Basic Income (Part 3: Funding)
TLDR: True UBI should be an aspirational goal, for the modern world is presently too unequal. Utopia is wealthier, and provides for the welfare of all by a basic income funded largely by land-value taxes, and supplemented with a progressive consumption tax.
Prerequsities: Part 2, Personhood, and World Government
“I am now convinced that the simplest approach will prove to be the most effective —
the solution to poverty is to abolish it directly by a now widely discussed measure:
the guaranteed income.”
— Martin Luther King Jr., Where Do We Go From Here (1967)
As I discussed in Part 1 and Part 2, I think welfare in general and basic income in particular are a good idea. Here’s a summary of the major benefits of basic income, from my point of view:
It serves as an effective way of helping the poor and forming a social safety-net.
It’s respectful, both in allowing people to direct resources to what they think matters most and in not making people jump through hoops to prove they need help. Stigma would almost certainly be lower, thanks to universality.
It doesn’t distort market-activity like unemployment-tested benefits, food-stamps, housing-assistance, minimum wages, rent-control, et cetera.
It doesn’t trap welfare-beneficiaries in poverty by dis-incentivizing work or other productive activity.
It’s simpler to understand and easier to implement than other government programs, improving efficiency and reducing overhead.
There’s a natural pathway to UBI (in the USA, at least) in the form of two small changes to income taxes:
Move away from the regressive system of deductions to a system of tax-credits with a large, standard credit.
Allow negative income tax values to be refunded for cash.
But basic income suffers from two essential problems that plague all welfare programs big enough to make a real dent in poverty:
Substantial welfare in a country means the world’s poor are naturally rewarded for moving there to take advantage of the relief.
Welfare sufficient to live on is expensive.
Again, these are problems particular to welfare, not basic income. I suspect that these things are often talked about as counter-arguments to basic income because either the critic secretly doesn’t like welfare or because the budget numbers involved for basic income are bigger on paper, and people find it unpalatable to raise taxes to keep pace even if the overall tax burden would be comparable.
Some critics may oppose it on the grounds that they don’t trust poor people to spend the money well. Others may oppose it on the grounds that they think some demographics (e.g. seniors) deserve money more than others (e.g. students). But here I want to focus on the budget question: is universal welfare affordable?
The short answer is no.
The Long Answer
In these essays I try to focus on individual aspects of Utopia that are within reach. Part of what makes my conception of Utopia unrealistic is that I’m simultaneously supposing a world that has changed quite a lot from our own, and yet hasn’t changed so dramatically as to invalidate the basic technologies and lifestyles we’re familiar with. My version of Utopia still has airplanes and cars that are driven by humans, for example, despite the fact that autonomous vehicles/robots will clearly exist by the end of this century.
My conception of Utopia has a livable, universal basic income. This means whether one live’s on a remote island or in the heart of a metropolis, the world government sends a regular stream of money that is enough to survive on with a reasonable standard of living in cheaper parts of the world. But this is only possible because Utopia is significantly more wealthy/productive.
Wealth and welfare go hand-in-hand. Caring for the poor (including via basic income) requires there to be enough wealth to spread around without ruining the living standards of the world’s most productive workers. A truly universal basic income — welfare that applies equally to everyone in the world — is out of reach for Earth right now. There are simply too many poor people.
In the current world I’m still a proponent of welfare, but only within a specific nation and only with limits on who can be naturalized into that nation. This is hardly a fringe opinion — basically nobody thinks their nation’s welfare program should apply to everyone, or to fully open the “borders1” and let it apply to anyone who shows up.
But I want to note that this feels somewhat sad to me, and doesn’t reflect how I think Utopia would look. I suspect that Utopia will still have occasional borders here and there and exclusive benefits to people in one group or another. But I think a truly beautiful world involves everyone having enough to eat and a place to sleep regardless of who they are or where they live. Anything less than that isn’t Utopia.
The Wealth of the World
Let’s check my math, and see what’s possible on Earth today.
There are about 100 trillion US dollars worth of goods and services produced every year. There are about 8 billion people (at least if we only count humans, great apes, cetaceans, and elephants; we’re closer to 8.5 if we count pigs, and 60 billion if we count birds). Thus, if we were maximally egalitarian about redistribution, each person would get about $12,500 per year to live on. This is below the poverty line in the USA, at least for a household of one. Whether this sounds like enough to live on depends on your standard of living. To someone in Sub-Saharan Africa earning the equivalent of four dollars a day, it’s a miracle. To someone in New York City it’s a joke.
But realistically, a 100% tax rate would destroy the world economy by removing any selfish reason for working. If we instead imagine a basic income of 25% of the world’s production we get a basic income of only about $8.50 a day. 25% is about the fraction of the overall income that goes to taxes in the USA, so we could give everyone in the world $8.50/day if the USA and every other country redirected essentially the entire governmental budget to basic income.
