How a Basic Income could be funded from Income Tax in the USA

A flat income tax rate of just 27% could fund a Basic Income in the USA of $9,000 per annum, virtually eliminating poverty, increasing disposable income and reducing effective taxes across the board.

Crowd of workers

I was recently challenged to come up with a scheme that would fund a basic income in the USA at a level that would lift everyone out of poverty, but not negatively effect public finances (which are already in a pretty poor state).

Level of Basic Income

I have settled on a Basic Income level of $9,000 per year per adult under 65 years of age , $14,000 per adult over 65 years, and $3,600 per year per child (0-15 years old).

This would lift virtually everyone out of poverty (using the US Census Bureau definitions below)

U.S. Census Bureau Poverty Thresholds, 2014
Size of Family Unit Poverty Threshold Basic Income (Child related payments included)
One person $12,071 $9,000
Under age 65 12,316 9,000
Age 65 or older 11,354 14,000
Two people 15,379 18,000
Three people 18,850 27,000
Three people with two related children 19,073 16,200
Four people with two related children 24,008 25,200
Five people with two related children 28,960 34,200
Six people with two related children 33,303 43,200

Only a single person  would fall slightly short of the poverty line, but additional benefits would still be available for extra support for those with disabilities, and we should assume that further opportunities for further earnings would exist in the vast majority of cases. Therefore, this rate should be sufficient to see virtually everyone in the USA lifted out of poverty.

Cost of scheme

The total cost of this scheme is outlined below

Current proposed BI Number of people Total cost ($bn)
Non pensioner $9k 210m 1890
Pensioner $14k 50m 700
Child $3.6k 65m 252
Other benefits 140
Total spend 2982

So, the total cost would be $2,982 billion

This would ordinarily mean that the Federal government would need to collect $2.98 trillion in income taxes to pay for it.

Currently income taxes make up nearly 50% of its revenues of $3,34obn. Or, to put it in cash terms, $1,64obn. This, therefore represents nearly a doubling of income tax revenues to pay for it.

In fact, the reality is even more daunting. Currently income taxes collected cover the cost of all welfare payments, plus $340bn (welfare programmes in 2015 cost $1.3 trillion), so in order to have an equivalent fiscal effect, we would need to raise $3,340 billion.

Income tax rate required

This could be done by levying a flat tax of 27% on all earned income in the USA. This means not just income from work (i.e. wages), which only account for 2/3 of all personal income, but income from all sources. The summary breakdown is below

Personal Income $bn
Wages/Salaries/Pension contributions 10,118
Income from Interest/Dividends 2,270
Total 12,388
Flat Tax 27% 3,344

So, this flat tax rate would raise $3,344bn, which would be almost exactly what was required to fund the Basic Income, thus leaving the federal budget with a similar amount as currently for other public spending programmes.

Huge tax rise, or tax decrease?

However, the amount paid in income taxes would more than double from $1.640bn to $3,344bn- or would it?

The trick of calculating Basic Income costs, is to remember that every cent raised in taxation is paid back to taxpayers. For many this will mean an effective tax rebate, while for others it will mean a direct payment from government.Either way, their tax payments will almost certainly fall, even for those whose marginal rate increases from 10 or 15% to the new rate of 27%.

Here are 4 examples using the tax and BI rates I have outlined above:

  1. A single man has an income of just $10,000. His tax bill, using my scheme, is 27% or $2700. However, he is entitled to a Basic Income payment of $9,000 per year, so his net tax bill is in fact -$6,300 (i.e. the government pays him $6,300 and his final take home pay is $16,300). Current take home pay is $9,200.
  2. A lone parent with 2 children and an income of $30,000, is liable to pay tax of 27%/$8100. But she is also entitled to a basic income of $9,000 for herself and $7,200 for her two children (2 x $3,600). So her tax bill is -$8,100 (i.e. the government pays her $8.100 and her final take-home pay is $38,100). Current take home pay is $27,200.
  3. A family of 2 parents and 2 children has an income of $60,000, which creates a tax bill of $16,200. But their total Basic Income entitlement is $25,200, and so their final tax bill is in fact -$9,000 (i.e. the government pays them $9,000 and their final take home pay is $69,000). Current take-home pay is $51,700.
  4. A wealthy family of 2 parents and 3 children has an income of $200,000. Their tax bill is $54,000, but their basic income entitlement is $28,800, meaning their final tax bill is $25,200. Their take-home pay is therefore $174,800. Current take-home pay is $156,000.

In each case, the person receives a significant decrease in their effective tax liability and increase in take-home pay (post tax income).

Therefore, in effect, the basic income/income tax model delivers a lower tax burden on working people than the current set-up. Of course, those who currently avoid tax in other ways (i.e. taking advantage of loopholes or other schemes) would potentially be paying more under this, more comprehensive income tax regime.

It also delivers all the other benefits of a Basic Income scheme, such as a reliable source of income for all citizens, a flexible workforce, an effective social safety net and a steady stream of demand for the economy.

But, in short, it works within the current fiscal framework, with an increase in the marginal rate of tax, but a decrease in the effective total amount of tax paid by most individuals.

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2 Comments Add yours

  1. dhasenan says:

    A flat tax benefits the wealthy more than anyone else. Adding a basic income improves things for the poor. So this proposal kind of screws over the middle class, doesn’t it?

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    1. martinfarley says:

      Actually, middle income earners would probably benefit the most.

      This is because the poorest already received substantial levels of support. The basic income would most likely match that, or perhaps improve it slightly. It would, importantly, free them from govt interference and accountability, so their situation would still improve even if their income were the same.

      The richest tend to receive as much as one-third of their income from non-work sources (shares, capital gains, inheritance) which are taxed at much lower levels. The tax outlined above would level the playing field and shut down most of these tax avoidance loopholes, so many of them would in fact be paying at least as much as before, if not slightly more.

      But those in the middle would do best of all, because they currently pay full taxes on their earnings, while receiving nothing (or very little) in current welfare payments/benefits. The Basic Income would give them a boost in their income, which would act like a tax rebate for most.

      The table I included in the article outlines what the outcome would be for each income percentile in the UK. The next body of work is to compare that with current take-home pay, but the small bits of work I’ve done on that so far, suggest a significant leap in the disposable income of middle-income households (probably around £5-£7k, which is about a 25-35% increase). To give a full picture would require a lot more work, but I’ll make it a New Year’s Resolution for 2017..

      Like

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