OPINION: FEDERAL INCOME SUPPLEMENT: FINANCIAL INDEPENDENCE FOR ALL

by Guest Contributor | Jun 6, 2011 | Opinion

INTRODCUTION

Over the decades economists have suggested many forms of minimum income, most recently the Basic Income Guarantee or BIG which is an unconditional regular payment from the government to everyone. The objective of this paper is demonstrate the financial feasibility of a specific $12,000 per year per person U.S. federal government program financed entirely by cutting only existing federal welfare associated programs and changing the federal personal income tax to a flat rate of 16.2% but allowing no deductions. This program would not add to nor reduce the federal deficit. Other potential avenues for federal deficit reduction such as defense, Medicare, Medicaid, foreign aid, wealth taxes or gas taxes have not been preempted.

FEDERAL INCOME SUPPLEMENT

The Federal Income Supplement (FIS) program would take the form of an unconditional taxable government payment of $12,000 each year to every adult US citizen. The cost would be approximately $2.6 trillion per year for the 218 million recipients. Half would come from eliminating multiple forms federal welfare and reduction of other federal programs. The other half would come from a 16.2% flat rate personal income tax with no deductions. For the sake of greater income equality, Progressives would give up sacred social programs such as Social Security and welfare. Libertarians would buy into income redistribution for the sake of major reductions in the size of government. It would not increase the federal deficit.

A convenient truth is that not everyone needs to work. Full employment is not necessary for the production of sufficient goods and services for everyone. Not everyone needs to work fulltime, but everyone needs money to buy these goods and services

This Federal Income Supplement (FIS) is a straightforward uncomplicated solution with little government intrusion and little opportunity for fraud, abuse or bureaucracy. It is similar in concept to the current Alaska Permanent Fund annual dividend and a proposed Basic Income Guarantee (BIG).

The following direct savings and increased income tax revenues would finance the entire cost:

1. Elimination of all Federal welfare programs
2. Elimination of Social Security
3. Elimination of Federal unemployment benefits
4. Elimination of Minimum Wage laws
5. Elimination of Farm Subsidies
6. Elimination of Federal subsidies for student loans
7. Elimination of Federal retirement breaks for employers and employees
8. Elimination of Federal financial benefits for married couples
9. Elimination of Federal tax exemptions for “non-profits”
10. A flat 16.2% Federal income tax rate and elimination of all deductions

The benefits would be:

1. Elimination of poverty
2. Elimination of unemployment
3. Maintenance of a viable economy with only partial employment producing enough goods and services for everyone
4. Decoupling of old age income from employment
5. All citizens would pay federal income tax, becoming stakeholders with greater interest
6. Elimination of the bulk of retirement tax breaks going to the wealthiest
7. Security for people of any age or any circumstance who are not employed
8. Elimination of the minimum wage would make the US labor more flexible and competitive in the global market
9. Drastic simplification of the tax code

It is different from welfare or unemployment as it is paid out to everyone. There is no stigma. It is not lost by working. It is different than a negative income tax because it is issued as a separate payment similar to how Alaska pays oil dividends to each resident. It can be characterized as a birthright, a common share of America that pays a dividend, or as an inheritance, or as a trust fund.

Financial Summary (in billions)

Please note that all these program reductions are at the Federal level and do not necessarily affect any welfare programs at the state or local level. Also, these program reductions for FIS only affect welfare related programs. This FIS program does not reduce or increase the federal deficit. Other federal programs such as Defense, Medicare, Medicaid, and Foreign Aid are not affected. Cost reductions in these Federal programs are still available for reducing the federal deficit.

CALCULATIONS

Replace Social Security with FIS

Reductions in Discretionary Spending from Obama 2012 Proposed Budget (1)

Reductions in Mandatory Spending from Obama 2012 Proposed Budget (1)

CONCLUSION

The numbers can work. Real incomes would be increased by more than 50% for individuals now receiving maximum welfare benefits, those making minimum wage and students with federal loan support. Middle-income individuals would realize a modest net income increase that would decline to zero for those making about $125,000 per year. Individuals now making over $125,000 would realize a lower net income.

Notes:

1 Resident Population by Sex and Age 198-2009, US Census Bureau
2 Table 42 Foreign Born Population 2009, US Census Bureau
3 Table S-4 Obama Proposed Budge 2009, Office of Management and Budget
4 Table 2.1, Personal Income and Its Disposition Bureau of Economic Analysis
5 Table 4.3 Actual and Projected Capital Gains Realizations and Tax Receipts, Congressional Budget Office.
6 Social Security Administration, Pg. 165, Obama Proposed Budget 2009, Office of Management and Budget.

OPINION: Why Jay Hammond favored a larger dividend, higher taxes, and smaller government

by Michael Howard | May 30, 2011 | Opinion

It might be an exaggeration to say that former Alaksa Governor Jay Hammond, the person responsible more than any other for the Permanent Fund Dividend, was a republican thinker in the tradition of Rousseau or Jefferson. I certainly don’t know enough about his history to make this claim. But his reflections on the Alaska Permanent Fund (APF) and the Permanent Fund Dividend (PFD) do echo some important themes from that nearly abandoned republican tradition, and may partly explain why Hammond was often at odds with others in the Republican Party over the dividend, taxes, and economic development. The success of the Fund and Dividend may suggest a model for leaders in any party who want to promote republican ideals of citizen participation, equality, personal independence, and government that serves the common good rather than special interests.