I don’t know about you, but I can’t live on $8.50 a day. It’s a bad sign if rounding the daily income to the nearest dollar makes a big difference. Even if it’s possible to live on that amount in a place like Guinea or Myanmar, I couldn’t recommend it. And nobody in the west would tolerate eviscerating their local welfare/military/education/etc. even if it would produce the greatest act of foreign aid in history. Such levels of generosity would ruin developed economies, and probably make the long-run future worse.
A global basic income that gives the same amount to everyone isn’t possible yet.
The Wealth of the West
For the remainder of this essay, I will thus suppose that the population producing/receiving welfare has an economy comparable to that of the USA. This is a huge leap from the global picture. Americans produce more than 25% of the world’s output with only about 4% of the people. But let’s ignore the mind-numbing poverty of the broader world for a moment and focus on the USA. Could it provide a universal basic income to its citizens capable of sustaining a relatively okay standard of living?
As I mentioned earlier, about 25% of the USA’s income goes towards taxes. This is approximately 6 trillion dollars a year, which amounts to around $17,500 per person, or approximately $1500/month.
This seems… pretty reasonable. It’s not a ton, but it’s clearly enough to live on if you’re healthy, frugal, and willing to live with others and/or in cheaper parts of the country. A family of four would be getting $6,000 a month, which seems quite good at first-glance — comparable to the median income in poorer states. It’s especially livable when supplemented with income from one or more members of that family working.
Things get more difficult to evaluate when we consider that in order to fund this basic income without radically increasing the tax burden, we’d need to end other welfare programs like social security and medicare as well as seriously decrease military and education funding. It seems important to me that income taxes not go up too much because a basic income at this level would almost certainly result in a significant drop in employment, and income tax increases would make that even worse.
I think that things are ambiguously close. Healthcare costs are a huge portion of what seniors spend money on, and I’m most worried that if welfare shifted to be less biased-towards-the-elderly that might result in a major drop in lifespan and quality of life. Families with children look to be pretty well off in this picture, but that’s before considering the likely outcome of having to pay more for school/childcare. Overall I think it’s reasonable to suspect that UBI within a wealthy country might be workable, as long as healthcare is handled well and there’s a slow period of adaptation, but it’s not obvious.
Because of the benefits listed at the start of this essay, I think it’s worth establishing a small basic income in countries like the USA (probably via a small, fixed tax credit which becomes larger and increasingly refundable over time), so that experiments can be made in using it as an alternative form of welfare. UBI seems to me to be something to work towards, rather than jump into the deep-end with. I’m optimistic that a richer society could make it work, and with enough economic growth we can get there.
Utopian Basic Income
In Utopia I think there are multiple basic incomes. There’s a universal basic income provided by the world government, and depending on where one lives there might be additional basic incomes within states and cities that want to have a stronger safety-net given locally-high cost-of-living. The world government provides basic income because of the “insurance” argument from Part 1: to spread out costs, it’s useful to apply a fund to the largest population possible.
The primary way in which basic income is funded in Utopia is by land value taxes. While local governments may spend their land taxes for local improvements, all land taxes collected by the world government go to basic income, divided equally between all people.
Because this is the primary way in which taxes are collected, poor Utopians tend to try and have a small footprint (e.g. apartment buildings) and/or live in low-demand locations (e.g. the countryside). This split usually goes with being young and being old. Young professionals want to live in cities to find work and accumulate experience and connections, so often choose to live in small apartments near mass-transit hubs. In Utopia it’s fairly common to live off basic income and the savings from childhood basic income for a while, even after finishing school, so as to find the best work opportunity rather than having to take the first available job.
After finding a job and advancing one’s career, Utopians move to bigger housing and a more suburban lifestyle both to signal success and to have enough space to raise children. Occasionally the workers in a family, before having children, will retire early or find remote work and move to the country where land is less expensive. Regardless, it’s common for seniors to move away from cities to avoid high cost-of-living, falling back on savings and basic income to live in small towns with less industry.
One of the big advantages of having steep land-value taxes is that there is less of an income tax burden, and thus more reason to do productive work. This keeps the economy going strong and produces less deadweight loss. But land taxes alone are not necessarily sufficient to produce enough basic income for a Utopian to live on. Thus, basic income is supplemented from a progressive consumption tax that mostly effects the highest earners.
Utopian Consumption Taxes
To reduce friction for entrepreneurs and encourage small-businesses, there are no taxes (income/sales/consumption/etc) applied to small-scale transactions. This, combined with an absence of occupational licenses, means that it’s legal to trade, work, and make deals as a professional without any red tape or government involvement. Have an idea for making money? Go do it!
