Blue Collar Lunch

Intellectual Reading for the Working Man

Bringing Poverty Back to America

Trade and technical progress form some of the most important cornerstones of economics, identified as early as David Ricardo’s theory of Comparative Advantage in 1817 and Nicholas Klador’s model of productivity growth in 1957.  Trade and technical progress make an economy—a region, a nation, or the entire global system—and the people living under it wealthier, increasing the standard-of-living and allowing for population growth; yet one of the most-reliable political themes throughout history has been the resistance of trade and technology, whether it be the machine-breakers of Luddism, unionists arguing for adherence to classical production processes and guaranteed retention of regional jobs, or the modern uprising against globalization and outsourcing.

People, as individuals, want to be secure in their livelihoods.  An economy becomes wealthier by increasing productivity or, put simply, by reducing the jobs required to produce a unit of goods or service.  If three people working 40-hours produce 40 pairs of shoes between them, then those shoes must be priced at a minimum of three hours’s wage—if the factory workers make $25 per hour, those shoes cost $75.  If those same people working 40-hours can produce 60 pairs of shoes, then those shoes only require the price of two hours’s wage or $50; and if we don’t need more shoes than before, one of those three people is laid off.  Shoemakers might not enjoy the prospect of newer, faster shoe-making tools as much as the consumers who have to pay for those shoes.

Today, people worry about automation as a generalization of this scenario; and the topic of outsourcing has become a heavy political topic.  The ideal of “bringing jobs back to America” and “protecting American jobs” appears in political discussions frequently, because people don’t want their jobs pulled out from under them and sent off to a foreign country.  In a sense, trade is a form of technical progress:  cheap shipping and a more-cost-efficient process come together to give new production strategies, producing the same goods for lower prices.  As such, some people lose their jobs.

These effects impact individuals, rather than an economy.  The jobs lost are replaced as consumers use their greater purchasing power to buy more and better things, creating new labor demand; and robust economies such as Americas always have overlapping progress, continuously creating new jobs.  Jobs are destroyed more-rapidly than they’re created in recessions, and created more-rapidly than they’re destroyed during recovery and booms.  Even so, the individual who becomes unemployed for a few months is less-concerned with the long-term growth of his and everyone’s wealth—ostensibly the “greater good”—than he is with immediately feeding himself and his family.

Modern political dialogue has brought this individual concern back to the fear of “selling our jobs to China.”  As with automation, people believe American jobs are going away—to Chinese factories—and never coming back. This has brought campaigns to “bring jobs back to America.”

Modeling Chinese Imports on Jobs

With a look at the International Trade Administration’s data, we can try to model the change in jobs if we bring an outsourced manufacture back to the United States.  Using statistics for textiles, we can project the impact on jobs if we ended the import of a set of goods, such as Men and Boys’s Cotton Trousers.  To do this, we’ll use the number of units imported and the total cost of imports in 2015.

The advantage of trade increases as the gap between domestic and foreign costs increase.  That means higher American per-hour wages and lower Chinese per-hour wages favor outsourcing to China.  These models will use the high estimate of $3.50 hourly Chinese labor, although Bloomberg estimates the costs at 64 cents per hour, and the Bureau of Labor Statistics estimated the cost as high as $1.74 on average in 2009.  American labor will be modeled to include payroll taxes—Social Security OASDI and Medicare—and $3,000 yearly benefits on top of a theoretical $21 factory wage, the average wage for a General Motors factory line worker; the median income in 2015 was equivalent to a $27.89 wage.  The benefits number is low:  employees typically cost 18% to 26% more than their salary, and even much more at lower wages.

The cost of shipping bulk goods from China has a negligible impact.  In 2015, importing one 40-foot shipping container of goods from China into the United States carried a total cost of under $1,300.  Such a container can carry 20,000 pairs of pants or jackets, bringing the shipping cost of importation to 6.5 cents per one article of clothing.  Once imported, these containers load directly onto 48-foot container trucks, using the same domestic shipping as American-made goods.

Men and Boys’s Trousers

In 2015, America imported 16,298,776 dozen Cotton Men and Boys’s Trousers (M&B Trousers) from China, or a total of 195,585,312 pairs.  These imports came at a cost of $1,197,391,000, or $6.12 per unit.

At $21/hr wage (GM factory line worker) and 40-hour, full-time, American factory worker costs $23.85/hr after including 6.25% Social Security Retirement and 0.2% Medicare payroll taxes, plus $3,000 in benefits.  This figure doesn’t count further per-employee costs, such as unemployment insurance.  At a rate of $23.85 per hour, an American factory producing M&B Trousers at the same efficiency as the Chinese equivalent would produce them at a cost of $41.72 per each.  Levi’s Made-in-USA jeans retail for over $100, but other brands of jeans made in the state of Georgia retail as low as $58, so this seems fair.

This conversion is accomplished by multiplying:  Chinese Factory Cost x (American Hourly Wage / Chinese Hourly Wage)

In theory, 196 million pairs of M&B Trousers represents 171,056 jobs brought back to America; however, the American factory would produce them at a total cost of $8,159,364,390, or $6,961,973,390 more-expensive than the import good.

This conversion is accomplished by dividing:  Cost of All M&B Trousers Imports / (Chinese Hourly Wage x 2,000 Full-Time Hours per Year)

Wages are paid out of revenue, and the amount of spendable income available in any span of time is finite.   The amount of total money spent in 2015 would have been the same even if goods were slightly-more-expensive; Americans would have just bought less, because they would have run out of money faster.  The total number of jobs created can only reflect the number of M&B Trousers that Americans can now buy.

Directly calculating this on labor costs would ignore the non-changing cost of shipping and retail, which includes freight transit, warehousing, stocking, retailing, and providing infrastructure to retail centers.  Those are a lot of jobs unaffected by the change in importation.  Instead, we need a model price.  For our model, the average price of imported M&B Trousers is assumed $14.97—a number picked arbitrarily from Google as a low estimate.  This average spans children’s and adults’s clothing, so will include per-unit goods ranging from $10 to $25, all the way up to Lands’s End and Jos A. Bank products.  A higher estimate might be more-fair, assuming most clothing purchased is Wal-Mart adult clothing; however, high estimates favor Chinese outsourcing.

An average price of $14.97 would increase to $50.57 per pair of M&B Trousers.  Assuming Americans buy the same amount of all other goods, they would have to buy fewer M&B Trousers; either case is equivalent.  This reduces the number of purchaseable M&B Trousers to 57,898,203, or 29.6% as many.

The new price is established by adding the cost increase to the price:  Average Price + (Total Increase in Cost / Total Number M&B Trousers)

The number of purchaseable M&B Trousers is the number that costs as much:  Total Imports / (New Price / Old Price)

This, in turn, reduces the number of jobs created to manufacture all of those trousers.  Bringing M&B Trouser manufacture back to America would provide 50,637 40-hour full-time jobs.

