investments, make charitable donations, and take advantage of numerous tax expenditures.

Current – $243,381 per year

This example tests my commitment to crunching numbers for a blog post. The tax code is so complicated, and there are so many factors, that it’d take me far too much time to process the likely outcomes. So I cheated; I used this super-simplistic tax calculator to check the possibilities. Assuming $10,000 in state taxes, $15,000 in mortgage interest, $10,000 in charitable donations, $5,000 in job-related costs, and $15,000 in child care costs, the family would owe about $61,849 for the year in federal income taxes according to the calculator. With none of those offsetting items, they would owe $69,472, meaning they are getting $7,623 in yearly tax breaks from the federal government. Note that I believe this number would go up if we took into account a few more situations, and playing around with other calculators I got their tax bill as low as $56,619, so we’ll use that number instead.

So their final income is $300,000 – $56,619 = $243,381, or just about a 20% total tax rate.

UBI – $251,261 per year

Under our new plan, their yearly income would be the $300,000 they make in wages + 2 * $8,829.50 + 2 * $1,537.12. They would lose some money they’d previously gotten from the government as tax expenditures; meaning they’d pay their full tax amount of $69472 we calculated above. So their final take is $300,000 + $17,659.00 + $3,074.24 – $69,472 = $251,261.24. Note that this is actually more than they were making under the previous complicated tax code; while they’re spending more on taxes, they’re UBI means they are only giving up 17% of their cash to the government per year. Even a very wealthy family would benefit from a UBI; tax expenditures definitely primarily benefit the very wealthy.

Scenario 4 – Retirement

Because we specifically engineered our plan to turn the UBI into a value matching that of social security, there should be no change for the very old. Their benefits will remain the same.

Conclusions

So that’s our UBI. About $1.5k peer child per year, $14k for a senior citizen, and $8k for everyone else. Peg those numbers to whatever your preferred cost of living measure is and forget about it.

We see the biggest help of a UBI goes to the low-income persons. They almost double their income. Options open up for young families that simply wouldn’t be there before. Notice that even a wealthy family sees a small benefit to their income as well. All this is accomplished without increasing government spending above current levels. That’s smarter spending.

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