However, many Utopian business-owners want more. In order to form a company that is legally distinct from the employees of that company, one must register with the government. Legal distinction makes it possible to sell shares of the company, as well as having limited liability for company-ending disasters. Registering a company means selecting a protected name and trademark, buying insurance (to properly discourage risky behavior), agreeing to pay taxes to employees, and sponsoring a fraud prediction market.
Much like a futarchy, the fraud market for a company is conditional on a tax auditor from the government checking the company’s books for tax evasion; market contracts pay out proportional to the quantity of taxes the auditor declares the company to have illegally evaded. In this way, the market price serves as a signal about which companies are committing tax fraud, and should be investigated.
The taxes paid by established companies are withdrawn from wages and salaries of company workers according to a tax rate function. This function scales based on what multiple of the (global) median income the person’s pre-tax income is (ignoring basic income). If we assume that our tax rate asymptotes at 100% and is 0 when one earns nothing, then a natural function to use will be in the family of:taxRate(income) = 1 - 1/f(income/medianIncome)
With the following constraints:
f(0) = 1
the derivative of
x/f(x)
is always positivemore income leads to more take-home income
takeHomeIncome = income*(1 - taxRate) = income/f(income/medianIncome)
the second derivative is always negative — i.e. the tax is progressive
What should f(x)
be? I think something like exp(x/12)
is good. Utopia actually sets this via futarchy, but let’s go with my guess.
Income/Median Income | Tax Rate
0 | 0%
0.5 | 4%
1 | 8%
1.5 | 12%
2 | 15%
3 | 22%
5 | 34%
12 | 63%
16 | 74%
Let’s say that the median earner makes $50,000 before taxes, not counting basic income. This means after taxes they’d be taking home $46,000, and combined with a basic income of $17,500, they’d get a total of $63,500 per year. A doctor earning $250,000 a year (5 times median) would take home $164,800 + $17,500 = $182,300. And a CEO earning $800,000 pre-tax (16 times median) would take home $210,000 + $17,500 = $227,500.
This tax might seem comparable to income tax in the USA, albeit more progressive. But there is a key loophole: as part of registering with the government for basic income, everyone has a “personal shell company” (often just called a “shell”) automatically set up for them. Money transferred between two companies doesn’t count as income, so most workers choose to have employers pay wages/salary to their shell, and then have their shell pay them a (potentially lower) salary.
Shell companies are the primary way in which investment happens. Instead of simply sitting on accumulated income, shells automatically buy a diversified portfolio of bonds, index funds, and other stable assets. Those with a license to pursue a riskier investment strategy can manage their shell portfolio directly. Because none of the gains from investment are taxed until the shell’s owner withdraws the money for spending, this taxation scheme is closer to a consumption tax than an income tax. This setup encourages investment and savings, which in turn produces more economic growth than under a simple income tax.
Of course, money saved in the shell is worthless to the owner unless they eventually spend it. Thus most Utopians pick a standard of living that feels right to them and draw a fixed income from their shell to supplement their basic income. Since shell income can be spread out over many years of retirement, the effective tax rate is usually much lower than the above figures suggest — high-income people usually invest their extra wealth and spend it slowly.
The biggest (undesired) loophole in the Utopian consumption tax is the same as with income taxes: employee benefits. If a company buys their employees, say, health insurance, this isn’t “income” and thus isn’t subject to taxation. In the limit you can imagine a person who receives only a basic income, but whose shell pays for lavish parties, a big house, et cetera. In Utopia employee benefits are a form of illegal tax fraud unless the benefits are intrinsic to performing the job (e.g. uniforms or transportation) and the benefits aren’t specific to that employee, but apply to everyone in that position (e.g. no bias in who flies first-class). The auditor system isn’t perfectly strict about benefits, so Utopia still has a decent amount of companies paying for perks, but shell companies in particular are heavily restricted from spending money on things other than investments or dividends. (With an exception for charity: shell companies can spend money on their owner’s behalf if it’s going to fund public goods.)
Thanks to progressive taxation and basic income, Utopia is a very egalitarian society. People receive support whether they’re young or old, sick or healthy, northern or southern, or even human and non-human. There’s a shared recognition that everyone is fundamentally on the same team, and that it’s only through mutual-prosperity and building towards the future that no one ever starve again.
“An army of principles will penetrate where an army of soldiers cannot; it will succeed where diplomatic management would fall: it is neither the Rhine, the Channel, nor the ocean that can arrest its progress: it will march on the horizon of the world, and it will conquer.”
— Thomas Paine, Agrarian Justice (1797)
“Open borders” implies that the restriction on who gets welfare is a question of who lives where. What I mean to imply is less about restricting immigration to a place, and more about restricting who is a recipient of the welfare state, regardless of where they live.