These jobs are established by:  Total Theoretical Jobs x (Purchaseable M&B Trousers / Total Imports)

In doing this, Americans reduce the number of jobs supporting the retail of M&B Trousers.  Those jobs are the remainder of the price; the jobs lost are the ones that went with the no-longer-purchaseable share.  In total, this is a $8.85 share of each of 137,687,109 M&B Trousers, or $1,218,530,910.  That represents 59,267 minimum-wage, full-time jobs, including taxes and benefits in the minimum-wage cost.

This totals to a net loss of 8,630 jobs.  The total Chinese textile import market is 35 times this size, which would bring a total job loss of 302,050 jobs; while the total Chinese import market of $483,244,700,000 represents roughly a loss of 2,175,040 American jobs.

Breaking Even

The break-even point on jobs is just over an $18/hr American wage, or $36,000/year.  This is 64.5% of the $55,775 United States median income in 2015.  At the same time, all goods Made in China increase in price by just over three times.  In other words:  of goods currently Made In China, that $36,000 buys corresponding American-made goods equaling about what $12,000 buys today.  This includes clothing, televisions, phones, watches, and a lot of business goods.  Fortunately, only about 3% of American spending actually goes to the Chinese import market, so the damage is limited:  that $36,000 would buy about $33,000 of goods, since 97% of consumer expenses are houses, medical care, Internet service, and other domestic goods.

In other words:  when replacing Chinese imports with American manufacture, higher American factory wages translate to fewer American jobs, and reduce the amount of stuff purchaseable with American dollars.  The scope of damage from a protectionist policy is limited by the narrow margin of goods imported from China; although the United States has a much-larger impact than just China, at a whopping 12% of our spending.  Expect to see $1,100 budget cell phones, $2,000 iPhones, and $1,500 televisions instead of sub-$600 on these types of goods; as well as a mild rise in food prices and an increase in hunger among American families.

“Bringing Jobs back to America” is a great way to make Americans poor.  It’s interesting that the impact is equivalent to raising minimum wage and follows a similar mechanism, yet is particularly-popular among minimum-wage opponents.

Social Security: Universal and Retirement

Earlier I discussed the impact of a Universal Social Security, in the form of a Citizen’s Dividend, on retirement income.  I used some rough estimates of income and savings and came up with the below chart:

Retirement Income

Projected Retirement Income in 2013 under Citizen’s Dividend

After the last post, I’d like to revisit this topic to provide more detail.  Retirement benefits are one of our most important and critical services, and replacing them with a Universal Social Security benefit requires careful consideration.

Low-Income Benefits

First, I want to discuss low-income Social Security benefits.  The above chart uses the 2013 averages; it doesn’t reflect minimum wage workers.  Under the current system, the less you’ve been paid in your 40-year working life, the less you get paid in retirement; long-hours for low-pay means poverty in retirement.

A person retiring at age 62 in 2016, if having received 2,000 hours per year of minimum-wage pay every year since the age of 18, would receive only $746/month of Social Security Retirement Benefits; this is just $165 more than the Universal Social Security benefit.  Those workers who spend time on and off welfare, underemployed, and otherwise not banking the full minimum wage receive even less.

In theory, anyone receiving any form of income can bank that income and live on the USS benefit, providing a vehicle for retirement savings; in practice, that sucks.  Even so, a person who gets current minimum wage plus Universal Social Security and banks 100% of their USS benefit would live above the minimum standard and retire with the equivalent of (roughly) $135,000 in the bank.  That means they’d still retire with $1,150 monthly income (20-year amortization of savings) instead of $746, which isn’t bad even if you ignore that poor people don’t live long.

Growth

I gave a 3.5% growth model over 20 years as a basic model, with returns projected up to 6%.  This wasn’t exactly arbitrary:

The safe option pays

Actual 401(k) return rates

Even that Vanguard Total Bond Market Index has been as low as -4.8% (losing money), and the other two have been low-return or moderate-loss holdings.  As Representative Elijah Cummings (D-MA) put it:

We promised that we would never again allow those who protected us as children to die penniless, and hungry, because their private retirement plan fell apart in the stock market.

That’s a real concern:  strategic income and bond investment vehicles can lose money.

Money Market Accounts, Certificates of Deposit, and other guaranteed-income investment vehicles do not share this concern.  These options are often lower-growth—Pentagon Federal currently offers a 1.20% Mutual Fund CD, and my SF Guaranteed is now 3%—and carry no risk of loss.  The primary risk of these types of investments is low growth:  Vanguard’s Money Market accounts have made 4.41% and 5.18% per year since inception on average, and yet their 10-year averages are currently 1.07% and 1.13%.

There are strategies to maximize these investments, and the least-risky option of taking a no-loss investment and adding 3% of your paycheck ($30 per $1,000) provides great outcomes.  There is no reason for Americans to risk their retirement in the markets if they don’t have the skill and the income to cover for the risks involved.

Compared to OASDI

OASDI takes 6.2% directly off your paycheck at all income levels, plus an extra 6.2% from payroll.

At a minimum-wage income, Social Security retirement benefits pay just $165 more today than the Universal Social Security benefit.  Under Universal Social Security, diverting 6.2% of the past 42 years of a minimum wage to an individual IRA would yield $104/month additional for 20 years; at 1.2%, it would yield $129/month; and a 2.5% growth rate would exceed Social Security benefits.

That 6.2% represents money currently removed from the employee’s paycheck.  As well, the minimum-wage employee under Universal Social Security has an additional $581/month today, which they can further put toward retirement or use for immediate elevation out of poverty.  Financially-distressed low-income families today do not have the option to leverage Social Security in this manner, and are forced to pay 6.2% of their income to fund current retirees.

In total, a Universal Social Security better protects retirees from an unstable retirement and enables low-income families to survive to retirement int he first place.  It gives the lowest and the middle classes far more potential to save for retirement while simultaneously supplying an irrevocable lifetime Social Security benefit.  This makes Universal Social Security a powerful extension of modern OASDI benefits.

A Basic Income Is A Trillion Dollars Cheaper

Earlier this week, Slashdot covered a story by some bloke named Robert Greenstein claiming a Universal Basic Income would cost around $3 trillion.  Like all such reports, the report uses simplistic policies and bad math:  it assumes we give every single American $10,000 more than they have now, with no remediation of existing services or the tax system at large.

In response, I’ve crunched some numbers to demonstrate the real impact of a Universal Social Security, both on poverty and on taxes.  The short and long of it is it costs over a trillion dollars less, not three trillion more.

Universal Social Security Definition

To start, I need to define a Universal Social Security (USS) system.  This is my Citizen’s Dividend, and the brief run-down is as follows:

  • Funding source
    • Combine OASDI (the 6.2% paycheck and payroll taxes) into the income tax brackets
    • Remove the cost of welfare from these income tax brackets
    • Apply a flat 17% tax on top of these new progressive tax brackets as the funding source for Universal Social Security
  • Distribution
    • All natural-born, resident, adult, American citizens receive Universal Social Security as a direct deposit, monthly or semi-monthly
    • All naturalized, non-resident, and minor American citizens receive Univesral Social Security as a non-refundable tax credit, not to reduce their tax liability below $0
    • Low-income households with naturalized adults and minor household members are eligible for public aid benefits for these household members, distributed similarly to the modern system (e.g. EBT)
  • Adjust the progressive tax brackets to establish a sensible tax system

In other words, the current tax brackets are re-made to start with a 17% tax and add a progressive income tax.  Low-income households with children or immigrant family members qualify for public aid for those members; otherwise, USS replaces welfare.

I firmly suggest not raising the top-tier tax bracket above 40%.  This represents 4/3 of our current effective income tax (the IRS takes almost exactly 30% of all taxable income as income tax).

Cost Impact

To estimate the cost impact, I estimate the required amount of downward transfer.  Downward transfer is the redistribution of income:  if you have $10,000 of income and end up with $17,000 of take-home pay, Universal Social Security has taken money from someone else and given it to you.

Universal Social Security will decrease the tax burden of many who are still paying.  If the USS income for your two-adult household is $14,000 and your household is keeping $9,000 more than before, it’s inarguable that you’ve got more income under USS than the current system; and you’re still paying the downward transfer cost of USS.  The difference is USS costs less, and you’re essentially paying that much less in welfare-supporting taxes.

2013 Model

We can get an idea of the cost impact by estimating the tax savings and tax costs of a Universal Social Security in 2013. To do this, we need a baseline goal.

For our baseline, let’s assume we want the bottom 30% of all households to receive the maximum benefit of Universal Social Security. In 2013, that’s about $6,558 per person per year. We can also include the following statistics from the Census Bureau:

  • In 2013, the average number of adults per household was 1.93
  • There were 122,469,000 households

With a little math, we get 36.7 million households receiving $6,558 per adult for an average of 1.93 adults, or a displacement of $465 billion.

This $465 billion replaces almost all of the expenses for Retirement, Sickness and Disability, Food Security, Income Security, Unemployment Insurance, and Housing Assistance.  That’s $1,269 billion in Federal expenses, and a total of $1,619 when including State-funded benefits.

We still need public aid benefits for children of low-income families and for low-income families supporting naturalized Americans.  These groups, together, make up less than 10% of current Welfare recipients; and naturalized Americans deduct Universal Social Security from their taxes, thus they don’t receive USS if they’re a part of a low-income family.  In total, these benefits cost 1.4% of taxable income, or $131 billion.  These are currently state-funded benefits.

A bunch of noise and yapping, but what does that mean in terms of Federal tax burden on the American people?

$800 billion isn't much, is it?

Federal Tax burden on the American People

In other words, our end-state is a reduction of $804 billion in Federal taxes taken and retained, and $1,023 billion in total tax burden reduction on the American people.

There’s a transitional consideration about grandfathering people who receive Social Security retirement benefits for the next 15 years, along with the state-side welfare services (housing assistance, food stamps, unemployment, etc.); the below chart represents these as an (initially) 5.59% OASDI payroll tax, and simply leaves state welfare costs where they stand now during the transition period.

That's a trillion dollars

Welfare costs, including transitions from here to there

It’s a trillion dollars cheaper.

2014 Model

In 2014, the situation changed as thus:

  • Federal welfare spending increased to $1,283 billion
  • Total welfare spending increased to $1,626 billion
  • Population increased by 2.5 million
  • The percent of adults in population increased from 76.5% to 76.92%
  • The number of households increased to 123,229,000
  • There were an average of 1.94 adults per household
  • The USS benefit (as 17% of taxable income) increased by 2.75% to $6,739/year

The national average CPI showed the following changes:

  • Rental housing prices increased by 2.90%
  • Food at home prices increased by 0.50%
  • Home energy (gas and electric utilities) prices increased by 4.48%
  • Non-food commodity goods prices decreased by 0.20%
  • Clothing prices decreased by 0.30%

To summarize:

  • Overall, living costs increased by 2.07%
  • The USS benefit increased by 2.75%
  • The buying power of the USS benefit increased by 0.696%
  • USS displacement is $483 billion
  • Supplemental welfare costs increased to $136 billion
  • Universal Social Security cost $1,006 billion less than 2014 Welfare

The $17 billion reduction in the gap between modern welfare and a Universal Social Security system comes from the shift in distribution of the population (a higher percentage of Americans are over the age of 18) and the reduction in necessary welfare services since 2013 (unemployment has decreased).

The graphs look the same, so I’m not giving you pretty pictures this time.

Income Impact

All of this has little meaning without a beneficial effect on the United States taxpayer.  To project these, I’ve used some rather steep tax brackets, aiming to reclaim much of the Universal Social Security payment from higher income households.

I used 2015 tax computations for these, including a $6,924 annual USS benefit.  That number is projected from the 2.75% increase from 2013 to 2014, and is slightly-smaller than other indirect calculations I used (i.e. it’s the worst-case projection).

The tax rates on the left include the 6.25% OASDI tax; the taxes on the right include the 17% Dividend tax.  These rates aren’t adjusted to discount the USS benefit from the tax rate.

Single filing rates are as below.  There is a $6,100 standard deduction, on which 6.25% OASDI is paid currently.

Income Tax Rate Tax Rate (USS)
(Up to) $9,225 16.25% 17%
$37,450 21.25% 23%
$90,750 31.25% 34%
$118,500 34.25% 34%
$189,300 28% 34%
$411,500 33% 35%
$413,200 35% 37%
More than $413,200 39.6% 40%

Married-filing-jointly rates are as below.  These filers take a $12,200 standard deduction.

Income Tax Rate Tax Rate (USS)
(Up to) $18,451 16.25% 17%
$74,900 21.25% 29%
$151,200 31.25% 34%
$230,450 34.25% 36%
$237,000 39.25% 36%
$411,500 33% 36%
$464,850 35% 37%
More than $413,200 39.6% 40%

Median Households

Median households are above our minimum threshold, and don’t tell us about the poor.  These numbers explain the practical impact of the tax brackets above.

These tables shows each class, their income, their after-tax income (now), and their after-tax income with Universal Social Security. The first one, below, shows figures for single-adult households filing single.

Class Income Current After-Tax Income After-Tax Income with USS USS Impact
Median Household $53,657 $42,621 $49,085 +$6,464
Single Male $39,181 $32,232 $39,050 +$6,818
Single Female $26,673 $22,382 $29,419 +$7,037
Family Median $68,426 $52,775 $58,832 +$6,058
Single Father $53,684 $42,640 $49,103 +$6,463
Single Mother $36,151 $29,845 $36,717 +$6,871

The table below shows impacts on two-adult households filing jointly.

Class Income Current After-Tax Income After-Tax Income with USS USS Impact
Median Household $53,657 $45,008 $57,697 +$12,689
Married Couple $81,025 $66,560 $77,128 +$10,568

As shown, households into the $70,000 and above range still largely receive a tax benefit from this policy.  The high marginal tax brackets begin cutting into the Universal Social Security benefit as income increases, rather than reducing it from existing income.

It’s notable even households at this level are covering for the cost of Universal Social Security.  To put things simply:  if you’re benefiting from the Universal Social Security system but your benefit is less than the $6,900 per-adult distribution, you’re the one paying for the folks at the bottom.  You happen to be paying less than modern welfare, but you’re still fronting the cash.

That means single households with less than a $6,924 benefit and two-adult households with less than a $13,848 benefit are the ones paying for welfare.  Again:  Universal Social Security is over a trillion dollars cheaper; of course we’re all making out like bandits.

Higher-Income Households

To finish the above points, I have included the income impacts on single-adult households in the upper income classes below.  As incomes increase, the positive impact of the Universal Social Security benefit decreases.

Class Income Current After-Tax Income After-Tax Income with USS USS Impact
Top 10% $158,500 $114,970 $118,282 +$3,311
The 1% $330,000 $231,721 $230,126 -$1,595
The 0.1% $1,700,000 $1,065,061 $1,056,557 -$8,504
Model Rockerfeller $10,000,000 $6,078,261 $6,036,557 -$41,704

To put that impact into visual terms:

65% tax brackets aren't required

Tax impact of Universal Social Security on the Very Rich

I’d like to point out that Thomas Pikkety is still demanding 80% tax brackets on the rich, but I’m not sure where to go with that; I can think of where he can go with it, though.

Low-Income Households

Proponents of all kinds of UBI—this Universal Social Security plan included—press hard on the idea that we can fix poverty this way.  Robert Greenstein thinks this will move us backwards on income inequality; while I claim the buying power of this form of Universal Social Security plan is tied to GDP-per-capita—which continuously increases—and thus acts as an effective control on income inequality (although I also don’t think income inequality is a bad thing).

Let’s start with single-adult households and the bottom quintile.  These are the poorest of poor in America, the people making the least.

Class Highest Income Current After-Tax Income After-Tax Income with USS USS Impact
5% $7,100 $6,556 $13,854 +$7,298
10% $12,300 $10,911 $18,170 +$7,259
15% $17,100 $14,843 $22,048 +$7,205
20% $21,800 $18,544 $25,667 +$7,123
Really poor people

Single-income households in the first quintile

The numbers are bigger for two-adult households.  These households get less than a $1,000 advantage for filing jointly, but receive over $14,000 from Universal Social Security.

Class Highest Income Current After-Tax Income After-Tax Income with USS USS Impact
5% $7,100 $6,656 $20,948 +$14,292
10% $12,300 $11,521 $26,131 +$14,610
15% $17,100 $15,541 $30,115 +$14,574
20% $21,800 $19,478 $34,016 +$14,538
Really, really poor people

Two-adult, married households in the first quintile

All of these households also potentially qualify for family aid, providing assistance for children of low-income families.  It’s notable that a family with $20,948 of income is above the poverty line for a 3-person household to start with.

HUD Households

I’ve talked about HUD before, when covering a case study on one woman in Washington, DC.  To summarize:  75% of all families qualified for HUD housing-assistance go on a waiting list and never receive benefits.  That’s out of all of America.  Every single American whom HUD approves for assistance has a 1 in 4 chance of ever receiving any assistance at all.

The table below shows the national average HUD guidelines.  These are the highest incomes at which HUD will classify an individual for benefits.  These numbers vary by state and even municipality, and the numbers below are averages for the entire United States.

Class 1 Person 2 Person 3 Person 4 Person
Extremely Low Income $12,600 $14,200 $15,800 $17,050
Very Low Income $18,400 $21,050 $23,650 $26,300
Low Income $29,450 $33,700 $37,900 $42,100

All one-person households are also one-adult households.  Assuming all two-person or more households are two-adult (which may not be true in the case of single-parent households), the below table shows their after-tax income under a Universal Social Security:

Class 1 Person 2 Person 3 Person 4 Person
Extremely Low Income $18,461 $27,708 $29,036 $30,074
Very Low Income $23,049 $33,394 $35,552 $37,751
Low Income $31,557 $43,527 $46,509 $49,491

Which represents this chart:

Not representative of 1-parent households

Impact on HUD families, national average; all 2-person or larger households are 2-adult

We also need to inspect the impact on single-parent households at this income level.

Class 2 Person 3 Person 4 Person
Extremely Low Income $19,747 $21,047 $22,009
Very Low Income $25,089 $27,091 $29,132
Low Income $34,830 $38,064 $41,298

Each of these households also qualifies for low-income family assistance.  Additionally, a 2-person household with more than $18,000 of income is considered above the poverty line, while a 3-person household with $22,000 is above the poverty line:  according to Federal measures, all but the Extremely Low Income 3- and 4-person single-adult households are above the poverty line.

Conclusion

A Universal Social Security system represents a form of UBI which costs over one trillion dollars less than current welfare.  This system effectively lifts nearly all HUD households and even all households down to the lowest 5% directly above the Federal poverty line, while leaving room for a public aid system covering children of low-income families.

This system also has a high likelihood of success in completely-eliminating homelessness and hunger in the United States by creating a stable profit motive at income levels which currently incur high risks and associated cost of risk.  This would allow the development of small, low-income rental units at a living space of 245 square feet per person, elevating the 1.6 million homeless Americans out of the gutters of our inner cities and providing them money for food, clothing, and personal care.

Most importantly, this kind of system doesn’t cost three trillion dollars, or six trillion dollars, or whatever other bad-math numbers UBI opponents can come up with.

Citizen’s Dividend: The Impact on the Poor

Earlier, I covered the impacts of a Citizen’s Dividend on take-home pay.  The Dividend provides an increase in take-home pay for all incomes below $625,000, as well as a reduction in business income taxes; and, unfortunately, adds an additional $100,000 of tax burden on a $10,000,000 yearly salary.

on High-Income Earners

Take-Home Pay Impact on High-Income Earners

Unlike vague plans suggesting tax rates of 55% or 85% on all income over $1 million, this amounts to a rough 1% increase on marginal tax rate.  That still demands answers:  what are we buying with other people’s money?

