Where’s All That Money Coming From (Universal Basic Income Part 4)

We’ve been spending the last couple weeks diving deep into the details on Universal Basic Income.

We’ve explored the different visions for it, looked into the research showing that it works, and addressed a whole string of questions and concerns that people have raised about it.

The biggest question about Universal Basic Income, however, is: How will we pay for it? That’s what we’ll tackle today.

As I researched and drafted this article, it grew to be quite long. A quick Twitter poll suggested that you all would rather read such a lengthy discussion in two parts.

To that end, today will cover the background of funding a UBI, how much it will cost, and what spending we could cut to help pay for it. Thursday will get into the details on what taxes could be raised and where else new revenue could be found.

A Note on Deficits

It is important to recognize that on some level the question of “How will we pay for it?” is often used in bad faith.

If America decides something is worth doing, it just does it and figures out the money later. I’m not saying that I agree with this approach, just that we should recognize and call out when people believe some policies need to be paid for and others are fine being funded with deficits.

If you recall the 2000 election between George W. Bush and Al Gore, one of the big questions was what to do with the surplus(!). Gore wanted to set it aside for Social Security (in an oft-mocked “lock box”) and pay down the national debt while Bush argued that it should be given back as a tax cut because the government shouldn’t have a surplus.

After Bush used tax cuts to shrink down the surplus, we launched two long and expensive wars that were not paid for in the budget. We also launched a large expansion of Medicare that was mostly paid for by deficits.

We then went through eight years of going back to caring about deficits. During Obama’s presidency the deficit was cut extensively and decreased by over 50% between when he entered office and when he left office.

Shortly after Trump took office, Congress passed another round of tax cuts that were almost entirely deficit spending. We did not figure out how to pay for these tax cuts before we passed them.

Just Do It

The purpose of this digression is not to say that this is a good practice or a bad practice. It is not to point out hypocrisy or inconsistency in the parties’ governing philosophies. It is not intended as a partisan attack.

Instead, it is pointing out that when we want to do something, we do it.

If we are nitpicking about how to pay for something, it usually just means that we don’t actually want to implement that policy and the price is an easier fight to pick than the underlying policy.

There’s a reason that politicians right now are fighting over how much a Medicare for All proposal would cost while ignoring the cost of increased military spending and tax cuts. The concern about deficits is not in good faith.

And Yet…

All of that said, I am still going to figure out how to pay for a UBI here today.

There is some level at which deficits would become a major problem. Nobody seems to know what level that is. Countries with smaller deficits than us have had their economies collapse while countries with larger deficits have been fine. But that line exists somewhere.

A UBI is a very very expensive program. I have no real data to back me up on this, but it feels quite risky to fund the whole program with deficit spending.

Maybe a small portion of it could be paid for with deficit spending. Maybe the best approach is to make it completely budget neutral in an average year, but let deficits fund it in bad years and surpluses build up in good years.

We’ll save that particular decision for another day. Today, we’ll dive into the projected costs and where we can find more revenue.

Calculating Costs

Before figuring out where we’ll get the money for a UBI, we first need to figure out how much its going to cost. As we explored previously, that varies greatly depending on our vision for UBI.

For our purposes, we’ll be planning on a UBI that would push towards eliminating poverty in the United States. This means giving enough money to lift people up to the poverty line.

Even that has a variety of proposals, however.

Most of the proposals in this category aim to give every working-age American around a thousand dollars a month. If we define that as between ages 21 and 65, we’d be looking at around $2.15 trillion per year. If we lower the starting age to 18 our cost goes up to $2.4 trillion.

If we expand to the entire population, the cost shoots up to $3.9 trillion per year.

Why Working Age?

The rationale for limiting Universal Basic Income to working age Americans is pretty simple: Kids generally don’t have to pay mortgages or other costs that adults incur, while poverty among the elderly is addressed by Social Security and Medicare.

Eliminating Social Security and Medicare to help pay for a more broad UBI would result in a drastic reduction in benefits to seniors, as we saw when discussing the Libertarian vision for UBI, so proponents of the poverty-elimination vision don’t want to get rid of those benefits. At the same time, giving seniors a Universal Basic Income on top of the other poverty-reduction tools that have been working well seems like overkill.

I don’t have a strong push back on this argument. Maybe one approach would be to launch UBI as excluding seniors and then gradually transition that demographic from the current set of programs to a UBI as the original UBI recipients age out of the “working age” demographic. Either way, I think we’re fine excluding them in our initial calculations today.

UBI and Children

Children are a trickier case. It is true that kids don’t have a mortgage, but they’re pretty damn expensive. (In fact, day care for our son costs more than our rent, so it kind of is like an extra mortgage.) Giving a check only for adults misses out on a major expense for most families. It also fails to lift a lot of families to the poverty line.

An individual getting $12,000 a year would be right around the federal poverty line. A married couple with no kids would be almost 50% over the poverty line with their $24,000. Meanwhile, a single parent with three kids would be under 50% of the federal poverty line. In short, this system would reward two adult households with no kids while punishing single parent households with children.

There are approximately 73.8 million children in the US. Giving them (or their parents on their behalf) an extra $1,000 per month brings our annual cost up to a bit under $3.3 trillion. If instead we allocate $500 per child as a compromise, we’re closer to $2.8 trillion per year.

The $1,000 per child figure would bring any family with children well over the poverty line and is likely too much. $500 per month per child would be enough to lift every household out of poverty. It would still reward two parent households, as they will receive an extra $12,000 per year, but it is enough to make sure that every single-parent household is above the poverty line.

