Net incomes under a Basic Income system

Net incomes under a Basic Income system

In the May 23, 2017 edition of Basic Income News, Karl Widerquist laments the tendency of some basic income commentators to overstate the cost of a basic income. The typical methodology used to generate these overestimates is as follows:

  1. Obtain the population of the jurisdiction which will implement a basic income
  2. Obtain the amount of the basic income provided to each person in that jurisdiction
  3. Multiply the number in “a” by the number in “b”
  4. The product referred to in “c” is the cost of a basic income

As Widerquist points out, the reason this is an overestimate is that it fails to consider the fact that even though everyone would receive the amount referred to in “b” above, not everyone would be net beneficiaries of this amount.

Suppose the amount referred to in “b” were $10,000, meaning that under a basic income scheme, everyone would receive $10,000 per year. But in every basic income proposal I’ve seen, although the basic income wouldn’t officially be taxed, all other income would be. This means that at some income level, there would be those who’d owe at least $10,000 in their annual tax bill. Since the amount they’d owe in taxes would be at least as large as the $10,000 basic income, they would no longer be net beneficiaries. Their basic income would, in effect, have been taxed back from them. Under a basic income scheme, there would also be those who’d be net beneficiaries of a basic income but not of the full $10,000 amount. All of this might be easier to see if we did a bit of math.

Again, assume that our basic income comes out to $10,000 per year per person. Suppose all other income is taxed at a marginal rate of 25%. The use of one rate is to keep things relatively simple. Here is the key equation for the basic income system being described in this paragraph:

Net Income = $10,000 + (1 – .25) * Other Income

Now let’s play with this equation a bit. Suppose someone had no other income. We’d then end up multiplying $0 by (1 – .25) which would give us $0. And $0 + $10,000 would mean this person would end up with a net income of $10,000. That is, they’d be a net recipient of the full basic income benefit level.

Now consider someone with other income of $30,000. Multiplying $30,000 by (1 – .25), we end up with $22,500. Once we add this to the $10,000 basic income, they’d end up with a net income of $32,500. Let’s look more closely at what’s happened here. The person made $30,000 in other income. If they didn’t have to pay taxes, we’d have (1 – 0), which is just 1, instead of (1 – .25). So they’d keep all $30,000 plus the $10,000 basic income for a net income of $40,000.

Looked at this way, we see that the tax on other income is effectively a tax on the basic income as well. That is, the fact that the person with $30,000 in other income only ends up with a net income $32,500 instead of $40,000 means that $7,500 of their basic income has been taxed back to the government.

Next, let’s take a look at what happens to someone with other income of $40,000.

We’d have to multiply (1 – .25) times $40,000, ending up with $30,000. And $30,000 + $10,000 is a net income of $40,000. If this person paid no taxes on other income, we’d add their $40,000 in other income to the $10,000 basic income for a net income of $50,000. With taxation, their actual net income is $10,000 less than $50,000. That is, we’ve taxed back all $10,000 of their basic income. So this person would no longer be a net recipient of the basic income.

Finally, suppose someone had other income of $100,000. We’d end up multiplying (1 – .25) by $100,000, which comes out to $75,000. Since $75,000 plus $10,000 is $85,000, this person’s net income would be $85,000. Now if they didn’t have to pay taxes, they end up with a net income of $100,000 plus $10,000 or $110,000. But with taxes, their income is only $85,000. We see that not only has their $10,000 basic income been taxed away, so they’re no longer a net recipient of a basic income, but they’re paying enough in taxes to help finance someone else’s basic income, someone with much lower other income than they have.

If we think carefully about these examples, we see what’s wrong with some cost estimates of a basic income: they assume the tax rate in the equation above is 0%. But as I said above, every basic income proposal I’ve seen, assumes that all other income would be taxed at some positive marginal tax rate. This means, of course, that our net income equation will include a term where some positive marginal tax rate will be subtracted from 1. We used a 25% rate for illustration, but really any positive rate will do. This is because any positive marginal tax rate on other income, although not officially a tax on the basic income, is effectively a tax on basic income. And this means some people won’t be net recipients of the benefit. Understanding this point is key to arriving at better estimates of the cost of a basic income guarantee.