Rather than focusing on the economic impacts of job and wealth creation, I’ll focus on the social impacts of income stability for individual families.  Stability in the consumer base leads to greater business prosperity, which I believe makes up for a small increase in taxes on those individuals whose income largely comes from that prosperity.

Meagan Limes:  A Real-World Example

recent NPR article covers the financial plight of Meagan Limes, a woman whose situation collapsed after losing her full-time job.  Meagan now works only 20 hours per week, making $10.50 an hour or just below $785/month.

Meagan is a single mother of two children, and also supports her 18-year-old niece.  She receives no child support, and only survives on her own income.  That places four people under her household, with a monthly rent of $1,275 and a prior income of around $1,600 after taxes.  Clearly, Meagan has struggled to get by on hard work and a minimal income.

The loss of her job and her new position at only half as many working hours per week leaves Meagan without enough money to move out of her three-bedroom apartment and into a small, $800 studio.  At her income level, she qualifies for housing assistance; and she has been on the DC HUD waiting list for over 7 years, a waiting list which stopped accepting new applicants after it grew to over 70,000 people.

Meagan’s life has not excluded long-term burdens from personal decisions:  she is a single mother from two fathers, one of whom is in prison; and she took her unemployed niece into her own home despite hardly having the means to support herself and her family.  At the same time, she has been approved for and yet not provided with state assistance, and has supported herself entirely on her own hard-earned income; and neither father provides any child support.

In the end, Meagan is only human:  a hard-working, compassionate individual who has taken responsibility for her life and, like all of us, has found she must still rely on others from time to time.  She currently works at a grocery store, where she provides an important service to those of us who do have the financial stability to feed and shelter our families.

A Dividend In Practice

I have argued that public aid and minimum wage are outdated concepts.  For all their expense, food stamps and housing assistance leave 50 million Americans without enough food and 600,000 Americans without homes.  Only one quarter of Americans the housing assistance program qualifies for support actually receive that support.  This is not a healthy, modern system.

Just to make housing assistance work, we’d need a tax increase of 2.4% on all Americans, which would restrict consumer buying power, destroying jobs and creating a greater need for housing assistance, food stamps, and other welfare programs.  Factor the tax in for only incomes above $140,000 and you have to double it:  the upper 10% American income earners take 48% of the income.  Factor in food stamps, income assistance, and other programs and you’re looking at a major tax hike on the upper income earners to prop up a failing and unsustainable welfare system.

Clearly, this system has not worked for Meagan; and it won’t work for America.

How would a Dividend impact Meagan?

Meagan Limes: Monthly Income

Meagan Limes with and without the Citizen’s Dividend

Today, Meagan’s household would have an additional $1,200 of income.  Without an increase in wage burden on her employer, her household would have a full $2,000 monthly income, more than enough to pay for her three-bedroom apartment and feed her family.  Even after her niece moves out, she still carries $550 more, a total of $1,420 household income.

The Dividend would give Meagan the ability to thrive; if nothing else, it would give her the ability to afford the smaller, $800 studio apartment and still carry her family on the remaining $600.  Even unemployed and living with her niece, she would carry $1,160 of monthly income, enough to barely get by with government assistance feeding her children.

Clearly, Meagan would have no need for public aid in her current situation if we provided a Citizen’s Dividend.  Living with only her children and working part-time, she would have $180 less than her prior full-time employment provided.  Further, Meagan’s household would still qualify for WIC through EBT to provide food and other basic needs for her children.

We, as a society, can do better.

Correction: More Evidence the Dividend Gets Cheaper

Remember this chart from before?

Welfare vs Dividend

Welfare vs Dividend as a Percentage of adjusted gross income

This chart is wrong, and not just because I’m too lazy to go back and look for 1980 or because it’s not to horizontal scale after 2010 (look along the bottom axis before hand-drawing trend lines).

When I made this chart, I did some fancy accounting using gross rents to try and adjust for changes in consumer costs over time.  The Atlantic had better data, although some of their conclusions are iffy:  the lowest 20% of income earners spent 10.5% of their income on food in 1989 and 11.0% in 2011, not an unchanging 16.1% since 1984.  We can estimate that means they’re buying better food, eating away from home more, or facing rising food prices that don’t impact anyone else—The Atlantic favors the latter conclusion over the former two, despite publishing this chart in the same article.

Following in their methodology, I had a look at the BLS Expenditure Shares tables, Census data on housing sizes, and some often-repeated numbers from Googling–including the 983-square-foot 1950 average house and the similar growth of apartment sizes.  I’ve got accurate data back to about 1980; between 1950 and 1980, I’ve had to read bar charts instead of spread sheets, so 1468-ish might be approximated as 1450.  It’s close enough for trend work, and there’s no point in pretending we can magically predict the economy (as much as theory-of-value economists think they know the correct price of everything).

So that chart looks like this:

Welfare vs Dividend

Welfare vs Dividend as a Percentage of adjusted gross income

Three things stand out:

  • Instead of 19% of AGI, 1950 shows some 32% for the Dividend
  • The cost drops by 4.5% of AGI between 1950 and 1960
  • Something drastically changed after 1990

We can get a better-scaled look with a line chart that interpolates to no assumed accuracy:

Interpolated

Welfare vs Dividend as a Percentage of adjusted gross income

So apparently nothing interesting happened around 1980, although I haven’t gotten in the IRS DeLorean and checked AGI and Welfare statistics that year.  After 2000, we had the dot-com bust, automaker bailouts, the housing crisis, the Great Recession of 2008, and so forth, so we know why wealth didn’t increase and welfare costs sharply increased.

What happened between 1950 and 1990?

Well, the Dividend sure got a lot cheaper, according to my new projections.  As I said earlier:  I used aggregate consumer spending on food, shelter (per square foot), utilities, and clothing to adjust spending.  Basically, if proportion of income spent on food was 20% higher, then the food portion of my per-person Dividend budget is increased by 20% and adjusted for inflation.  That means my numbers are low where I don’t have good math, particularly around personal care (I just assume soap is as expensive as ever).

As a stacked bar chart, we can see the same leveling around 1990.  Housing and Utilities are arbitrarily shown as percentage of income per 1,000 square feet of living space to give them some substance.  This fits in with the 1950 median house floor space of 983 square feet.

Consumer Expenses

Consumer Expenses by Year

This masks that housing and utilities have increased slightly from 2000 to 2010, as shown in this below chart per category:

Consumer expenses

Consumer Expenses by Category

I used 2013 numbers for my Dividend because that year in particular represents a localized low point in welfare costs and high point in dividend costs, while 2009 represents a localized high-welfare, low-dividend sample.  In short:  I picked the year in which a Dividend has the highest probability of failure for my model.

