Covid Food line in Pittsburgh

Universal Basic Income and Flat Tax

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.
William Jennings Bryan

UBI Highlights

• A fixed flat-taxed monthly income for all American voters
• A tax-free bracket for earned personal service income
• Incentives for states to encourage voting rather than suppression
• Elimination of most means-testing benefit programs and their associated expensive bureaucracies

Flat Tax Highlights

• A flat tax on all other income, divided between Federal and state governments
• Elimination of most other income, sales, payroll, and property taxes
• Elimination of complex tax dodges and their associated expensive enablers

A vastly simplified flat tax offers many advantages over the current labyrinthine structure. Above a certain fixed amount that is not taxed, all income from whatever source is taxed at the same rate. The ideal goal would be a flat tax on discretionary income, but simplicity and transparency are important aspects of tax policy, so the zero-bracket amount is fixed.

Andrew Yang and others advocate a Universal Basic Income for all Americans to address the worst economic uncertainty and replace many unrelated ad-hoc means-tested assistance programs, like the covid food line photo above. The goal is to make sure that all Americans can afford non-discretionary expenses of survival.

How can these ideas be combined?

Suppose every qualified United States citizen received a basic income amount every month - in lieu of social security, unemployment, welfare, EITC, and a host of other uncoordinated Federal, state, and local benefits. Simple to administer - no means test. It should be high enough to cover non-discretionary expenses of survival, low enough that going to work still pays off for discretionary expenses. Though as we've seen during the pandemic, many people who thought they hated working eventually become desperate to get back to work.

How much should UBI be? To replace social security, it should be at least the maximum social security benefit. That's 3895/month in 2021 - 46740/year. A less generous amount would be the proposed $15/hour minimum wage - 30000/year, 2500/month. Even less generous is Andrew Yang's proposed 1000/month. If the UBI were less than what Social Security would have provided, then Social Security would have to continue, covering the difference.

The UBI should be taxed at the same flat rate as other income - so that EVERYbody has a vested interest in keeping tax rates reasonable. Every voter will understand that increasing the UBI amount will increase the flat tax rate. In addition, states have a vested interest in UBI because they get some of it.

But what about an incentive to work? That could be accommodated easily enough. Make tax-free a basic amount of earned personal service income - from W-2, Schedule C (small business), and Schedule F (farming) - NOT from investments or other income. Why not make that amount equal to the UBI amount? So if the UBI were $4000 per month, or $48000 per year, then the first $48000 of earned personal service income would be tax free - so the net tax on the combined amount is only half the flat tax rate.

So who is qualified to receive UBI income?

• Certainly anybody who has voted in a Federal election should be qualified for UBI for the following four years. This is important because it creates a financial incentive for states to encourage voting and penalizes voter suppression.
• And anybody who was qualified for UBI on their 65th birthday could be qualified for the rest of their life.
• Anybody who is serving or has served in the armed forces and separated under honorable circumstances could be qualified for life, although with military retirement pay reduced by UBI.

What about children? Adults qualified for UBI should receive an additional amount for their dependent children who are too young to vote. Perhaps it should be half the UBI amount for each child with a maximum UBI per household of 3 times the individual UBI. Remember that this is in lieu of many other means-tested child support programs that would end.

The UBI should be the same everywhere in the country. That's because low-cost-of-living places are also low-standard-of-living places that need more help, and also to make those places more attractive to knowledge workers now liberated by zoom, whose higher incomes will stimulate those depressed local economies.

Of course, some people will waste their UBI just as they waste their wages and just as billionaires waste their money on seldom-used villas around the world and on frivolous hobbies. All that waste is income for somebody else though, just very inefficiently distributed.

Persons voluntarily in public homeless shelters or mental hospitals might have their cost of care deducted from their UBI. For involuntarily incarcerated persons, UBI might go toward satisfying judgments for victims, or toward prisoners' dependents, or accumulated for prisoners until they are released.