 

Rebalancing the mix of benefit systems

Rebalancing the mix of benefit systems

Most developed countries’ benefits systems exhibit a mixture of different kinds of benefits, and this is increasingly true of developing countries. Most run social insurance schemes of some kind (either government-run or organised by trade union, employer, or independent organisations); most have a layer of means-tested benefits; and some have universal and unconditional benefits for certain demographic groups (usually elderly people and/or children). In the short to medium term this is likely to remain the situation. This is both because complex systems tend to be path dependent ( – that is, adapting an existing system is easier than starting from scratch), and because there are good reasons for all three kinds of benefits. Social insurance represents reciprocity, with a contribution record granting a right to receive benefits when certain contingencies arise; means-tested benefits recognise that a needs-based approach can be appropriate; and unconditional benefits recognise our equal membership of society and represent a solid financial platform on which families can build. Each of the three types exhibit both advantages and disadvantages, with perhaps means-tested benefits offering more disadvantages than advantages, and unconditional benefits more advantages than disadvantages, with social insurance somewhere in between.

So the question is rarely: How can we replace the current benefits system? It is usually: How should we rebalance this mixture? In the UK, and in the medium term, no viable Citizen’s Income scheme could entirely abolish means-tested benefits. The complexity of the current system means that levels of Citizen’s Incomes that could be funded by adapting the tax and benefits system would be too low to avoid losses for low income households at the point of implementation unless means-tested benefits were left in place and recalculated.

Social insurance benefits (National Insurance benefits in the UK) are another question. If a Citizen’s Income scheme were to be implemented, would we wish to abolish National Insurance benefits? Even though they are not genuine social insurance benefits (there is no connection between the amounts collected and the amounts paid out; and the Government can alter the rates and durations of benefits at whim), many older members of the public still have a soft spot for them. However, younger members of society do not, and don’t understand them either.

The UK’s propensity to manage change in an evolutionary fashion, rather than through wholesale demolition and building afresh, means that we are likely to see Citizen’s Incomes implemented alongside social insurance and means-tested benefits. This is not a problem: at least for the time being.

The ‘people’s dividend’: A universal income proposal with real numbers

The ‘people’s dividend’: A universal income proposal with real numbers

Written by: Thomas Clarkson

This opinion solely represents the view of the author and is not necessarily the view of Basic Income News or BIEN. BI News does not endorse any particular petition or policy.

A Problem

One of the difficulties in talking about universal income is that the arguments lack punch because we discuss them in the abstract. The “People’s Dividend” (PD) petition on Change.org tries to correct that problem by asking people to sign a petition and call Congress to take action. The PD petition is different because it uses real numbers:

  • $27 trillion, the personal net worth of the one percent wealthiest (PNW1)
  • $1.5 trillion per year, the annual growth of the personal net worth of that same one percent
  • $4,500 per person, if the $1.5 trillion was re-distributed to all 333 million people in the U.S.

The PD petition proposes that the IRS annually harvest the growth of the wealth of the one percent and distribute it every year to every adult and child in the U.S. without conditions. It also urges people to take two specific actions to make that happen: 1) sign the petition and 2) call Congress.

Please Sign the Petition

If you read the petition first, or watch the video that introduces it, you will have a sufficient background for this article. Here is a link for the People’s Dividend Petition. Feel free to sign the petition while you are there.

Fun with Numbers

Before we go into the details of the proposal, it may be enlightening to compare some of the numbers given above to other things.

$27 trillion (PNW1) is:

  • about 686 percent of the Federal Budget ($3.9 trillion)
  • about 136 percent of the federal debt ($19.8 trillion)
  • about 143 percent of GDP ($18.9 trillion)
  • $81,000 per person in the U.S.

$1.5 trillion (the annual growth of PNW1) is:

  • 38 percent of the Federal Budget ($3.9 trillion)
  • 256 percent of the U.S. Defense budget ($585 billion)
  • 253 percent of the annual Federal deficit ($592 billion)
  • $4,500 per person in the U.S.