What we’ve learned:

  • Food got cheaper (I have no idea what happened in 1980-1990)
  • Housing got cheaper
  • Houses got bigger
  • Utilities got cheaper
  • Clothes got cheaper
  • The per-capita cost—the amount of flat income tax required—to supply basic needs to every American got cheaper

So what the hell is going on from 1950 to 1990?  Essentially, a lot of technological growth.

Agricultural productivity increases mean we made twice as much food in 1982 as in 1948, yet at the same cost.  By 2000, we made 25% more than that; if we’d grown at the same rate, we’d have had a 70% drop in the cost of food between 1982 and 2000.

One cannot discount the advances in computing, with the UNIVAC in 1951, the IBM System/370 in 1970, and the Apple II in 1977.  Computers allow us to manage growing accounting and legal ledgers without exponentially growing the number of accountants and lawyers:  where you might need 10 clerks to keep track of 100 legal contracts, you need 300 of them to track 1,000—30 clerks per 100 contracts.  With computers, you need substantially fewer, and you can scale up a lot farther before you start adding on more humans per unit of work.

New construction methods, standards, and powered machines have reduced the labor in erecting and maintaining buildings, roads, and other structures and infrastructure.  Meanwhile, we can blame globalization for lowering our local cost of clothing and many construction materials, freeing up American dollars to buy more products and create more jobs in shipping, logistics, retail, and IT services, while simultaneously freeing up American labor to perform those new jobs and produce and deliver these new services.

Coming advances in technology will continue this trend.  Locking the Dividend at 17% ensures the poorest of Americans will always benefit from the growth of American (and global) wealth; without a fixed Dividend rate, we would lower the Dividend year after year, keeping the poor at their minimum standard while cutting back the tax cost.  There are interesting economic considerations for both extremes, as well as a middle-ground of lowering the Dividend more slowly than growth; the only certainty is that the economy will become more and more amenable to a Dividend as time progresses, delivering more wealth and a greater standard of living per proportional cost.

Impact of a Citizen’s Dividend on Retirement Income

The American Citizen’s Dividend, as described earlier, effectively expands Social Security to establish a minimum standard of living for all natural-born, resident, adult, American citizens, directing child and immigrant welfare to a condensed public aid system which can take advantage of its vastly diminished size to operate more effectively by accepting a higher relative risk of fraud and other excess costs in exchange for ensuring aid more frequently reaches those in need.

This raises an important concern:  What happens to Social Security retirement benefits?  A more modest payment covers the bare minimum living expenses, and is smaller than the average Social Security old-age pension.  How does this affect retiree income?

We cannot reasonably reduce the total benefit for retirees receiving or expecting to receive Social Security old-age pensions.  These individuals will have planned their finances on a known income; reducing that income would greatly harm their economic position.  Long-term, we still want to know what impact future retirees will face.

The American Citizen’s Dividend does not replace Social Security with a privatization strategy, as had been discussed around 2005, lowering taxes and expecting each person to divert the difference into their retirement savings; instead, it provides a constant, lifelong income in excess of what many individuals are capable of diverting to savings.  In contrast to the privatization strategy, this policy directly provides individuals with additional income which they can divert to savings, and provides low- and no-income individuals with an income to live from.

In transition, the American Citizen’s Dividend targets a balance between cost-savings and benefits retention.  We pay the Dividend to retirees and lower Social Security retirement benefits by the amount paid in the Dividend, providing exactly the full benefit those retirees would receive under the current system.  All retirees reaching the retirement age within fifteen years of the enactment of the Citizen’s Dividend are grandfathered for life, and receive this benefit until they die.  This gives fair warning and a degree of just compensation to everyone else, leaving them over a decade to plan their retirement more thoroughly.

After that, it gets more complex.  The below graph shows the retirement income average for an individual retiring in 2013 as under the current system; as during transition, as if the Citizen’s Dividend had just gone into effect; and as under a model in which the American Citizen’s Dividend had been in place since before 1969.  The model used the calculated value of the Dividend in 1969, along with the calculated 4.33% yearly inflation.

Retirement Income

Projected Retirement Income in 2013 under Citizen’s Dividend

The last model shows what a modern-day retiree might collect under the Citizen’s Dividend with various amounts of growth if he had saved only every Dividend payment from age 18 to age 62, and then paid himself a 20-year amortization expecting to live to age 82.  Individuals who cannot save their Dividend payment obviously need it to survive, which is the whole point:  you shouldn’t have to die because you can’t afford to save for retirement.

Financial advisers typically claim between 5% and 8% of growth per year in 401(k) and equivalent retirement plans; I’ve shown a more modest 3.5%, 5%, and 6%.  Even the 3.5% brings a monthly retirement income $288 higher than current Social Security retirement benefits.  Modern IRA 5-year Certificate of Deposit rates, at 1.45%, fall less than $60 short; no long-term investment plan should use such a low-return investment object in the earliest years, and the first decade of high-growth investments in any standard term-selected 401(k) fund would easily leave a zero-risk investment option ahead of modern Social Security retirement benefits.

One more chart:  Let’s look at an individual’s 401(k) deferral at each income level if that individual were to save the entire Dividend as 401(k) retirement savings.

401(k) deferral

The Dividend as a 401(k) Deferral as a percentage of income

This is a double-whammy:  Individuals with less income earn less in Social Security Retirement Benefits, and also need to store much more of their paycheck—which is already small—to save for retirement.  The American Citizen’s Dividend corrects both of these problems; and, as current, higher-income individuals not satisfied with their retirement prospects can defer additional income to 401(k), which should more than double their income in retirement.

Rather than cut off Social Security retirement benefits, as proposed in 2005, the American Citizen’s Dividend provides Social Security to all Americans, allowing them to survive unemployment and underemployment, as well as to build strong savings for retirement.  Social Security remains in place and continues to provide end-of-life benefits in the form of the Citizen’s Dividend, which should add to the recipient’s savings; reasonably high savings should be possible for all working Americans, as the Dividend provides enough to build a strong retirement fund on its own.

Tax Rates and Income Distribution

I really want to talk about tax rates, the cost of labor, and its impacts on employment and product costs; but first, I need to talk about a hot-button political topic:  income inequality.

Income inequality, in a political grenade shell, means the rich get more money than poor people.  In the United States, the top 10% earners take 48% of all income; the remaining 90% take 52%.

We’ll call it 50/50.

Growth

First, let’s look at a graph of the growth of income over time.

Income Distribution, Projection

Income Projection Per Year

These graphs assume 4.1% economic growth per year, or 22% over 5 years. Growth isn’t constant, and the common estimate—GDP—is all over the place.

As you can see, the working class (blue) gain more and more income each year as wealth and productivity increase.  So what’s wrong with this?  Why do people complain?

Income Distribution over time

Income Distribution over Time

That’s why.

These graphs assume that, for every extra $10, the rich collectively take $7.50, and the working class collectively take $2.50.  The rich are growing their collective income three times as fast as everyone else.

That means the working class isn’t actually getting poorer; it’s just looking up to see the rich climb further and further out of their view, and then look down from on high through their golden monocles while sipping their billion-dollar Champagne.

Progressive Tax Systems

Progressive tax systems leverage income inequality.  Where a flat-tax system charges a marginal rate equal to the percentage of income required as tax revenue—30% in the United States—a progressive tax system charges above-marginal rates to the high-income earners, while charging below-marginal rates to the lower-income earners.

To illustrate, I’ll use a fictitious progressive tax system.  This system achieves a nominal 30% tax rate by charging the top 10% a higher rate than the working-class (90%).

Marginal tax rates

Marginal tax rates to reach a nominal 30% tax

As shown above, at a 1:1 distribution (2015), the pay-off is 1:1.  The rich, in total, earn the same amount of money as the entire working class; if we take 1% more from the rich, we can take 1% less from the working class.

As you approach 2:1, the rich in total are earning twice the amount of money the entire working class brings in.  If we raise taxes 1% on the rich, we can lower taxes 2% on the working class.  That’s because the rich are taking, say, $2,000, and the working class are taking $1,000:  if we take an extra 1% from the rich, that’s $20; but 1% of the working class’s money is only $10, so we have to give them 2%.

To put in simple math:

  • 30% of $3,000 = $900 (total income, 30% flat tax)
  • 40% of $2,000 = $800 (rich people, 40% tax rate)
  • 10% of $1,000 = $100 (working class, 10% tax rate)
  • $100 + $800 = $900 ( total taxes from progressive tax system)

We can compare this to a 1:1 system where the income is more equal:

  • 30% of $3,000 = $900
  • 40% of $1,500 = $600 (rich people, 40% tax rate)
  • 20% of $1,500 = $300 (working class, 20% tax rate)
  • $300 + $600 = $900

There’s a reason I put a graph here.

This all doesn’t guarantee the after-taxes take-home remains even, or even distributed a certain way.  Carrying out the projections on this fictitious system produces the below graph of aggregate take-home income:

Class total take-home after taxes

Class total take-home after taxes

As we can see, the rich, in total, take home less than the working class.  This actually holds true today when considering the Adjusted Gross Income (AGI), including either just personal income or personal and business income.  The AGI makes up about 80% of the total income; capital gains—taxed at 15%—fills in part of the remainder.

Over the long term, the rich actually catch up as a class to the working class.  They eventually pass the working class despite the reduction in working-class income taxes.  Because of the way my Citizen’s Dividend affects effective taxes, workers under about $50k in 2013 dollars collect an effective negative income tax, which significantly slows this process.  The above graph would look different under a Citizen’s Dividend:

Citizen's Dividend model

Class total take-home after taxes using a model of a Citizen’s Dividend

An incredibly wealthy society begets a high income gap, and even having a rich upper-class with this much collective income above the working class is novel.  The Romans had a population of over 100, million and 23,000 equites—a very small aristocracy and a very large population; America had 314 million people in 2014, and 31.4 million of them together collected half the income.  Part of the enormous gap is just that we have more rich folks than ancient empires; the other part is that our rich folks are richer than historical rich folks, hence why we have multi-millionaires running businesses where employees make $30k.

Conclusion

Income inequality isn’t a new problem; in the long view, it isn’t even really a problem, so long as the buying power and, by extension, the standard-of-living of all classes increases at a reasonable rate. A progressive tax system which lowers the income tax rate on the working class while not increasing the income tax rate on the high-income earners can steadily decrease the cost of labor, increasing employment and keeping the cost of any standard-of-living low.

Take-Home Pay and Business Profit Impact of a Citizen’s Dividend

I wrote earlier about the labor cost and effective tax impacts of a Citizen’s Dividend; as a quick follow-up, I’ve computed the 2013 take-home pay and business retained profits under those models.

These numbers all use the $6,100 Standard Deduction for a single-filing individual as a baseline, and the single-filer tax brackets.  The business profits use the 39.1% business flat tax applied to all United States businesses, compared to the tax rate of 35.6% under the proposed Citizen’s Dividend.

Take-Home Pay Impact of Citizen's Dividend

Take-Home Pay Impact of Citizen’s Dividend

The above chart shows the impact of the Citizen’s Dividend on the take-home pay of a single-filing individual.  The incomes (across the bottom) reflect each tax bracket plus the standard deduction.  The red block represents the additional take-home income.

An individual with no income takes home the Dividend under this plan and, up to $6,100, takes home all of their income plus the Dividend.  The Dividend covers the absolute bare minimum cost of living, replacing services such as unemployment and food stamps; this is how it makes that guarantee.

The larger red blocks around the upper-middle-class represent the reduced taxes as well as the Dividend.  This impact tapers off as income increases.

on High-Income Earners

Take-Home Pay Impact on High-Income Earners

Up to around the $1,000,000 mark, the take-home income breaks even.  An individual with $10,000,000 (that’s ten million) of income pays approximately $125,000 (or $0.125 million) more in taxes, an unfortunate effect caused by the 1.4% tax increase above $400,000 of income.  Policy makers could adjust this out by modifying business income taxes; a 2% reduction in the top tax bracket represents under $100 billion dollars of Federal income, so manipulating the finances is feasible.

Impact on Business Income Taxes

Impact on Business Income Taxes

The above chart represents the tax impact on business profits.  The taxes taken fall from 39.1% to 34.6%, losing almost one ninth of the tax burden.  This can cover for the cost of transitioning away from current public aid and OASDI onto a universal Citizen’s Dividend with Public Aid for families and immigrants; or it can cover for the tax increase on high-income individuals.  It could even represent a policy decision to lower business income taxes.

The Citizen’s Dividend is not an attack on the rich or businesses; it provides opportunities to lower taxes on either, while reducing the cost of labor and increasing the amount of buying power each consumer earns.  These factors directly create higher employment, greater profits, and more income for the rich, while completely eliminating homelessness and hunger among the poor and unemployed.

Labor Cost and Tax Impacts of a Citizen’s Dividend

Earlier, I pointed out that minimum-wage-and-public-aid systems are outdated:  they carry high costs, make labor expensive, and lead to increased unemployment.  Good systems for the 1900s; better systems available now.  Horses were a good form of transit when railroad and motorcars cost a millionaire’s salary and the rail and road infrastructure needed every man to pay 80% of his income to the Government, too; we waited until it was affordable before we paved the continent.

I included an abridged run-down of a Citizen’s Dividend in that discussion.  This post investigates the labor cost and tax impacts.

Labor Costs

Imagine you make a middle-class, $60,000 annual salary. The government takes a third in taxes and you bring home $40,000 each year, or roughly $1,500 per paycheck.

