Transitioning to BIG+VAT

John Quiggin raises some interesting questions about the BIG+VAT in the comments to the last post:

I’m unconvinced by your transition strategy, though of course the nature of a transition strategy depends on the starting point. I don’t see how a ‘small’ [UBI*], say $3000/person/r or $1 trillion per year in the US context let’s you eliminate any means tests, and it certainly doesn’t let you relax the conditionality of benefits.

By contrast, my proposed transition to the GMI works precisely by relaxing conditionality. In the US context, for example, you could remove term limits on welfare, make access to unemployment insurance easier, make early access to Social Security more favorable etc.

My version of the transition probably has tons of public choice problems that I’m not fully considering, inflection points where the short-term cost-benefit looks bad to the median voter, but I don’t think the GMI is better in this regard. As I see it, a small BIG+VAT is unconditional, itself, but leaves the current “conditionality” considerations for traditional benefits in place. Yet as the BIG grows, they can be eliminated.

If the starting VAT was 5% of consumer spending, then in 2008 it would have raised about $2500 per household, which is a little more than the Alaska Permanent Dividend. (The median household would pay exactly what it receives, and there would be no cap for luxury expenditures like there is for payroll taxes.) But part of what makes poverty is household size: the median US household is 2.6, but the lowest decile household is smaller, and has fewer wage earners. In general, then, poverty is not caused by spending more, but by earning less. We do prioritarian ethics a disservice when we pretend otherwise.

So, on a 5% VAT+BIG, a family of 2 living in the bottom decile would have $2500 more a year, no matter how much they earn. (I haven’t said this, but I imagine that this would be paid on a per-person basis, not per-household.) You can’t do much with that, but it’s a start: it’s about what foodstamps are worth (for a family of 2 living on less than $19,128) and about twice what low-income heating/cooling assistance pays, or roughly equal to LIHEAP plus Medicaid. At 10% VAT+BIG, you could start to phase those out, plus foodstamps, or (the incredibly restrictive) TANF completely. At 15% you can eliminate all of the above. At 25%, you’ve basically replaced the value of the federal means-tested benefits, which in the US right now is equal to about $12,000-$13,000.

I think that a truly just BIG would require about 30%-35% VAT+BIG, and in that case you could eliminate Social Security, as well. (Social Security is not actually a redistributive form of social insurance: it’s based on your income so rich people receive more and poor less. Phasing out the Social Security payroll tax would be great for workers of all incomes, but especially the least-advantaged!)

Of course, all along the way, you’ll be able to gradually reduce income taxes and means-tested programs, so I can readily imagine some inflection points where these reductions and gains are not linear. There’s all sorts of public choice hay to be made of those moments, and I’d be interested to think them through. What happens if the VAT+BIG ramps up 1% a year? What about 1/2% a year?





One response to “Transitioning to BIG+VAT”

  1. […] The Basic Income and the Value-Added Tax: I’m not sure I’m “most likely to be wrong” on BIG+VAT, but I do think it’s the policy advocacy position where my confidence in advancing it is the least-well-matched by the sensus communis. Call it the “largest gap between my estimation of the evidence and the general estimate.” This blog got its title by my mixed feelings about utopian theorizing, but with BIG+VAT I do feel a bit like a utopian. But beyond all the naysayers, there’s even some recent evidence that consumption (which a VAT would disincentivize) is an important component in reducing poverty. This suggests one reason to prefer income redistribution over VAT, and so the whole edifice is certainly shaky if the right empirical evidence comes along. […]

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