$4,500 per person is:

  • one-third of the poverty level for 1 person, which is $11,880
  • $18,000 or three-fourths of the poverty level for a family of 4 persons, which is $24,300
  • one-seventh of the median wage for workers in the U.S.
  • $450 million of added income for the population of Flint, MI, a city of 100,000 people
  • $3 billion of added income for the population of Washington, DC, a city of 675,000 people
  • $36 million of added income to the 8,000 homeless people in Washington, D.C., which is equal to one-third of Washington, D.C.’s 2017 affordable housing budget of $100 million
Are These Numbers Reliable?

The Forbes list of U.S. billionaires, as of March 21, 2017, identified 565 U.S. billionaires with a combined net worth of $2.8 trillion. This contradicts the established fact that “the personal net worth of the one percent wealthiest (PNW1) is actually $27 trillion. A lot of what is written in the popular press about wealth and income grossly understates PNW1.  Fortunately, the World Wealth and Income database (located here) is pulling back the covers on this issue. WID.world has authoritative statistics on wealth and income going back 100 years. That is where the data that supports the People’s Dividend came from. Online access to the WID.world database has been available since 2011. However, economists have been laboring on it for thirty years or more and they deserve great credit for their results. This resource makes it possible for a non-economist like me to grasp wealth inequality trends.

With WID.world data, we can avoid erroneously limiting the wealthiest one percent of U.S. citizens to those found on the Forbes billionaires list.  For example, an extrapolation of WID.world data from 2013 to 2017, indicates that the one percent includes all households with over $5 million in net worth. There are about 1,670,000 such households. I estimate that their total wealth in 2017 is $27 trillion, with an annual increase of $1.5 trillion projected. The important result that follows from getting the numbers right is that the size of the People’s Dividend payment gets large enough for people to notice. $4,500 per person is significant. That is the result when you divide the growth of $1.5 trillion by the entire U.S. population. The proposal takes data seriously and the petition includes a link, also given here, to all of my calculations and sources here.

Making It Real

Because the People’s Dividend idea is formulated as an actionable petition with known dollar results for individuals, it makes the numbers behind the universal income/wealth inequality discussion more real. For example, a person knows that their payment would be $4,500, with 99 percent paying no wealth tax.  They also know whether their household net worth is above $5 million and, therefore, they know if they are in the 99%.

It is also immediately apparent to many that $27 trillion is simply too much money for one percent of the population to have when 50 percent of the population has so little. For those less easily convinced that that is too much inequity, consider the fact that the one percent’s share of total U.S. wealth has grown from 25 percent in 1982 to 40 percent in 2017. If the one percent’s share keeps growing one point every 2.3 years, then in 23 years it will grow 10 more points to 50 percent of total U.S. wealth. By 2040, the one percent would have as much wealth, 50 percent, as everyone else in the U.S. put together. I think, at that amount, almost everyone would agree that would be much too much.

The purpose of asking people to sign the petition and contact their one Congressional Representative and their two Senators is to encourage them to think about this data, and, in the process, have it become more real for them.

High Points of the People’s Dividend

The $4,500 PD Payment

  1. The $4,500 per person goes to everyone in the U.S., but only households with PNW greater than $5 million pay the tax. A household of 2 people worth $5.1 million would pay $7,800 and receive $9,000. This means that slightly more than 99 percent of the people would be better off financially.  This should make it easier to get a majority of voters in favor of PD.
  2. The PD goes on year after year.
  3. The $4,500 is tax-free, so a dollar of the People’s Dividend is worth more to people who pay income taxes than a dollar of ordinary income.
  4. $4,500 is equal to about one-third of the poverty level for 1 person, which is $11,880. However, for a family of 4, $18,000 in PD payments is about three-quarters of the poverty level for a family of 4 persons, which is $24,300. Therefore, it would be a significant poverty fighter.
  5. The PD potentially adds a big boost to local economies. In Washington, DC, for example, a city of 675,000, the total PD payments to the population would equal $3 billion per year. This is equal to about 24 percent of the city’s 2017 budget of $13.8 billion.
  6. The PD is paid to everyone, including the one percent. Therefore, no apparatus for measuring need is needed, and virtually all the $1.5 trillion collected can go to the people.
  7. The PD would be paid out monthly like a social security check to provide a steady flow of income year around.
  8. The PD amount would vary up or down, depending on how fast the PNW1 is growing or decreasing, as it might if stock markets decline. Therefore, the PD amount is not guaranteed to be the same from year to year. This feature helps avoid deficit spending because the PD is always equal to the amount of wealth tax collected. To smooth the change in the PD amounts from year to year a moving average of collections might be used.