Rough Numbers

Now that we know the different levels of funding, it’s time to go find some money.

A quick note about the numbers found here:

They are rough. I don’t have a team of economists or an economic forecasting model to work from. I would love to have found a program that lets me put in different proposals and score them. Or even just find out the specific impacts of a 35% top marginal rate versus a 45% top marginal rate.

Alas. The world is not yet as nerdy as I am and there does not appear to be much demand for something like this to be publicly available.

So all of my numbers are pulled from scoring of other people’s plans. Some of these gave an annual amount based on the year that they were scored. Some gave a ten-year horizon. I took the annual amount at face value even though it is likely lower than the average annual value (especially for plans scored less recently) and I divided by ten on the long horizon scores even though that will likely overestimate the value in the present year.

I hope that these roughly even out. We’re also dealing with such massive numbers and hypotheticals that rough numbers should give us a feel for what would need to be done. When Congress calls me to draft a policy I’ll work with economists and models and get the details down much better.

My limited data points also mean that I have less flexibility. When looking at different rates for the Estate Tax, I can compare Obama’s plan with Trump’s plan with Clinton’s plan with Congressional Republicans’ plan. I can’t compare a $10 million exemption with a 45% rate against a $2 million exemption and a 35% rate.

Spending Cuts

Everyone hates raising taxes, so let’s first quickly touch on spending cuts that could help fund a UBI.

As noted previously, the Libertarian vision for Universal Basic Income funds it entirely through spending cuts and eliminating tax deductions. The spending cuts are the bulk of this plan.

The American Enterprise Institute proposed a plan that included cuts to a wide range of benefits programs that include everything from SNAP to Housing Assistance to Social Security and Medicare to Veterans Benefits and September 11 Victim Compensation. Cutting all of these would save over $2.5 trillion and would fully fund a Universal Basic Income. (Or would almost fully fund our version that gives half a check to kids.)

However, if the goal is the elimination of poverty, I think we want to leave some of these programs in place. I also have no interest in cutting Veterans Benefits or September 11 Victim Compensation.

There are some programs that seem like they would make sense to swap out for a UBI. The Earned Income Tax Credit is basically handing cash to the working poor. SNAP is giving a monthly stipend that can only be used on certain food items. A Universal Basic Income would be a better form of aid than both of these programs.

Whether we should eliminate them because they are less efficient or keep them because they would contribute to combating poverty on top of a UBI is an interesting policy question. For now, we’ll list out the costs of various programs that could be up for elimination.

Food Assistance Programs – $108 billion

Earned Income Tax Credit – $82 billion

Housing Assistance – $47 billion

Unemployment Assistance – $44 billion

Temporary Assistance for Needy Families – $20 billion

A Universal Basic Income around the poverty line would also bump a lot of people out of Medicaid eligibility. We could either raise the Medicaid eligibility so that these families don’t see increased health care costs or pocket around $400 billion in savings. Or something in between.

Eliminating all of the listed programs would net a bit over $300 billion a year. Pocketing the Medicaid savings would increase that to over $700 billion.

Military Spending

The military makes up over half of all discretionary spending the U.S. budget. The Department of Defense will get $716 billion in 2019. If you want to cut your personal spending, I always recommend looking at the big expenses first. Under this rationale, much of our attention on cutting spending should go to the military, simply because that’s where much of the spending is.

The United States has the highest military spending in the world and famously spends more than the next seven countries combined. That’s a lot of money.

A 2015 internal report found that the Defense Department could save $125 billion over five years by eliminating “bureaucratic waste.” Basically this would implement a plan to streamline the bureaucracy, cut back on overpriced contractors, and better utilize technology. This suggests that there is some money to be saved without hurting any of our goals or priorities.

The defense budget has also grown by $133 billion since Trump took office, even as the wars in Iraq and Afghanistan continue to wind down. If we want to look at other cuts to military spending, the newest money in is a good place to start.

Larger cuts are possible if you want to dive in and start reprioritizing what the military does. That’s certainly a possibility, but it is well beyond what I’m prepared to do in this article. I don’t pretend to have the intricate knowledge of the Pentagon budget necessary to make smart decisions on what can and cannot be cut.

What About Everything Else?

That’s as far as we’re going to look for spending cuts today.

I’m sure there are other cuts here and there that could be conducted in different agencies across the government. There are surely some inefficiencies that could be addressed and some redundancies that could be eliminated.

The problem is that once you move beyond mandatory spending like Social Security and Medicare, Military spending, and tax expenditures (which we’ll address Thursday) there really isn’t that much money in play.

This is all relative, of course. Hundreds of billions of dollars is a lot of money. But when you spread it across a host of different agencies, assume that most of what those agencies do can’t be simply eliminated, and then compare the potential savings against the cost of UBI, you see how hopeless paying for such a large program with cuts in discretionary spending really is. It’s like trying to pay for a new house by clipping coupons to save on your grocery budget.

Depending on your particular taste for spending cuts, we’ve found almost a trillion dollars a year of cuts to consider. This won’t cover the cost of a Universal Basic Income, but it could take a lot of pressure off of the tax increases that will be required to fill the gap.

Those tax increases will be the subject of the next UBI installment. See you then!

Join the Conversation!

What do you think? Are you with the Libertarians? What programs would you cut and what would you save? Let us know in the comments!

2 thoughts on “Where’s All That Money Coming From (Universal Basic Income Part 4)”

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge