A Basic Income Is A Trillion Dollars Cheaper

by John Moser

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.

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