Alaska’s permanent fund dividend in 2016 was $1,022 per person. The PD would be more than four times that. See here.

The Wealth Tax

  1. The wealth tax is calculated so that it is equal to the year to year growth in the PNW1, estimated to be $1.5 trillion. Therefore, it represents the increase in PNW1 after the one percent has spent all they want to and paid all their taxes.
  2. The intention is to keep the wealth tax equal to the growth so that the amount of wealth does not decrease and kill the goose (PNW1) that lays the golden egg (PD).
  3. A good part of PNW1 is composed of stocks and bonds whose value can decrease in a market slump. If that happens, then the wealth tax rate would be reduced for a few years, but not eliminated, in order to allow the wealth to recover. You can see from the green and orange chart in the video that the 2008 recession caused everyone’s PNW to decrease. However, by 2013, everyone except the 50 percent least wealthy had recovered.
  4. The wealth tax applies only to every dollar over the household wealth threshold necessary to be part of the one percent. This is $5 million in 2017. A household with PNW of $5,000,001 would pay 7.8 cents in wealth tax. A household with PNW of $6,000,000 would pay $78,000 tax on the $1,000,000 of wealth over and above $5,000,000.
  5. The $5 million threshold amounts to about $500 billion leaving only $1 trillion to tax. The $1 trillion is taxed at 7.8 percent but the overall tax is 5.5 percent of PNW1. PNW1 grows on average 5.5 percent a year so the tax is equal to the growth.
The Amount of PNW1

 

  1. It is better to tax wealth than income because only “realized” income counts for income taxes, but increase in asset values results in increased wealth tax revenues whether the gain is “realized” through a sale or not.
  2. Capital gains are taxed at a lower rate when it comes to income taxes. Consequently, a lot of big earners take their compensation in the form of shares of stock. In this way, they reduce their income taxes, but a wealth tax would neutralize this tax avoidance strategy.
  3. The PNW1 amount is a comprehensive measure of the wealth inequality and considers: the effects of all other tax laws; economic forces, such as automation and globalization that reduce the share of profits going to labor; changes in government expenditures for health care and other social programs; right to work laws that weaken labor’s position; and all of the other factors that increase or reduce the concentration of wealth in the one percent. As such, it is an easy litmus test for inequality and a measure we should all watch carefully.
  4. Because the WID.world data only went until 2013, I estimated the 2017 amounts using the historical compounded growth rate of 5.5 percent.
  5. But it should not be necessary to estimate wealth amounts. Therefore, an important feature of the PD petition is that it would direct the U.S. Treasury to collect wealth data promptly and directly from banks, brokerage services and other wealth depositories, so that the public could see the PNW1 amount and other wealth distribution amounts shortly after the end of the calendar year.
  6. The petition requests Congress to appropriate extra money to the Treasury to create a wealth reporting system and a reliable means to track down wealth hidden in various tax havens.
  7. Not mentioned in the petition, but a necessary addition, would be for Congress to provide funds to Treasury to negotiate tax treaties with other countries to prevent other countries from giving our one percent a better tax deal than the U.S. This is necessary to prevent all of our “one percenters” from fleeing to other countries to avoid the wealth tax.
  8. By taxing personal wealth, the PD proposal avoids interfering in the taxation of corporations. If they become more profitable, then the shares owned by the one percent increase in value and the wealth tax harvests more.
Obstacles

There are several possible obstacles that might undermine a campaign for getting this petition signed. First, the ideas of universal income and the magnitude of wealth inequality are not well-known by the general public. Second, it might seem too “pie in the sky”, at least initially.  Third, many might buy into the common belief that any “giveaway” will ruin the moral fiber of the country and encourage laziness.  I am convinced, however, that with enough support, especially from individuals widely admired and trusted such as the Pope, Oprah or Bono, momentum could be achieved. Anyone reading this article with good ideas for getting people on board, please contact me at toclarkson@gmail.com.

