Tuesday, January 13, 2015

Where would the money for a (really big) UBI come from

A couple of posts ago I waddled in the intricacies of state budgets to determine if it was feasible to pay everybody residing legally in a country a fixed amount, enough for a comfortable (but not luxurious) existence without any need to prove merit or desert, and without having to substantially increase the amount of the economic activity taken by the state in the form of taxes. That exercise was done with a medium to small sized country with a moderate welfare structure, and after validating the essential validity of the scheme I wondered if it could be extended to a bigger, less interventionist state. Of course, the ultimate example would be the Ol' US of A, and in this post we are going to take a look at how a UBI would look like exactly there.

So let's start by taking a look at how the Federal budget for 2015 looks like:

M $ M €
Current expenses 3.042.000 2.433.600
Medicare + Medicaid (Publicly provided healthcare) 800.000 640.000
Social Security (pensions) 808.000 646.400
Defense, VA and Security 822.000 657.600
Other expenses (rest of agencies and departments) 612.000 489.600
Total expenses (w debt interest) 3.265.000 2.612.000
Debt servicing 223.000 178.400

Given a total US population of 319 M in 2014 (according to the CIA Factbook: Population figures for the USA), it is interesting to note that the federal government expends about 11.700 $ per inhabitant per year (9.000 €), not very different from the 9.500 € per inhabitant per year of the supposedly more welfarist Spain, although of course the structure of those expenses is very different (surprisingly, the expenditure in healthcare is much bigger, even when a much smaller percentage of the population is covered, and unsurprisingly the expenses in defense are stratospherically higher, as befits the "weaponized Keynesianism" the USA has been pursuing for the last eight decades, under the occasional guise of free market economy, supply side economics and other false labels).

Where does the money come from? the projected federal revenues in 2014 are (rounding up a bit):

2014 Federal Income 2.720.000 2.176.000
Income tax 1.300.000 1.040.000
SS/ S insurance taxes 950.000 760.000
Corporate taxes 250.000 200.000
Other 220.000 176.000

It is also worthy to note that, thanks to the same legerdemain we noted in the Spanish case, the state gets away with spending a 20% above what it receives, but presents it as an increment of the deficit of only a 3,3% (as it measures it over the full GDP, about 16,72 American trillions, or 16.720.000 M$)... Also interesting that the average American citizen, that rugged individualist that basically lives without the nanny state interfering in his free pursuit of enlightened self interest, in a political system supposedly geared towards keeping state intervention at a minimum, pays to that unobtrusive state about 8.500 $ a year (6.800 €), or a 17 % of the wealth he adds to the economy (the GDP per capita being 49,800 $), whilst the average Spanish citizen in his semi socialist economy hobbled by supposedly massive state intervention is taxed about 6.000 € a year, although that amount represents a somewhat higher percentage of what he adds, a 25 % (the GDP per capita being a more modest 30,100 $).

So how much would a Universal Basic Income cost int he case of the USA? given a population of 319 M, of which 62 M are under 14 years old, and assuming the same amounts to be paid we used in the Spanish case (translated to PPP $, at a rate of 1,25 $/€, that means 10,000 $/year per person above 14 YO and 5,000 $/year for the under 14) we are talking about the state disbursing 2,88 trillion USD/ year (that's 2,880,000 M$).

Now, if we want to use that money to give security to people it is obvious it can not come at the expense of the meager (by its results to cover the full population) effort done to provide a modicum of medical security (a medical emergency being already the primary cause of bankruptcy for individuals), so, as we did for Spain, the budget for Medicare and Medicaid should not be modified. Unfortunately, as all the rest of the expenses of the state amount already to less than the cost of the UBI (2,242,000 against 2,880,000) and there are minimal amounts that have to be spent to keep even a minimalist state functioning, in the USA implementing a UBI would require a major restructuring of the tax code in order to raise the taxes so the new outlays could be paid for. How much would those taxes have to be raised? it depends of course on what the final cost of running the state would be, which in the end boils down to how much does the American public wants to keep on subsidizing special interest groups (starting with the famous military industrial complex). For the sake of completeness, let's contemplate an scenario in which defense, VA and security spending were halved, and the expenses of the rest of the departments reduced in a 70% (as the justification of a vast amount of subsidies would be eroded if all the population -the current subsidies recipients included- were receiving instead a direct payment from the state):

M $ M €
Hypothetical expenses (w UBI) 4.295.000 3.436.000
Medicare + Medicaid (Publicly provided healthcare) 800.000 640.000
Social Security (pensions) 0 0
Defense, VA and Security 411.000 328.800
Other expenses (rest of agencies and departments) 204.000 163.200
Cost of UBI 2.880.000 2.304.000
Total expenses (w debt interest) 4.518.000 3.614.400
Debt servicing 223.000 178.400
So we are basically saying the USA would need to find 1,253,000 M$ of additional revenue if it wanted the UBI to be "deficit neutral" (not to add more to the deficit than its current spending patterns, which are already considered unsustainable by a significant portion of their electorate -until their elected representatives come to office, at which moment they find a totally unexpected tolerance for current levels of federal spending, but that would be the topic for another post), elevating the average fiscal pressure to 14,163 $ per citizen per year, a 28% of their current per capita GDP, instead of the comfortable 17% at which it stands now (and much closer to the rest of the advanced world, where it hovers around a 25%)...

So in the USA the discussion of a UBI faces a much higher hurdle, as to implement it it would require much deeper cuts in their current spending patterns plus a significant increase in taxation (an increase that would put it more in line with the rest of the civilized world, by the way). The obstacles to ever overcome such a hurdle are compounded by the fact that the US political system has historically been very successful to disenfranchise those segments of the population that would benefit the most (the poor and undereducated) whilst giving disproportionate weight to those that would pay the most (the rich and entrepreneurial). I thus think that efforts should focus on implementing it in the rest of the economically advanced world, and hoping that seeing how it translates into a much better, fairer, more humane society the progressive elements in the hegemon would start pushing for it from the inside (not in my lifetime, more likely than not).

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