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Andrew Yang’s Universal Basic Income Proposal (UBI) – does it add up?

Here at Life Itself we’ve had a longstanding, though sceptical, interest in Universal Basic Income (UBI) proposals. So we were excited to see this as a major plank in Andrew Yang’s presidential platform under the name of the “Freedom Dividend”.

Yang may be an outsider and a longshot candidate but it’s still good to see this and its indicative that these ideas are returning to the mainstream. At the same time, from prior experience we are a little sceptical for UBI proposals as there is a tendency for them to be rather vague on how they would work financially — it’s great to say that everyone should get $1k a month but where does the money come from?

Below we summarize the proposal and do a back of the envelope analysis. The rough analysis confirms what I suspected: this is an exciting and ambitious proposal but one whose financial implications are enormous and not very worked out. Based on our rough calculations, this proposal would require approximately $3 trillion in additional spending, 1/3 of which is unsourced and a 1/3 of which depends on generous economic growth projections. This represents an approximately 60% increase in the federal budget as of 2018.

Overview of Yang’s Proposal

For an overview see: https://www.yang2020.com/what-is-freedom-dividend-faq/

In short it’s $1k a month for every adult American.

There isn’t a lot of detail as far as I can tell. There a good set of FAQs more focused on the political than the details e.g.

Isn’t this Communism/Socialism?

No. Communism is, by definition, a revolutionary movement to create a classless, moneyless, and stateless social order built upon shared ownership of production. With Socialism, the core principle is the nationalization of the means of production – i.e. the government seizes Amazon and Google. The Freedom Dividend is none of those things and actually fits so seamlessly into capitalism, it is projected to grow the economy $2.5 trillion in eight years.

Really, the Freedom Dividend is necessary for the continuation of capitalism through the automation wave and displacement of workers. Markets need consumers to sell things to. The Freedom Dividend is capitalism with a floor that people cannot fall beneath

Analysis

Summary: $3tn needed, 1/3 or which unexplained and 1/3 depends on generous economic growth projections

He estimates that $150bn – $450bn (?? – second number he does not specify) comes in savings from current spending and rest is new spending. This represents ~60% increase in the federal budget as of 2018.

Digging in

There are ~240m americans over 18 in 2019 (234m according to census https://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf and now 9m more in total since 2010 or which > 60% are over 18).

240m * 12k = ~$3tn (current US GDP in 2019 was 19tn so this is around 10% of GDP)

Here’s how he proposes to pay for it:

How would we pay for the Freedom Dividend?

It would be easier than you might think. Andrew proposes funding the Freedom Dividend by consolidating some welfare programs and implementing a Value-Added Tax (VAT) of 10%. Current welfare and social program beneficiaries would be given a choice between their current benefits or $1,000 cash unconditionally – most would prefer cash with no restriction.

A Value-Added Tax (VAT) is a tax on the production of goods or services a business produces. It is a fair tax and it makes it much harder for large corporations, who are experts at hiding profits and income, to avoid paying their fair share. A VAT is nothing new. 160 out of 193 countries in the world already have a Value-Added Tax or something similar, including all of Europe which has an average VAT of 20 percent.

The means to pay for the Freedom Dividend will come from 4 sources:

  1. Current spending. We currently spend between $500 and $600 billion a year on welfare programs, food stamps, disability and the like. This reduces the cost of the Freedom Dividend because people already receiving benefits would have a choice but would be ineligible to receive the full $1,000 in addition to current benefits.

    Additionally, we currently spend over one trillion dollars on health care, incarceration, homelessness services and the like. We would save $100 – 200+ billion as people would take better care of themselves and avoid the emergency room, jail, and the street and would generally be more functional. The Freedom Dividend would pay for itself by helping people avoid our institutions, which is when our costs shoot up. Some studies have shown that $1 to a poor parent will result in as much as $7 in cost-savings and economic growth.

  2. A VAT. Our economy is now incredibly vast at $19 trillion, up $4 trillion in the last 10 years alone. A VAT at half the European level would generate $800 billion in new revenue. A VAT will become more and more important as technology improves because you cannot collect income tax from robots or software.

  3. New revenue. Putting money into the hands of American consumers would grow the economy. The Roosevelt Institute projected that the economy would grow by approximately $2.5 trillion and create 4.6 million new jobs. This would generate approximately $800 – 900 billion in new revenue from economic growth and activity.

  4. Taxes on top earners and pollution. By removing the Social Security cap, implementing a financial transactions tax, and ending the favorable tax treatment for capital gains/carried interest, we can decrease financial speculation while also funding the Freedom Dividend. We can add to that a carbon fee that will be partially dedicated to funding the Freedom Dividend, making up the remaining balance required to cover the cost of this program.

Summarizing

  1. Current spending: ?? unclear how much he reckons we would save out of $500-600bn on current welfare. He estimates $100-200bn from savings due to lower costs elsewhere in the system.

  2. VAT: $800bn in new revenue. (assume no displacement here — though he does seem to imply falling income taxes happening anyway)

  3. Economic Growth: $800-900bn. This is one to be sceptical of as it is a) hypothetical b) almost always optimistic c) so often used — it is the go to device new policy proposers on right and left – give out a massive tax cut, no problem the economy will grow so much will have more tax revenue!

  4. Tax on top earners and polluters: this will pay an unspecified amount but one sufficient to make up the balance. Our estimates on pollution tax suggest ~$250bn (see below) but he does not specify this in detail so I’m cautious (see further analysis below). The financial tax would yield ~$50bn a year. So a total for $300bn.

In short, he proposes paying for this via 10% VAT + replacing current welfare. But that still leaves more than half the additional spending unfinanced and the rest comes from economic growth plus some hand-waving.

Adding it up we have: $1.8tn defined (of which $850bn is hypothetical from growth) + unspecified savings in welfare + unspecified tax. Welfare is max $300bn (upper bound of 50% of current $600bn as a good amount of that spend is stuff like medicare that won’t be substituted). This leaves $900bn gap plus potentially generous assumption of $850bn in economic growth (which would take time to happen anyway).

In perspective

US Federal budget for 2018 had $4.1tn in spending and $3.3t in income.

Assuming generous numbers for savings in spending, Yang’s proposal implies at least $2.5tn increase in federal budget spending. This is around 50% increase in the federal budget.

Appendix: Taxes on Top Earners and Polluters

Carbon fee

https://www.yang2020.com/policies/carbon-fee-dividend/

As President, I will…

Propose a carbon fee and dividend system that:

Sets an initial carbon tax of $40/ton, which would increase in regular intervals. Use that tax to fund, after administrative fees:
(50%) The Universal Basic Income
(50%) Projects that are enhancing efficiency of fossil fuels or increasing availability of renewable resources
Create a border carbon adjustment to protect American goods that would:
Charge a fee on imports from countries that don’t impose a similar carbon fee, or some type of carbon tax.
Provide a rebate on exports to countries that don’t impose a similar carbon fee, or some type of carbon tax.

Emissions in the US in 2017 were 5.7bn tonnes of CO2 equivalents^1.

At $40 a tonne this => ~$250bn in revenue. (Though it may also mean some higher energy prices – i guess this is offset by the freedom dividend).

Financial Transaction Tax

https://www.yang2020.com/policies/financial-transaction-tax/

Propose a 0.1% financial transaction tax that would raise as much as $50 billion per year that will be used to help fund Universal Basic Income.