At a workshop in which I participated in Anchorage on the PFD in April 2011, the Alaskans who had for decades studied the Fund and Dividend, and participated in their creation, all agreed that distributive justice played no part in the debate, and thought that had the Dividend been framed as a way to reduce inequality or end poverty, it never would have passed. The primary case for the Dividend was that it would create popular support for the Fund, and thus prevent the legislature from wasting money. Nevertheless, it is clear that distributive justice informed Hammond’s thinking about the Dividend, and partly explains why he favored dividends over competing policy proposals.

This is most obvious in the proposal, which passed despite Hammond’s opposition, to abolish the income tax and fund Alaska’s government with oil revenue. Hammond would have preferred the continuation of income taxes while paying larger dividends from larger investments of oil revenue in the Fund. One reason is that by repealing the income tax, “you’ll cut the one string connecting the citizen’s pocketbook to the government purse, and see state spending soar….[By [e]liminating the income tax…[n]ot only will we reduce our means, we’ll cut the one prime restraint on government spending” (265). Paying taxes makes us vigilant about what is being done with our tax dollars. It helps to keep us engaged as citizens. If we stop paying attention, we also get robbed.

This is clear in the second reason Hammond gave for continuing income taxes, that has to do with distributive justice: Eliminating, capping, or reducing the possible dividends paid out to citizens, in order to abolish income taxes, has a regressive effect on income distribution. “The most regrettable aspect of income tax repeal is that it exerts pressure to invade the Permanent Fund to replace the money lost by income tax repeal [pressure that will grow as oil revenue declines—MH]. This, of course, will shift the burden for state spending entirely from those who can best afford to pay taxes—including the non-residents who make up about a quarter of our workforce—to the shoulders of each and every Alaskan, regardless of income. None would feel the burden more than the low and middle income groups” (266). In contrast, funding government from income taxes and permitting a higher dividend would give a bigger proportionate boost to the incomes of low and middle income groups.

Hammond points out that the abolition of income taxes in effect created hidden taxes. Proposals to cap dividends in order to allow more APF money to be used for government spending “equates with imposing a head tax on every Alaskan and only Alaskans—regardless of income…. it never makes more sense to cap dividends than to simply ratchet up taxes to raise the same amount. In effect, capping dividends taxes only—and all—Alaskans. Increasing most taxes spreads the burden to those best able to pay—and also includes transient workers who currently remove so much wealth from our state ” (320–22).

The dividend, according to Hammond’s estimate, “is but one half of the earnings derived from investments of roughly only one-tenth of their oil wealth.” If all the wealth were distributed in dividends, each Alaskan would receive an additional $6,000 per person per year (in 1993). By funding government with this oil revenue instead of from taxes, Alaskans are in effect paying a regressive head tax, falling heaviest on those who can least afford to relinquish this wealth. But because it is not taken out of their paychecks, the tax remains hidden. A large dividend would contribute to personal independence. Hammond speculates that “were every Alaskan annually granted his full per capita share of the wealth we could eliminate or vastly curtail all welfare programs, unemployment insurance and subsidies” (319).

The supporters of income tax abolition, he notes, are first of all the wealthy who stand to benefit from lower taxes more than they would gain from larger equal per capita dividends. Secondly, a legislature flush with money that no one is watching becomes a tool of special interests. Hammond says to proponents of income tax repeal,” “though you seem perfectly willing to cut down on the little guy’s ‘living’ by slicing social programs like welfare, you seem unconcerned about boosting ‘living’ for select interests through subsidies such as lower than market rate loans and other ‘hidden dividends’ not based on need. Some might call that ‘corporate welfare’” (265).

Thus we find another classic republican theme, promotion of the general good over particular interests, alongside Hammond’s concerns for personal independence, progressive taxation, and more engaged citizens. All of these ends are well served by a large dividend and funding of government through income taxes.

There are some blind spots in his thinking. While he recognizes the legitimacy of government spending on the basis of need or “constitutional obligation”, he seems not very sensitive to the case to be made for government spending for public goods. There are some goods we all benefit from that the market will not deliver efficiently, no matter how much income we have. And his outlook is narrowly nationalistic, aiming for what is good for all Alaskans (not even all Americans), as is evident in the above quotations referring to non-Alaskans. (In his original dividend proposal, found unconstitutional by the Supreme Court, Hammond wanted those who had lived in Alaska longer to receive larger dividends.) Why, one might ask, should Alaskans enjoy a large dividend because of Alaska’s oil, while Vermonters, say, with fewer resources, could only give themselves a much smaller dividend? Shouldn’t the unearned natural wealth of the United States be shared equally by all Americans? Or, to go a step further, shouldn’t the natural resources of the earth be shared equally by all of its inhabitants, not just those fortunate to be born on top of rich deposits of oil or other wealth? This of course is not a blind spot peculiar to Hammond or political thinkers in the republican tradition, and getting beyond it in practical politics will require the strengthening of institutions and an ethos of solidarity at the federal and global levels. As these emerge, the global community may have something to learn from the example of the Permanent Fund Dividend, including the thinking of its strongest advocate.

All references are to Jay Hammond, Tales of a Bush Rat Governor (Fairbanks/Seattle: Epicenter Press, 1994).