Please Sign the Petition

Meanwhile, be sure to sign the petition, if you agree with it, and get one or two others to do the same – People’s Dividend Petition. Once people realize that they have skin in this game and that change is possible we may see some of these proposals become a reality.

Addressing uncertainty in basic income

Addressing uncertainty in basic income

Written by: Michael A Lewis

As someone interested in basic income (BI), I read a fair amount about the topic. I read pieces by supporters and opponents, as well as those who might be considered more neutral. I’m often struck by the degree of uncertainty concerning implementation of BI.

A popular argument for BI these days is based on concerns about the possibility of mass technological unemployment. Some in the “tech industry” contend that BI will become necessary as automation replaces more and more human laborers in the years to come. This has led to a debate among economists and others regarding whether automation will result in a net loss of jobs (for humans) big enough to warrant the need for something like BI. Both sides of this debate bring evidence to make their cases. But in the end, we simply don’t know for certain if and when automation will lead to a net loss of jobs for us human beings.

Assuming BI might be implemented in a society which would still require a fair amount of human labor power, we’d like to know what impact BI would have on people’s inclination to sell their labor or, more commonly, “work.” A BI could affect labor supply in at least two ways.

One is that people who received an income they didn’t have to work for may be inclined to work less. The second possible effect has to do with how BI would be financed. If it were financed by an increase in income taxes, this could also reduce labor supply. The reason is that a large proportion of many people’s incomes are earnings, meaning that an income tax is largely a wage tax. A higher wage tax has two possible effects on labor supply.

On the one hand, such an increase could cause people to work less because with the higher tax (and all else equal) their take home pay is smaller than it was before, creating an incentive to work less. On the other hand, a smaller take home pay means one would have to work more than before to maintain their standard of living. This would create an incentive for people to work more not less. If BI were implemented, we have no way of knowing which of these effects would dominate the other.

Leaving the labor market (but still related to it), another area of uncertainty has to do with how people would spend their time, assuming they did reduce their labor supply. Opponents of BI worry that people would use their time “unproductively”, while proponents tend to argue that individuals would engage in more care work or pursue “self-actualization” through pursuing education, writing poetry, starting a business, and the like. But if we’re being honest, regardless of which side of the debate we’re on, we must admit that we don’t have much of an idea what the relative proportion of unproductive to productive activities would be, assuming we could even agree on how to categorize activities as unproductive or productive.

A third area of uncertainty is related to personal relations and household composition. BI could have an effect on who lives with whom, who marries whom, who has kids or not (as well as how many to have), etc. As a society, we obviously differ when it comes to our values about such matters, meaning we might differ on the desirability of BI. But we don’t really know for sure how implementation of BI would affect “family life.”

Now I’m not saying we’re completely in the dark when it comes to questions of BI’s effect on labor supply, use of non-wage time, etc. Economists, sociologists, and others can draw on theory to help us think through these matters. And, by this point, there’ve been several experiments/studies (as well as more recent “startup” studies) which offer a lens on what might happen if BI were implemented. But we should be careful not to overestimate how much help we can receive from such experts, as well as the studies that have been (and are being) conducted.

Considering the many BI experiments (as well as proposed ones) around the world, we need to be cautious about what lessons might be learned. The philosopher Nancy Cartwright, well known for her work in the philosophy of science, has a phrase that’s quite relevant to this discussion: “it works somewhere.” Cartwright frequently utters this phrase within the context of discussing randomized controlled trials (RCTs), the so called gold standard of empirical research in the social sciences. Her point is that even if a well-designed RCT shows that a policy works in one context, that doesn’t necessarily mean it’ll work in another one. This is relevant to BI studies because they’re being conducted, or proposed, in a variety of different contexts. So if we find out that something works in India or Finland, that doesn’t mean it’ll work in Japan or the U.S. In the article cited above, Cartwright goes into great detail about why generalizing experimental findings from one context to another can be so difficult. For those interested in what we might learn from BI experiments, I think her work is quite instructive.