Why should rich people get UBI? One of the lessons of the American Rescue Plan is that ordinary taxpayers are more receptive to poverty-fighting programs that benefit themselves as well. So it's politically essential that UBI be truly universal as far as income goes. Rich people still won't like it - they will ferociously resist a flat tax rate of 50%, but they won't be able to argue that they're excluded.

What about unemployment? Just as one of the goals of a simple flat tax is to render unemployed a vast army of accountants and attorneys whose job was to minimize taxes on the rich, and another army of tax preparers who prepare simple tax returns that could easily be automated, so too eliminating numerous means-tested anti-poverty programs will create an army of unemployed social worker bureaucrats, at great savings to state and local government. These newly unemployed will get the UBI, of course, while they retrain for productive employment along with workers from other dying industries.

The flat tax proposal mentioned above has a zero-bracket amount of untaxed income and an additional partial exemption for W-2 wage income. All income above those amounts is taxed at a uniform rate - starting at 30% for Federal and 10% for state and local and subject to adjustment by Congress - all replacing the current Federal, state, and local income, payroll, sales, and property taxes. Please see the details.

If Universal Basic Income were in place, however, there would be no need for the zero bracket and W-2 exemption described. They would be replaced by the zero bracket for personal service income. All income other than that personal service income would be taxed at the same flat rate, even the UBI income. That rate would have to be higher for Federal - perhaps 40% - to pay for the UBI.

But a 50% tax rate sounds outrageous for working people! It will seem so for one-percenters who are used to paying little or no tax. But somebody who received the UBI and also earned an equal amount by working would be paying an effective tax rate of 25% on the whole amount, not much different from what they are now - counting payroll, sales, and property taxes, which are more important than income taxes for minimum wage workers.

What about wealth and estate taxes? They are not in the flat tax proposal above. If the current flat tax rate on income were 40% Federal and 10% state, why not have

• An annual wealth tax on assets with readily obtainable market values, at 4% Federal and 1% state (one tenth the income tax rate) - but credited for flat income tax paid the same year.
• An estate tax at death on the entire estate value, at 40% Federal and 10% state, but with credit for all income and wealth taxes paid over life.

Because income taxes are credited against them, these additional flat taxes will affect very few taxpayers. They do insure that whatever scams sneak into the tax code at midnight eventually get paid for, and help reduce income and wealth inequality. Note that a wealth tax might require a constitutional amendment; scholars differ on that.

Every obscure clause in every tax and benefit law is there because it has a powerful constituency that put it there and wants to keep it there. That constituency will punish any legislator that wants to simplify tax law. It will reward primary candidates that like the status quo. That's why every tax "simplification" from Congress makes the internal revenue code longer rather than shorter. That's not a mistake - that's part of the plan - cockroaches love a maze of dark cracks and crevices to hide in. Politics is the art of devising simple messages to sell complicated legislation that most of the legislators voting for it will never read. In the case of tax legislation in particular, the simple message has to conceal the intent, usually by claiming the opposite. Some legislators are in on the joke, and others are completely clueless, with their positions on the legislation provided by helpful donors and lobbyists.

"Money is the mother's milk of politics" and it take big bucks to run for Congress - million-dollar donors are needed, especially for the Senate. Not really donors so much as investors - those who donate enough to be remembered are expecting return on investment, often in tax law. The candidates need that complicated tax law as a vehicle for rewarding donors. So nothing is going to change until campaign finance is uncorrupted. A good start would be to end unlimited dark money and restrict political donations to active voters - which also adds another incentive for states to encourage rather than suppress voting.

The top 1% who are major donors will oppose this scheme because it's a major tax increase that they pay that is redistributed to the 99%. But it's hard to get many voters excited about that. So instead their propaganda will be about all the special breaks that are going away. These provide relatively minor benefits to the 99% - and which are vastly outweighed in most cases by the UBI amount - but the 1% will argue that the 99% are losing far more tax breaks than the 1% - which might be true in terms of lines of tax law but false in terms of dollars of tax revenue.

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