One of my previous posts detailed the advantages of the United States adopting an unconditional or universal basic income (UBI). Within that post I only briefly mentioned the cost of implementing a basic income, which I will address more in this post. According to the Department of Health and Human Services, poverty is defined federally for 2017 as:
Persons in household
Applying this data broadly, if a UBI was given at $1,005 a month or $12,060 per person annually, poverty, as defined federally would be ended. Assuming $12,060 is given to every American citizen (approximately 324 million), the government will need to spend nearly $4 trillion to cover this expense. The federal government currently spends around $4 trillion annually, so yes, this would be a large (100 percent) increase in government spending. This additional $4 trillion expenditure would actually end up being much lower, however. First, people under the age of 18 (children) would not be eligible for an income payment, but a payment should still be allocated to parents with children. Roughly 25 percent of the American population is under the age of 18, so providing only a $500 monthly benefit to parents of children brings the total cost down to $3.5 trillion. A $500 child benefit, will provide single parents with enough income to remain above the poverty line. For example consider a single parent with two children and no income. This household would now receive a basic income plus two child benefits, now bringing their income to $24,060, above the poverty line for a three-person household. Despite lowering the benefit amount for children, this is still a substantial increase in government spending, but it can be brought down more. If the government raised taxes on people with incomes at or above the median income level so that after-tax income would remain the same despite receiving the UBI, the cost would be halved. This would bring the cost to a manageable $1.75 trillion increase in government spending. It may also be possible to cut some current cash-based welfare spending that would become redundant once a basic income is instituted. (Important note: a lot of these calculations were done to show that it would be relatively easy to whittle the cost of a basic income down, these are not necessarily the best way to lower the cost.) We are left with a $1.75 trillion increase in spending in order to eliminate poverty as currently defined. The obvious question is how can the government sustain that large of an increase in spending. Any economic student will tell you the government receives funds in three ways: taxes, borrowing, and money creation. Each of these sources has their associated problems. A new source of revenue for the government would be extremely beneficial. Creating a social wealth fund could be the way to increase government revenues while avoiding some of the issues associated with current sources.
A social wealth fund is an actively managed fund run by the government. The interest, dividends, and other income the fund creates could be used to fund a basic income. Social wealth funds such as these are actually pretty common. Both Norway and Alaska are two prime examples of successful social wealth funds. Norway’s fund has a market value of $7.8 trillion and has averaged a 5.7% return. Alaska’s fund has a market value of $58 billion and had a 5.7% return in 2016. The Alaska fund, in particular, is notable because it pays out a dividend to all citizens of Alaska, unconditionally. The successes of both of these funds can be replicated in an American federal social wealth fund. Since the size of the fund must be expansive, it might be best to split the fund. Dividing the fund would also allow for competition between the people running the funds and provide an extra incentive to perform well. Different parts of the fund could also be used to diversify the holdings of the overall fund. A robust social wealth fund could be beneficial in providing the government the ability to fund a basic income.
Obviously, a federal social wealth fund would have to contain a massive amount of assets to fund a basic income. Both Alaska and Norway’s social wealth funds are funded through oil reserves, which a national fund would not be able to replicate. So, if not oil, where would those assets come from? The simplest way to fill a fund would be to set aside a certain amount of current government revenues to purchase assets. Additionally, the government could introduce new taxes such as a financial transaction tax (FTT). The Tax Policy Center has estimated that a well-designed FTT could bring in $50 billion in additional revenue with limited effects on economic activity.
In addition to instituting new types of taxes, the government can do something it has always done, just slightly differently. In 2008, through TARP and other programs, the Federal Reserve purchased billions of dollars of risky assets to stabilize the markets. Instead of the Fed purchasing these risky assets, a social wealth fund could purchase these assets, removing this burden from the Fed. The high amount of capital a social wealth fund would have would allow the fund to purchase large amounts of risky assets cheaply and largely be protected against swings in the markets. Roger Farmer and Miles Kimball have discussed the potential stabilization benefits of social wealth funds due to this ability. If a social wealth fund is used to purchase these assets, the funds have a good chance at earning a higher return and the economy as a whole will benefit from the stabilization.
These proposals to fill the social wealth fund are all fine, but are unlikely to provide enough capital to create a truly robust fund. An important place to look to is corporate taxes. Nearly everyone is unenthusiastic about corporate income taxes; people either want to close loopholes or lower rates. News stories detailing corporate inversions or other loopholes are common. An entire industry exists to assist corporations in finding the lowest legal amount of taxes they can pay. This is all wildly inefficient. Dean Baker has proposed something that would solve these problems and provide social wealth funds with a large amount of capital. Baker proposes eliminating the corporate income tax in favor of a mandatory share issuance. This would mean that a “tax rate” is decided and all corporations make a one time transfer of shares to the government at that tax rate. So if 20% were decided as the desired rate, all corporations would issue shares equal to 20% of the corporation’s market capitalization. In effect, the government would become a 20% shareholder in all corporations. In order to remove potential problems associated with government control, the shares would be non-voting. This would entitle the government to 20% of the corporation’s income, while allowing corporations to maximize profits without worrying about the tax they must pay. Additionally, it removes the need for corporations to spend money on tax services or inversions, hopefully creating more economic growth.
You may be concerned about the effects of mandatory issuances on the current shareholders. Yes, share prices may decline by 20% (or whatever rate is chosen) due to dilution, but, long-term, this will benefit shareholders due to the absence of corporate income taxes. The lack of income taxes will result in higher profits paid to shareholders, and will eventually compensate them for the dilution. Also, this short-term decline in stock values would occur in conjunction with the institution of a basic income. Additional income received from a UBI would also help to offset the immediate cost to shareholders. The short-term effects may also be lessened if corporations are given a choice between income taxes and share issuances before issuances become necessary. If it were announced that by the year 2025 corporate income tax would be completely replaced by a one-time mandatory share issuance, then corporations and shareholders would have some time to prepare. Corporations may even elect to make the one-time share transfer before 2025 to replace their tax burden. If a national social wealth fund holds this much corporate stock, the fund will be well on its way to producing the income needed to fund a basic income.
The combined institution of a basic income, a national social wealth fund, and mandatory share issuances could very well result in the end of poverty as currently defined. While unlikely to happen in the current political climate, these three proposals each have benefits that would strongly enhance the United States’ economic environment, primarily through the end of poverty.