Recently a newcomer to the political scene, Andrew Yang, has announced that he will be running in the 2020 presidential campaign on the democratic platform. While a new candidate is relatively boring news, Yang’s entire campaign rests on his idea to “implement a Universal Basic Income, ‘the Freedom Dividend,’ of $1,000/month, $12,000 a year for every American adult between 18 and 64”(The Freedom Dividend). Universal Basic Income, referred to as UBI from here on out, isn’t a particularly new idea. But it has been gaining some traction within particularly left leaning groups because of recent advances in automation.
Yang’s believes that implementing UBI is necessary because according to him automation will upset America’s economy by displacing enough workers to cause either a significant depression or at the very least more poverty. Here’s the catch that Yang likes to brush over though, a conservative estimate of the number of eligible citizens is 201,945,890(U.S. Census Bureau). Which means that the cost of implementing his UBI is about 202 billion usd a month or $2.43 trillion annually. That number is over half the total U.S. federal budget last year and more than four times the annual military spending. To put that into perspective, if the U.S. Government were to cut all subsidies and spending in: Medicare and Health, Military, Food and Agriculture, Education,Transportation, Science and Environmental efforts then there would be just enough money to implement UBI, assuming there was still a country left to give it to and no government overhead.
So something's got to give obviously, and that “thing” is that Yang proposes a 10% VAT in order to cover about a third of the UBI costs. He has yet to state how he will get the rest of the money. For those that don’t know, VAT stands for value added tax and functions essentially the same as a sales tax, but with the producer paying the tax instead of the consumer. The effects of such a tax are quite simple, prices of goods and services affected will go up in price by about 10%, or more accurately, the supply graph in a supply and demand graph will shift upwards resulting in a new equilibrium price that in this case will be about 10% higher.
Value added taxes are dangerous for several reasons. First of all, they are hidden from consumers. If you or I went to buy gas there is no way for us to know whether the government is taking 5% of our purchase or 20% despite still having to pay that amount of money. Secondly, VAT is regressive since it is a consumption based tax meaning that you are hurt more the poorer you are. Considering that this tax is supposed to fund a program to help poor people that seems a bit backwards to me. Additionally, taxes beyond a certain level have been proven to reduce economic growth(Gale) which means that the quality of life overall will not increase as quickly as it has in past, potentially leading actually worse conditions for Americans even with an extra $1000 in their pocket every month. Unfortunately the economic effects of a rise in taxation as extreme as this one is unstudied, but they will for sure be harmful to the economy.
Yang hopes that the economic benefits of automation and more spending money for low income groups will offset the tax burden, but even optimistic economists are quite uncertain about the effects of UBI since the trials in Canada and Scotland are under a year old and the trial by the Finnish government only targeted unemployed citizens There are a couple of other problems theorized to be inherent to UBI that I haven’t mentioned yet. For one, the inflation of prices for staple goods and services such as food and housing is likely to increase as an increase in disposable income could shift the demand curve to the right. Unemployment would also decrease significantly since UBI is a disincentive to work. This unemployment means we produce less as a country, meaning we have less money, making UBI even harder to pay for.
Finally consider immigration problems. What will certainly happen if the U.S. were to start giving all people “free” money? We become an immigration hotspot for everyone, which means that the smart and productive potential immigrants are less likely to get in and we will be flooded with immigrants that provide no value. Additionally, the increased taxes will cause companies and people capable of moving away to do that. Without the rich paying the taxes the government would have to increase taxes more, causing more people to move away, eventually ending up with a situation like Chicago; and let me tell you, the U.S. does not want to emulate Chicago.
“File:TaxWithTax.svg.” Wikipedia, Wikimedia Foundation, en.wikipedia.org/wiki/File:TaxWithTax.svg.
Gale, William G., and Andrew A. Samwick. “Effects of Income Tax Changes on Economic Growth.” Brookings, Brookings, 8 Aug. 2016, www.brookings.edu/research/effects-of-income-tax-changes-on-economic-growth/.
“The Freedom Dividend.” Andrew Yang for President, Andrew Yang, www.yang2020.com/policies/the-freedom-dividend/.
“U.S. Census Bureau QuickFacts: UNITED STATES.” Census Bureau QuickFacts, 2018, www.census.gov/quickfacts/fact/table/US/PST045217.