Tag Archives: VAT

Taxing The Rich, Helping The Poor

Political observers have consistently dismissed Andrew Yang’s chances of securing the Democratic nomination, and I’ve agreed with their assessment. Yang also agrees–he has terminated his campaign.

Policy folks and political pundits alike have also dismissed his signature proposal–a UBI, or Universal Basic Income. I don’t agree–and neither does the Brookings Institution.

Now, don’t get me wrong–no one who isn’t imbibing very strong drink thinks American lawmakers are likely to pass, or even consider, a UBI any time soon. But as I argued in my most recent book, Living Together, there is a high probability that  millions of jobs will be lost to automation within the next 15-20 years–presenting a challenge America’s current inadequate and bureaucratic social safety net is clearly unable to meet.

In my book, I laid out a number of reasons how–despite Americans’ deep cultural disdain for social welfare programs–a UBI would be both efficient and socially unifying. I also took a stab at explaining how we could pay for it. Nevertheless, some of the sources I identified would require ending fossil fuel and other subsidies and curtailing military expenditures–measures we should take in any event, but that would obviously be politically difficult.

So I was excited to come across an analysis by William Gale of the Brookings Institution that not only made a persuasive case for a UBI, but for his preferred mechanism to pay for it. Here’s the lede:

The Congressional Budget Office just projected a series of $1 trillion budget deficits—as far as the eye can see. Narrowing that deficit will require not only spending reductions and economic growth but also new taxes. One solution that I’ve laid out in a new Hamilton Project paper, “Raising Revenue with a Progressive Value-Added Tax,” is a 10 percent Value-Added Tax (VAT) combined with a universal basic income (UBI)—effectively a cash payment to every US household.

The plan would raise substantial net revenue, be very progressive, and be as conducive to economic growth as any other new tax. The VAT would complement, not replace, any new direct taxes on affluent households, such as a wealth tax or capital gains reforms.

A VAT is a national consumption tax—like a retail sales tax but collected in small bits at each stage of production. It raises a lot of revenue without distorting economic choices like saving, investment, or the organizational form of businesses. And it can be easier to administer than retail sales taxes.

Gale’s UBI proposal is similar to–but smaller than–Andrew Yang’s. The linked article gives the details of how the VAT that paid for it would be structured, and readers with a background in economics are encouraged to read and analyze those details.

The article also explains several of the virtues of the proposed combination of a VAT and a UBI.

The Tax Policy Center estimates that the VAT in conjunction with a UBI would be extremely progressive. It would increase after-tax income of the lowest-income 20 percent of households by 17 percent. The tax burden for middle-income people would be unchanged while incomes of the top 1 percent of households would fall by 5.5 percent.

It may seem counter-intuitive, but the VAT functions as a 10 percent tax on existing wealth because future consumption can be financed only with existing wealth or future wages. Unlike a tax imposed on accumulated assets, the VAT’s implicit wealth tax is very difficult to avoid or evade and does not require the valuation of assets.

Liberals have typically viewed VATs as regressive, but Gale points out that they can be quite progressive when combined with the UBI. He also notes that conservatives should support a VAT because the evidence suggests that VATs almost never increase overall government spending.

Assuming that Gale’s numbers are sound, a VAT would generate more than enough money to pay for a UBI.

Granted, under a UBI, all those caseworkers and number crunchers hired by government to decide who is worthy of support and who is not would lose their jobs. But they would have a UBI, so they wouldn’t starve…