When engineers design systems, such as buildings, bridges, etc., they also must face uncertainties. They don’t know for sure what loads the systems will end up having to bear, they don’t know if there will be earthquakes, they don’t know how forceful the winds will be, etc. One of the things engineers do to deal with such uncertainties is include safety factors in their designs.

For example, suppose an engineer is designing a structure and wind, seismic, and other data indicate that it’ll have to bear a load of 1000 kg. Suppose also that the engineer wants a safety factor of five. Then the load which the structure should be able to bear isn’t 1000 kg but 5×1000 = 5000 kg. So a safety factor is a multiple used to increase the strength or robustness of a system beyond that which is thought to be required to account for uncertainty in what’s thought to be required.

Those of us designing policies don’t have the luxury of being able to use simple equations, which include safety factors, the way engineers do. But perhaps we should adopt a similar safety factor mentality. Implementation of BI would be a complicated undertaking, involving a great deal of uncertainty. Perhaps BI supporters should consider how to increase its robustness in response to labor supply reductions, as well as other unanticipated effects. I admit I’m not exactly sure how to do this. But I believe it’s something worth thinking about.

Michael Lewis

US: Libertarian VP candidate supports basic income

US: Libertarian VP candidate supports basic income

This past presidential cycle, libertarian presidential candidate Gary Johnson suggested to BI News that he was “open” to the universal basic income. Johnson’s 2012 running mate Judge Jim Gray recently laid out a proposal for broad reform and simplification of the tax code, as well as providing a guaranteed annual stipend of $15,000. The stipend would be gradually taxed away by 50 cents for each dollar. Those making $30,000 and above would not receive the stipend.

Gray said that his policy would effectively address poverty and is consistent with “liberty” and “compassion.” At the same time, it would remove the poverty traps that people in poverty face.

“Unlike today’s welfare and social security systems, this system always has incentives to work and earn the extra dollar,” Gray said.

The full interview can be found below.

 

What inspired this idea for the monthly stipend?

I don’t recall specifically. But I have always believed that institutions should regularly be revisited with an eye toward increasing their social incentives. Our tax system is terribly complex and in many ways harmful.  If it could be reformed and simplified, that would be a wonderful occasion to address all welfare issues and, along the way, address our homeless problems as well.

 

Where would the funding come from to pay for the $15,000 stipend?

Abolish all other welfare programs, and all the bureaucracies that go along with them. That should leave plenty of money to support this stipend.

 

Would there be any targeted programs that would remain, or would they be entirely replaced with the stipend system? For example, medical programs, or programs for the disabled.

The stipend would have to be weighted to address people with truly special needs. In addition, I would also employ a voucher system to facilitate people purchasing health insurance of the private market, based upon a sliding scale for need.

 

Can you explain the relationship between your proposal and expanding liberty?

Welfare systems are extremely intrusive, and in many ways inequitable. This system would be implemented voluntarily, which is consistent with Liberty, and would be far less judgmental and intrusive – all of which is fully consistent with Liberty.

 

You said we should have this safety net because “that is who we are.” What did you mean by that? 

I believe we Americans are compassionate people. If given a choice to provide for those in need, Americans would choose to assist – as long as they believed this was a workable system, and everyone understood this is not an “entitlement,” but simply compassionate.

 

How will the private sector respond to this stipend program? What new opportunities or businesses may arise that are not possible now? 

Really good questions! I believe the private sector will fully support it, for reasons provided above. And this system would also provide opportunities for people to become involved in the arts, public volunteerism and experimentation with other business opportunities, because it would provide them a back-up safety net to hedge against failure.

 

Do you think the $15k would encourage laziness? How would people respond to not being forced to work?

We will always have incentives to laziness. But, unlike today’s welfare and social security systems, this system always has incentives to work and earn the extra dollar. Our present systems punish working because recipients lose more money by working than they gain. And it also encourages attempts to “game the system.”

 

Update 3/27: Clarified the stipend will be taxed away up to $30,000.