Funding the UBI: 28% flat tax

2017 February 20
by Daniel Lakeland

Lots of people who are skeptical of the concept of UBI have concerns about how to fund it. So, I did a little calculation with the American Community Survey Microdata. Here's what I got for 2014 and 2015:

YearAvgIncomeAvgInvestIncomeAvgPeopleAvgAdultsAvgChildrenAvgSeniors
2014$55963$35892.401.810.270.328
2015$58138$38802.391.810.240.34

Some more important numbers:

  • GDP/capita is around $57400 /yr/person these days
  • Population is about 325,000,000 people
  • The US Budget is $3.9 Trillion, or $12,000 per capita or 21% of GDP
  • The US Tax Revenue from direct taxes is $2.6 Trillion, or $8000 per capita.
  • The Tax Revenue from other sources is $606 Billion or $1865 per capita.
  • The Budget Deficit is $1.3 Trillion or $4000/capita

So, how could we create a UBI that was more or less equivalent to the situation we have today in terms of the accounting? (Not, in reality, in terms of the Economics and incentives, and resulting changes to work hours and employment etc obviously, but if we held those things constant and just changed how the programs worked, what would the accounting look like?).

We'll use the following variables:

U_a, U_s, U_c, U_{d1},U_{d2},N_a,N_s,N_c,p_{d1},p_{d2},GDPC,B,D, I_e, I_i,Pop

We have the following equation to keep the per capita deficit D constant

D N= U_a N_a (1-p_{d1}-p_{d2}) + U_{d1}N_a p_{d1} + U_{d2}N_a p_{d2} + U_s N_s + U_c N_c + 0.08 GDPC N - t (I_e+I_i) - T_oN

In this equation D is the deficit per capita, N is the average household size, Na is the number of adults, pd1 is the fraction of adults with "level 1" disability, and pd2 is with "level 2" disability (these are just stand-ins for the fact that some people need much more support), Ns is number of seniors, Nc is number of children, GDPC is the per capita GDP with 0.08 being the current fraction of GDP spent on discretionary spending, t is the flat tax rate on income, Ie is the earned income, Ii is the investment income, and To is the other tax revenue per capita. N is the household number of people N= N_a+N_s+N_c.

Let's plug in some reasonable values

  • U_a for a standard adult let's put $500/mo as a "tax refund" or basic guaranteed income.
  • U_s is $16000/yr which is more or less what we're already paying in SS
  • U_c is $250/mo reflecting a cost of feeding a child and buying some very basic things.
  • U_{d1} for people with partial disability is $1500/mo reflecting the fact that they can work somewhat, with pd1 ~ 0.05
  • U_{d2} is for people with serious issues, such as rapid cycling bipolar or multiple sclerosis or whatever, with pd2 ~ 0.05. We put $2500/mo reflecting a basic stable living situation which is cheaper ultimately than having very sick people in and out of the ER.
  • I_e the earned income we put as $57000 per household
  • I_i we put at $3600/household

Plugging these numbers and solving for t the required tax rate I get t = 28%.

My Maxima computer algebra code:

Defeqn:Defecit *Nhh = Ua*Na*(1-pd1-pd2) + Na*(Ud1*pd1 + Ud2*pd2) +Us*Ns+Uc*Nc+Discrpct*GDPC*Nhh - t*(Ie+Ii)-To*Nhh;

Numeqn:subst([Nhh=Na+Ns+Nc,Na=1.8,Ns=0.33,Nc=0.25,pd1=0.05,pd2=0.05,Us=22000,Ud1=1500*12,Ud2=2500*12,Ua=500*12,Uc=250*12,Discrpct=0.08,GDPC=57400,Ie=57000,Ii=3600,Defecit=4000,To=1865],Defeqn);
float(solve(Numeqn,t));

You can run this as maxima code here:

So, with a 28% flat tax we can give every adult in the US $500/mo feed every child, take care of every senior citizen, take care of a disabled population totaling 10% of the full population, avoid all poverty traps, buy all the military and research and census and whatnot, eliminate all but the 1040ez form, have no poverty traps, eliminate high marginal tax rates on second earners in dual income households, and have the same deficit as we have currently.

I think that's an absolute STEAL.

NOTE: you might argue that we need an additional $6000/yr for seniors to cover some kind of medicare insurance, even when you do that you get a tax rate of 31% still way better than what we've got.

6 Responses leave one →
  1. Daniel Lakeland
    February 21, 2017

    Please take a look at my math. I want to be right, so if I made a mistake somewhere in all that, I'd love to hear about it in the comments and will fix it right away.

  2. Dennis Hazelett permalink
    February 22, 2017

    Why multiply D * Nhh? D is per capita, N is units of household.

    • Daniel Lakeland
      February 22, 2017

      D is dollars per person, Nhh is number of people in a household, so the result is dollars/household which is the dimensions of the full equation, each of the Na, Ns etc are in dimensions of people per household, and the U values are in dollars per person.

      The income values are Dollars/household, and the tax T0 is also dollars per person so needs to be multiplied by Nhh again like D, also with 0.08 * GDPC * Nhh this is the dollars per household that are spent on discretionary spending by the govt.

  3. Dale Lehman permalink
    May 28, 2017

    Your Medicare cost is severely underestimated. $6000 will purchase basic Medicare + a minimal supplemental and drug policy. Since these are inadequate, it will take more than that. But I agree with your basic premise - we could "solve" retirement, health care, and poverty measures while at the same time moving to a "flat" tax that is quite reasonable. Personally, I'd consider something even simpler - why give monthly income to all adults and monthly payments to all children. Just confine them to income levels below some level. And, if you want to include medical care, just add a catastrophic insurance policy which covers everyone and is paid for through this flat tax system.

    Regardless of its merits (which I am convinced of) it will never be implemented. Politicians don't want it and can't afford it (unless we add in public campaign financing). But then we'd probably have to amend the Constitution.

    • Daniel Lakeland
      May 28, 2017

      The Medicare cost wasn't supposed to be an estimate of the current value of what people are receiving. Details obviously need to be worked out.

      Why give monthly payments to all? Because some people can't work, some people can't find jobs even if they do work, some people would be better off doing extra school, and the future seems to hold less and less promise for steady employment as we automate more and more. The real reason to transition here isn't that it makes today's situation better and simpler, it's that if we don't do it, in not that long from now (10, 20 years?) we could easily have France's seasonal labor rioting and only 55% labor force participation, or even lower. The stabilizing effect on the country and the improvement in opportunity and economic risk-taking at the individual levels would I think easily pay for all of it. We've had steadily approaching zero GDP growth for the last 10 years. I believe a lot of that is down to poor utilization of human resources because more and more people are just spending all their time trying to not lose their house, job, car, food, etc.

      The median total net worth of african american families in the US is something around $6000, or the cost of a used car. A future where impoverished families get educations from city colleges and can afford to do it because of guaranteed minimum monthly payments is a better future for everyone.

    • Daniel Lakeland
      May 28, 2017

      Also Dale, see here and here for an explanation of the stabilizing effect of UBI in an environment where demand for labor is declining:

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