The obvious problem with a $60,000 salary is your employer has to pay $60,000 per year to each employee. Reducing the labor requirements is the solution; but we can benefit from reduced cost per labor hour.

The obvious problem with reduced salary, on the other hand, is they pay you less.  Never mind that everything costs less, and thus the balance of prices comes down; you still get less of that overall, and actually come out a bit behind.

So let’s imagine the government only takes 10% in taxes.  Your employer now pays you $45,000 per year; you bring home roughly $1,500 each paycheck, and actually $500 more each year, and your employer pays $15,000 less for each employee—only 75% as much.

This solution looks a hell of a lot like optimal:  you don’t bring home any less, but your employer sure pays you less.  This strengthens your negotiating position:  you’re cheap labor; it strengthens your employer’s market position:  goods cost less, and can sell for less while drawing the same profit; it strengthens the economy as a whole:  we can hire more people to make more stuff, and we can afford all of it because we still have the same amount of money to spend while they cost less to employ.

That leaves the question of where the money comes from.  If the government takes $15,000 less from you, it’s got to take $15,000 more from somebody, right?  Not necessarily.  There are two ways to do it.

Income Inequality

We can have a whole different discussion on income inequality.  The top 10% pull 48% of our income right now:  if we tax the rich an extra 1%, we can let up 1% on the working class.  If they pull, say, two-thirds of our income—a full 67%—then every 1% extra we tax them lets us relieve 2% from the working class.

As a corollary, we can reduce taxes on the working class as the income gap widens, and just not raise taxes on the rich at all:  they have a bigger chunk of the pie, we take the same portion of theirs, it’s bigger than last year, and it covers the little guy, so we don’t take any from the living guy.  In effect, we visit their door first, but we don’t look at how much they have and demand they pay even more of their share; we take the same 40% we took last year, even if the thing we’re taking 40% of is a lot bigger.

Efficiency

Income inequality marches to its own beat:  we don’t want to turn up the tap of gold flowing into the pockets of the aristocracy.  Sure, it’s not necessarily bad they enjoy a bit more of the benefits of progress than everyone else combined; that doesn’t mean we should throw our own meager earnings at them, too:  Not minimizing does not imply maximizing.

We instead attempt to improve our systems.  Instead of a welfare system fraught with fraud and a minimum wage to elevate the cost of labor, we provide a market incentive to grant the minimum standard of living to everyone.  So long as the cost comes in below our welfare system’s cost, this is cut-and-dry better; if it comes in slightly above, it may pay dividends due to secondary economic effects; if it’s too expensive, it’s a bad solution.

As I’ve said:  those costs crossed in 2013.  17.2% for welfare, 17% for an effective Citizen’s Dividend including the raw cost of living and an extra pocket full of cash to make sure it works, recession or not.

A Citizen’s Dividend, as such, cuts labor costs in two ways:

  • Reduces the cost of welfare, thus reducing the taxes required for welfare
  • Provides income, reducing the employment income needs and the effective tax burden of the laborer

If we look at the Citizen’s Dividend as a sort of tax credit—it’s not taxed and it’s not legally income—we can read it as a reduction in effective taxes.

Tax Impacts

A Citizen’s Dividend provides interesting direct tax impacts.  The below graph compares the taxes paid by a single-filing individual to two proposals; the yellow line (Proposal 2) represents the most plausible tax rates.

Tax graph

Single Filer Tax Proposals under Citizen’s Dividend

These rates include the OASDI 6.25% tax charged on all income up to $118,500.  Notice the dip in tax rate at the Social Security cap:  higher-income earners enjoy a tax break up until above $300,000 in the current system.  The working class covers these taxes instead.

The yellow line shows a plausible, proposed adjustment to cover this.  It includes a flat 17% Citizen’s Dividend tax—replacing OASDI, without a payroll component—and a general income tax which excludes the costs of the welfare services a Citizen’s Dividend replaces.  In this proposal, the working class pay less, until the Social Security cap; even then, it bridges to near-parity with the next tax bracket, until it steps from 39.6% to 41% at the highest tax bracket.

The dotted green line represents an unrealistic adjustment downward.  This structure may become possible in a future time, if the income inequality gap keeps expanding, without raising taxes on the top income earners.

The below graph shows the effective tax rate when adding in the Citizen’s Dividend.  At each tax bracket, we remove the taxes representing the amount of money each person receives.  For example:  if the dividend is $7,000 per year, you make $70,000, and you pay 30% in taxes, the below chart reflects 20% in taxes—30% minus 10%, as 10% of $70,000 is $7,000.  It’s a crude guideline.

Effective Taxes

Effective taxes paid by single-filer

This graph exposes two things.

First, Proposal 2 (orange) gives a negative effective tax rate below some $30,000.  A person making $9,000 of income would pay $900 in taxes, but receive about $7000, enjoying a tax rate of -68%.  This approaches negative infinity as income approaches zero.

Second, the break-even point is pretty high.  In fact, individuals with $400,000 income are still paying slightly less in total taxes.  Multi-millionaires pay a little more—an individual with $10,000,000 of income would pay a little less than $100,000 in additional taxes, which I consider unfortunate; as a realist, I don’t consider this catastrophic.

Businesses also pay income tax, and pay into this dividend tax; they won’t receive Dividend payments and, unlike OASDI, they won’t pay additional payroll taxes for each employee they hire.  The business income tax rate sits at 39.1%; in raw computation, it would actually fall to 34.6%, so there’s room to shift some of those rich people taxes to businesses and try to even things out.  The nice thing about business income tax is it’s a tax on success, not a cost paid just to make the attempt:  simply hiring employees and trying to do business doesn’t incur more income taxes.

All of this suggests the impacts of a Citizen’s Dividend range from lower taxes to cheaper labor, encouraging employment, slowing the rate of replacement of human labor with machine labor, and generally reducing the cost of goods.  Again: this plan would have cost more money in the year 2010; possibly too much in the year 2000; and more money than America could supply in the year 1950.  Minimum wage and public aid were the right things to do; they’ve aged out.

Paradigms: Minimum Standards of Living

Paradigms show up in everything from business structures to basic social policy.  People don’t often immediately recognize, accept, and integrate new paradigms; those who see them ahead of time are often called visionaries, and those who come late to the party are often called old-fashioned or outdated.  Frequently, a visionary can come so early that the new paradigm isn’t viable yet, and so failure occurs.

As of 2013, the cost of a new, more-effective paradigm for maintaining a minimum standard of living, in the United States, sits slightly below the cost of our modern social policies.  Those modern policies include minimum wage and public aid; the new, more effective paradigm is called a Citizen’s Dividend, a specific form of a Universal Basic Income.  The change in viability and appropriateness of these minimum-standard-of-living policies stems from changes in economic climate, including technology and wealth, which I will cover in a future discussion.

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